Which of the following elements underlies the application

of generally accepted auditing standards, particularly

the standards of fieldwork and reporting?
a. Internal control.
b. Corroborating evidence.
c. Quality control.
d. Materiality and relative risk.
D.
Inherent risk and control risk differ from detection risk
in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative
terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditors discretion.
C
When issuing an unqualified opinion, the auditor who
evaluates the audit findings should be satisfied that the
a. Amount of known misstatement is documented in
the management representation letter.
b. Estimate of the total likely misstatement is less
than a material amount.
c. Amount of known misstatement is acknowledged
and recorded by the client.
d. Estimate of the total likely misstatement includes
the adjusting entries already recorded by the client.
B
Which of the following best describes what is meant
by the term fraud risk factor?
a. Factors whose presence indicates that the risk of
fraud is high.
b. Factors whose presence often have been observed
in circumstances where frauds have occurred.
c. Factors whose presence requires modification of
planned audit procedures.
d. Reportable conditions identified during an audit.
B
An auditor is unable to obtain absolute assurance that
misstatements due to fraud will be detected for all of the
following except
a. Employee collusion.
b. Falsified documentation.
c. Need to apply professional judgment in evaluating
fraud risk factors.
d. Professional skepticism.
D

Which of the following is most likely to be a response

to the auditors assessment that the risk of material
misstatement due to fraud for the existence of inventory is
high?
a. Observe test counts of inventory at certain locations
on an unannounced basis.
b. Perform analytical procedures rather than taking
test counts.
c. Request that inventories be counted prior to yearend.
d. Request that inventory counts at the various locations
be counted on different dates so as to allowt he same auditor
to be present at every count.
A
When considering fraud risk factors relating to managements
characteristics, which of the following is least
likely to indicate a risk of possible misstatement due to
fraud?
a. Failure to correct known reportable conditions on a
timely basis.
b. Nonfinancial managements preoccupation with
the selection of accounting principles.
c. Significant portion of managements compensation
represented by bonuses based upon achieving
unduly aggressive operating results.
d. Use of unusually conservative accounting practices.
D
Disclosure of fraud to parties other than a clients
senior management and its audit committee or board of
directors ordinarily is not part of an auditors responsibility.
However, to which of the following outside parties
may a duty to disclose fraud exist?
To the SEC
when the
client reports
an auditor
change
To a successor
auditor when the
successor makes
appropriate
Inquiries
To a
government
funding agency
from which the
client receives
financial
assistance
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes
D

Which of the following factors or conditions is an

auditor least likely to plan an audit to discover?
a. Financial pressures affecting employees.
b. High turnover of senior management.
c. Inadequate monitoring of significant controls.
d. Inability to generate positive cash flows from operations.
A
Which of the following statements best describes the
auditors responsibility to detect conditions relating to financial
stress of employees or adverse relationships between a
company and its employees?
a. The auditor is required to plan the audit to detect
these conditions on all audits.
b. These conditions relate to fraudulent financial reporting,
and an auditor is required to plan the audit
to detect these conditions when the client is exposed
to a risk of misappropriation of assets.
c. The auditor is required to plan the audit to detect
these conditions whenever they may result in misstatements.
d. The auditor is not required to plan the audit to discover
these conditions, but should consider them if
he or she becomes aware of them during the audit.
D
Which of the following is least likely to be included in
an auditors inquiry of management while obtaining information
to identify the risks of material misstatement due to
fraud?
a. Are financial reporting operations controlled by
and limited to one location?
b. Does it have knowledge of fraud or suspect fraud?
c. Does it have programs to mitigate fraud risks?
d. Has it reported to the audit committee the nature of
the companys internal control?
A
Which of the following is most likely to be considered a
risk factor relating to fraudulent financial reporting?
a. Domination of management by top executives.
b. Large amounts of cash processed.
c. Negative cash flows from operations.
d. Small high-dollar inventory items.
C
An auditor who discovers that a clients employees
paid small bribes to municipal officials most likely would
withdraw from the engagement if
a. The payments violated the clients policies regarding
the prevention of illegal acts.
b. The client receives financial assistance from a federal
government agency.
c. Documentation that is necessary to prove that the
bribes were paid does not exist.

