Auditing November 2004

Multiple Choice Questions (Solve 95 of the following 100 questions)

1 – 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
A: $10,000
B: $15,000
C: $20,000
D: $30,000

2 - Following the Professional Standards which of the following is not one of the assertions made by
management in financial statements?
A: Completeness.
B: Existence or occurrence
C: Presentation and disclosure.
D: Relevance and reliability.

3- Those procedures specifically outlined in an audit program are primarily designed to

A: Prevent litigations.
B: Detect all misstatements due to errors or fraud.
C: Test internal structures.
D: Gather evidence.

4 - 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
A: Increase inherent risk.
B: Increase materiality levels.
C: Decrease substantive testing.
D: Decrease detection risk.

5- After obtaining an understanding of an entity's internal control and assessing control risk, an
auditor may
A: Perform tests of controls to verify management’s 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 company’s controls detected material misstatements in the financial
statements.

6– An auditor’s decision concerning whether or not to “dual date” the audit report is based upon the
auditor’s willingness to
A: Extend auditing procedures.
B: Accept responsibility for subsequent events.
C: Permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor’s
report.
D: Assume responsibility for events subsequent to the issuance of the auditor’s report.

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7-The auditor’s report should be dated as of the date on which the
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

8 - Jones, CPA, examined the 2001 financial statements of Ray Corp. and issued an unqualified
opinion on March 10, 2002. On April 2, 2002, Jones became aware of a 2001 transaction that may
materially affect the 2001 financial statements. This transaction would have been investigated had it
come to Jones’ attention during the course of the examination. Jones should
A: Take no action because an auditor is not responsible for events subsequent to the issuance of the
auditor’s report.
B: Contact Ray’s management and request their cooperation in investigating the matter.
C: Request that Ray’s management disclose the possible effects of the newly discovered transaction
by adding an unaudited footnote to the 2001 financial statements.
D: Contact all parties who might rely upon the financial statements and advise them that the financial
statements are misleading.

9 - With respect to issuance of an audit report which is dual dated for a subsequent event occurring
after the completion of fieldwork but before issuance of the auditor’s report, the auditor’s
responsibility for events occurring subsequent to the completion of fieldwork is
A: Extended to include all events occurring until the date of the last subsequent event referred to.
B: Limited to the specific event referred to.
C: Limited to all events occurring through the date of issuance of the report.
D: Extended to include all events occurring through the date of submission of the report to the client.

10 -“Subsequent events” for reporting purposes are defined as events which occur subsequent to the
A: Balance sheet date.
B: Date of the auditor’s report.
C: Balance sheet date but prior to the date of the auditor’s report.
D: Date of the auditor’s report and concern contingencies which are not reflected in the financial
statements.

11 -A major customer of an audit client suffers a fire just prior to completion of year-end fieldwork.
The audit client believes that this event could have a significant direct effect on the financial
statements. The auditor should
A: Advise management to disclose the event in notes to the financial statements.
B: Disclose the event in the auditor’s report.
C: Withhold submission of the auditor’s report until the extent of the direct effect on the financial
statements is known.
D: Advise management to adjust the financial statements

12 - When a contingency is resolved immediately subsequent to the issuance of a report which was
qualified with respect to the contingency, the auditor should
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.

13 - The Sarbanes-Oxley Act of 2003 authorized creation of the

A: Auditing Standards Board.
B: Public Company Accounting Oversight Board.
C: Financial Accounting Standards Center.

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D: Corporate Governance Institute.

14- Early appointment of the independent auditor will enable

A: A more thorough examination to be performed.
B: A proper consideration of internal control to be performed.
C: Sufficient competent evidential matter to be obtained.
D: A more efficient audit to be planned.

15 -The primary responsibility for the adequacy of disclosure in the financial statements of a publicly
held company rests with the
A: Partner assigned to the audit engagement.
B: Management of the company.
C: Auditor in charge of the fieldwork.
D: Securities and Exchange Commission.

16 -Which of the following statements best describes the phrase "generally accepted auditing
standards"?
A: They identify the policies and procedures for the conduct of the audit.
B: They define the nature and extent of the auditor’s responsibilities.
C: They provide guidance to the auditor with respect to planning the audit and writing the audit
report.
D: They set forth a measure of the quality of the performance of audit procedures.

17 -Which of the following underlies the application of generally accepted auditing standards,
particularly the standards of fieldwork and reporting?
A: The elements of materiality and audit risk.
B: The element of internal control.
C: The element of corroborating evidence.
D: The element of reasonable assurance.

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

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 client’s attorney identifies any litigation, claims, or assessments not
disclosed in the financial statements.
D: The planned assessed level of control risk.

19 - Inherent risk and control risk differ from detection risk in that inherent risk and control risk are
A: Elements of audit risk while detection risk is not.
B: Changed at the auditor’s discretion while detection risk is not.
C: Considered at the individual account-balance level while detection risk is not.
D: Functions of the client and its environment while detection risk is not.

20 -As the acceptable level of detection risk decreases, the assurance directly provided from
A: Substantive tests should increase.
B: Substantive tests should decrease.
C: Tests of controls should increase.
D: Tests of controls should decrease.

21 -Holding all other factors constant, decreasing the extent of substantive audit procedures for
accounts payable ordinarily has what effect on audit risk?
A: Increases.
B: Decreases.

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C: No effect.
D: Indeterminate.

22 -Which of the following audit risk components may be assessed in no quantitative terms?
Inherent Control Detection
risk risk risk
A. Yes Yes No
B. Yes No Yes
C. No Yes Yes
D. Yes Yes Yes
A: A.
B: B.
C: C.
D: D.

23 -Use the audit risk model to calculate audit risk (to the closest percent) in the following
circumstance:

Control risk 40%

Inherent risk 40%
Detection risk 40%

A: 1%.
B: 6%.
C: 13%.
D: 40%.

24 -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 error does exist is referred to as
A: Sampling risk.
B: Detection risk.
C: Nonsampling risk.
D: Inherent risk.

25 -As a lower acceptable level of materiality is established, the auditor should plan more work on
individual accounts to
A: Find smaller misstatements.
B: Find larger misstatements.
C: Increase the tolerable misstatement in the accounts.
D: Decrease the risk of assessing control risk too low.

26 -To be competent, evidence must be both

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

27 -Which of the following procedures would provide the most reliable audit evidence?
A: Inquiries of the client’s 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 entity’s trial balance.
D: Inspection of bank statements obtained directly from the client’s financial institution.

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28 -Which of the following statements concerning audit evidence is correct?
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 auditor’s judgment.
C: The difficulty and expense of obtaining audit evidence concerning an account balance is a valid
basis for omitting the test.
D: A client’s accounting data can be sufficient audit evidence to support the financial statements.

29 -Which of the following statements concerning evidential matter is correct?

A: Competent 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.

30 - 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
A: Analytical procedures.
B: Auditor working papers.
C: Review of the internal control.
D: Proper planning of the audit engagement.

31 - In connection with the third generally accepted auditing standard of fieldwork, an auditor
examines corroborating evidential matter which includes all of the following except
A: Client accounting manuals.
B: Written client representations.
C: Vendor invoices.
D: Minutes of board meetings.

32 -Most of the independent auditor's work in formulating an opinion on financial statements consists
of
A: Considering internal control.
B: Obtaining and examining evidential matter.
C: Examining cash transactions.
D: Comparing recorded accountability with assets.

33 -Which of the following statements is generally correct about the competence of evidential matter?
A: The more effective the internal control, the more assurance it provides about the reliability of the
accounting data and financial statements.
B: Competence of evidential matter refers to the amount of corroborative evidence obtained.
C: Information obtained indirectly from independent outside sources is more persuasive than the
auditor’s direct personal knowledge obtained through observation and inspection.
D: Competence of evidential matter refers to the audit evidence obtained from outside the entity.

34 -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?
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.

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C: The accounting estimates developed by management are reasonable.
D: The accounting estimates are presented in accordance with generally accepted accounting
principles.

35 - Of the following, which is the least persuasive type of audit evidence?

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.

36 -Which of the following is the least persuasive documentation in support of an auditor's opinion?
A: Schedules of details of physical inventory counts conducted by the client.
B: Notation of inferences drawn from ratios and trends.
C: Notation of appraisers’ conclusions documented in the auditor’s working papers.
D: Lists of negative confirmation requests for which no response was received by the auditor.

37 - Failure to detect material dollar errors in the financial statements is a risk which the auditor
primarily mitigates by
A: Performing substantive tests.
B: Performing tests of controls.
C: Assessing internal control.
D: Obtaining a client representation letter.

38 - While substantive tests may support the accuracy of underlying records, these tests frequently
provide no affirmative evidence of segregation of duties because
A: Substantive tests rarely guarantee the accuracy of the records if only a sample of the transactions
has been tested.
B: The records may be accurate even though they are maintained by persons having incompatible
functions.
C: Substantive tests relate to the entire period under audit, but tests of controls ordinarily are
confined to the period during which the auditor is on the client’s premises.
D: Many computerized procedures leave no audit trail of who performed them, so substantive tests
may necessarily be limited to inquiries and observation of office personnel.