d. Management fails to take the appropriate remedial

action.
D
An auditor who discovers that a clients employees
have paid small bribes to public officials most likely would
withdraw from the engagement if the
a. Client receives financial assistance from a federal
government agency.
b. Evidential matter that is necessary to prove that the
illegal acts were committed does not exist.
c. Employees actions affect the auditors ability to
rely on managements representations.
d. Notes to the financial statements fail to disclose the
employees actions.
C
Which of the following illegal acts should an audit be
designed to obtain reasonable assurance of detecting?
a. Securities purchased by relatives of management
based on knowledge of inside information.
b. Accrual and billing of an improper amount of revenue
under government contracts.
c. Violations of antitrust laws.
d. Price fixing.
B
Which of the following relatively small misstatements
most likely could have a material effect on an entitys financial
statements?
a. An illegal payment to a foreign official that was
not recorded.
b. A piece of obsolete office equipment that was not
retired.
c. A petty cash fund disbursement that was not properly
authorized.
d. An uncollectible account receivable that was not
written off.
A
The most likely explanation why the auditors examination
cannot reasonably be expected to bring all illegal
acts by the client to the auditors attention is that
a. Illegal acts are perpetrated by management override
of internal control.
b. Illegal acts by clients often relate to operating aspects
rather than accounting aspects.
c. The clients internal control may be so strong that
the auditor performs only minimal substantive
testing.
d. Illegal acts may be perpetrated by the only person
in the clients organization with access to both assets
and the accounting records.

B
If specific information comes to an auditors attention
that implies the existence of possible illegal acts that could
have a material, but indirect effect on the financial statements,
the auditor should next
a. Apply audit procedures specifically directed to ascertaining
whether an illegal act has occurred.
b. Seek the advice of an informed expert qualified to
practice law as to possible contingent liabilities.
c. Report the matter to an appropriate level of management
at least one level above those involved.
d. Discuss the evidence with the clients audit committee,
or others with equivalent authority and responsibility.
A
Under the Private Securities Litigation Reform Act of
1995, Baker, CPA, reported certain uncorrected illegal acts
to Supermarts board of directors. Baker believed that failure
to take remedial action would warrant a qualified audit
opinion because the illegal acts had a material effect on Supermarts
financial statements. Supermart failed to take
appropriate remedial action and the board of directors refused
to inform the SEC that it had received such notification
from Baker. Under these circumstances, Baker is required
to
a. Resign from the audit engagement within ten business
days.
b. Deliver a report concerning the illegal acts to the
SEC within one business day.
c. Notify the stockholders that the financial statements
are materially misstated.
d. Withhold an audit opinion until Supermart takes
appropriate remedial action.
B
Before accepting an engagement to audit a new client,
a CPA is required to obtain
a. An understanding of the prospective clients industry
and business.
b. The prospective clients signature to the engagement
letter.
c. A preliminary understanding of the prospective clients
control environment.
d. The prospective clients consent to make inquiries
of the predecessor auditor, if any.
D
An auditor is required to establish an understanding
with a client regarding the services to be performed for each
engagement. This understanding generally includes
a. Managements responsibility for errors and the illegal
activities of employees that may cause material
misstatement.

b. The auditors responsibility for ensuring that the

audit committee is aware of any reportable conditions
that come to the auditors attention.
c. Managements responsibility for providing the
auditor with an assessment of the risk of material
misstatement due to fraud.
d. The auditors responsibility for determining preliminary
judgments about materiality and audit risk
factors.
B
To obtain an understanding of a continuing clients
business in planning an audit, an auditor most likely would
a. Perform tests of details of transactions and balances.
b. Review prior year working papers and the permanent
file for the client.
c. Read specialized industry journals.
d. Reevaluate the clients internal control environment.
B
During the initial planning phase of an audit, a CPA
most likely would
a. Identify specific internal control activities that are
likely to prevent fraud.
b. Evaluate the reasonableness of the clients accounting
estimates.
c. Discuss the timing of the audit procedures with the
clients management.
d. Inquire of the clients attorney as to whether any
unrecorded claims are probable of assertion.
C
Which of the following statements would least likely
appear in an auditors engagement letter?
a. Fees for our services are based on our regular per
diem rates, plus travel and other out-of-pocket expenses.
b. During the course of our audit we may observe opportunities
for economy in, or improved controls
over, your operations.
c. Our engagement is subject to the risk that material
misstatements or fraud, if they exist, will not be
detected.
d. After performing our preliminary analytical procedures
we will discuss with you the other procedures
we consider necessary to complete the engagement.
D
Which of the following documentation is not required
for an audit in accordance with generally accepted auditing
standards?
a. A written audit program setting forth the procedures
necessary to accomplish the audits objectives.
b. An indication that the accounting records agree or
reconcile with the financial statements.

c. A client engagement letter that summarizes the

timing and details of the auditors planned fieldwork.
d. The basis for the auditors conclusions when the
assessed level of control risk is below the maximum
level.
C
Arrangements concerning which of the following are
least likely to be included in engagement letter?
a. A predecessor auditor.
b. Fees and billing.
c. CPA investment in client securities.
d. Other services to be provided in addition to the audit.
C
Select the proper reply as to the allowable form of the
understanding with a client when an audit is being performed
a. While preferably written, it may be oral; but in all
cases it should be documented in the working papers.
b. While preferably written, it may be oral, in which
case it need not be documented in the working papers.
c. The understanding must be obtained in written
form and included in the working papers.
d. No requirement exists that the auditor obtain an
understanding with the client.
A
Which of the following procedures would an auditor
most likely include in the planning phase of a financial
statement audit?
a. Obtain an understanding of the entitys risk assessment
process.
b. Identify specific internal control activities designed
to prevent fraud.
c. Evaluate the reasonableness of the entitys accounting
estimates.
d. Perform cutoff tests of the entitys sales and purchases.
A
In auditing the financial statements of Star Corp., Land
discovered information leading Land to believe that Stars
prior years financial statements, which were audited by
Tell, require substantial revisions. Under these circumstances,
Land should
a. Notify Stars audit committee and stockholders
that the prior years financial statements cannot be
relied on.
b. Request Star to reissue the prior years financial
statements with the appropriate revisions.
c. Notify Tell about the information and make inquiries
about the integrity of Stars management.
d. Request Star to arrange a meeting among the three

parties to resolve the matter.

D
A successor auditor should request the new client to
authorize the predecessor auditor to allow a review of the
predecessors
Engagement letter Working papers
a. Yes Yes
b. Yes No
c. No Yes
d. No No
C
Which of the following procedures would an auditor
most likely perform in planning a financial statement audit?
a. Inquiring of the clients legal counsel concerning
pending litigation.
b. Comparing the financial statements to anticipated
results.
c. Examining computer generated exception reports
to verify the effectiveness of internal control.
d. Searching for unauthorized transactions that may
aid in detecting unrecorded liabilities.
B
The audit program usually cannot be finalized until
the
a. Consideration of the entitys internal control has
been completed.
b. Engagement letter has been signed by the auditor
and the client.
c. Reportable conditions have been communicated to
the audit committee of the board of directors.
d. Search for unrecorded liabilities has been performed
and documented.
A
With respect to planning an audit, which of the following
statements is always true?
a. It is acceptable to perform a portion of the audit of
a continuing audit client at interim dates.
b. An engagement should not be accepted after the
clients year-end.
c. An inventory count must be observed at year-end.
d. Final staffing decisions must be made prior to
completion of the planning stage.
A
The in-charge auditor most likely would have a supervisory
responsibility to explain to the staff assistants

a. That immaterial fraud is not to be reported to the

clients audit committee.
b. How the results of various auditing procedures performed
by the assistants should be evaluated.
c. What benefits may be attained by the assistants
adherence to established time budgets.
d. Why certain documents are being transferred from
the current file to the permanent file.
B