39 - Before applying substantive tests to the details of asset accounts at an interim date, an auditor
should assess
A: Control risk at below the maximum level.
B: Inherent risk at the maximum level.
C: The difficulty in controlling the incremental audit risk.
D: Materiality for the accounts tested as insignificant.

40 - An auditor's decision either to apply analytical procedures as substantive tests or to perform tests
of transactions and account balances usually is determined by the
A: Availability of data aggregated at a high level.
B: Relative effectiveness and efficiency of the tests.
C: Timing of tests performed after the balance sheet date.
D: Auditor’s familiarity with industry trends.

41 - 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
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 management’s performance in causing this decline.
C: Require footnote disclosure.
D: Consider the possibility of a misstatement in the financial statements.

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42 -An auditor compares 2002 revenues and expenses with those of the prior year and investigates all
changes exceeding 10%. By this procedure the auditor would be most likely to learn that
A: An increase in property tax rates has not been recognized in the client’s accrual.
B: The 2002 provision for uncollectible accounts is inadequate because of worsening economic
conditions.
C: Fourth quarter payroll taxes were not paid.
D: The client changed its capitalization policy for small tools in 2002.

43 - Which of the following factors would least influence an auditor's consideration of the reliability
of data for purposes of analytical procedures?
A: Whether the data were processed in a computerized system or in a manual accounting system.
B: Whether sources within the entity were independent of those who are responsible for the amount
being audited.
C: Whether the data were subjected to audit testing in the current or prior year.
D: Whether the data were obtained from independent sources outside the entity or from sources
within the entity.

44 - Which of the following analytical procedures should be applied to the income statement?
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.

45 - Analytical procedures used in planning an audit should focus on identifying

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.

46 -Which of the following is ordinarily designed to detect possible material dollar misstatements in
the financial statements?
A: Tests of controls.
B: Analytical procedures.
C: Information technology controls.
D: Postaudit working paper review.

47 - An auditor's analytical procedures performed during the overall review stage indicated that the
client's accounts receivable had doubled since the end of the prior year. However, the allowance for
doubtful accounts as a percentage of accounts receivable remained about the same. Which of the
following client explanations most likely would satisfy the auditor?
A: The client liberalized its credit standards in the current year and sold much more merchandise to
customers with poor credit ratings.
B: Twice as many accounts receivable were written off in the prior year than in the current year.
C: A greater percentage of accounts receivable were currently listed in the "more than 90 days
overdue" category than in the prior year.
D: The client opened a second retail outlet in the current year and its credit sales approximately
equaled the older, established outlet.

48 -Which of the following is the most reliable analytical procedure to verify the year-end financial
statement balances of a wholesale business?
A: Verify depreciation expense by multiplying the depreciable asset balances by one divided by the
depreciation rate.

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B: Verify commission expense by multiplying sales revenue by the company’s standard commission
rate.
C: Verify interest expense, which includes imputed interest, by multiplying long-term debt balances
by the year-end prevailing interest rate.
D: Verify FICA tax liability by multiplying total payroll costs by the FICA contribution rate in effect
during the year.

49 -Which of the following statements concerning analytical procedures is correct?

A: Analytical procedures may be omitted entirely for some financial statement audits.
B: Analytical procedures used in planning the audit should not use nonfinancial information.
C: Analytical procedures usually are effective and efficient for tests of controls.
D: Analytical procedures alone may provide the appropriate level of assurance for some assertions.

50 -Which of the following tends to be most predictable for purposes of analytical procedures applied
as substantive tests?
A: Relationships involving balance sheet accounts.
B: Transactions subject to management discretion.
C: Relationships involving income statement accounts.
D: Data subject to audit testing in the prior year.

51 -The auditor notices significant fluctuations in key elements of the company's financial statements.
If management is unable to provide an acceptable explanation, the auditor should
A: Consider the matter a scope limitation.
B: Perform additional audit procedures to investigate the matter further.
C: Intensify the examination with the expectation of detecting management fraud.
D: Withdraw from the engagement.

52 -Which of the following is not a typical analytical procedure?

A: Study of relationships of the financial information with relevant nonfinancial information.
B: Comparison of the financial information with similar information regarding the industry in which
the entity operates.
C: Comparison of recorded amounts of major disbursements with appropriate invoices.
D: Comparison of the financial information with budgeted amounts.

53 -The objective of tests of details of transactions performed as substantive tests is to

A: Detect material misstatements in the financial statements.
B: Evaluate whether management’s policies and procedures operated effectively.
C: Identify specific financial statement assertions that satisfy the audit objectives.
D: Verify that significant deficiencies in the accounting system are discovered.

54 - Which of the following is a basic tool used by the auditor to control the audit work and review
the progress of the audit?
A: Time and expense summary.
B: Engagement letter.
C: Progress flowchart.
D: Audit program.

55 -A financial statement audit performed under the requirements of the Sarbanes-Oxley Act of 2002
must include an examination and report upon
A: Internal control.
B: Indirect effect illegal acts.
C: Inherent risk.
D: Forecasted financial information.

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56 -Which of the following is not required by the Sarbanes-Oxley Act of 2002?
A: It requires the principal executive and financial officers to disclose all significant internal control
deficiencies to the company's auditors and audit committee.
B: It requires management to provide an assessment of the effectiveness of internal control.
C: It requires management to certify that the financial statements fairly present, in all material
respects, the financial condition and results of operations of the company.
D: It requires management to certify that the company has violated no major laws.

57 -Which statement is not one of the objectives of internal control as included in the definition of
internal control developed by the Committee of Sponsoring Organizations (COSO)?
A: Asset safeguarding.
B: Compliance.
C: Financial reporting.
D: Operations.

58 -The COSO definition of internal control considers control activities a (n):

A: Component of internal control.
B: Control objective.
C: Element of the control environment.
D: Portion of information and communication.

59 -Which of the following is not a factor included in the control environment?

A: Board of directors or audit committee participation.
B: Commitment to competence.
C: Monitoring.
D: Organizational structure.

60 -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
A: The audit committee is active in overseeing the entity’s 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.

61-Which of the following is ordinarily considered a factor indicative of increased financial reporting
risk when an auditor is considering a client's risk assessment policies?
A: Commissioned sales personnel.
B: A corporate code of conduct.
C: Rapid growth of the organization.
D: Materiality standards for determining whether to capitalize acquisitions of fixed assets.

62 -While obtaining an understanding of a client's risk assessment policies, an auditor ordinarily

considers how management
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.

63 -When an auditor considers a client's internal control, control activities ordinarily relate to
performance reviews, information processing, segregation of duties and
A: Information and communication.
B: Operating decisions.
C: Physical controls.
D: Risk assessment.

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64 -If internal control is properly designed, the same employee should not be permitted to
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.

65 -Which of the following sets of duties would ordinarily be considered basically incompatible in
terms of good internal control?
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.

66 - For good internal control, which of the following functions should not be the responsibility of
the treasurer's department?
A: Data processing.
B: Handling of cash.
C: Custody of securities.
D: Establishing credit policies.

67 -Proper segregation of functional responsibilities calls for separation of the

A: Authorization, approval, and execution functions.
B: Authorization, execution, and payment functions.
C: Receiving, shipping, and custodial functions.
D: Authorization, recording, and custodial functions.

68 - Effective internal control requires organizational independence of departments. Organizational

independence would be impaired in which of the following situations?
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.

69 -An auditor would most likely be concerned with controls that provide reasonable assurance about the
A: Efficiency of management’s decision-making process.
B: Appropriate prices the entity should charge for its products.
C: Methods of assigning production tasks to employees.
D: Entity’s ability to process and summarize financial data.

70 - In an audit of financial statements, an auditor's primary consideration regarding a control is whether

the control
A: Reflects management’s philosophy and operating style.
B: Affects management’s financial statement assertions.
C: Provides adequate safeguards over access to assets.
D: Enhances management’s decision-making processes.

71 -In a consideration of the internal control, the completion of a questionnaire is most closely
associated with which of the following?
A: Separation of duties.
B: Documentation.
C: Flowchart accuracy.
D: Tests of controls.

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72 -In general, a material weakness in internal control may be defined as a condition in which
material misstatements would ordinarily not be detected within a timely period by
A: An auditor during the normal consideration of internal control.
B: A controller when reconciling accounts in the general ledger.
C: Employees in the normal course of performing their assigned functions.
D: The chief financial officer when reviewing interim financial statements.

73 -Which of the following controls would an auditor be least likely to review?

A: Segregation of the asset-handling and recordkeeping functions.
B: Company policy regarding credit and collection efforts.
C: Cost records classified by date of product introduction.
D: Authorization of additions to plant and equipment.

74 -An auditor considers existing internal control in order to

A: Determine the extent of analytical procedures which must be performed.
B: Determine the extent of substantive tests which must be performed.
C: Ascertain whether irregularities are probable.
D: Ascertain whether any employees have incompatible functions.

75 -In the consideration of internal control, the auditor is basically concerned that internal control
provides reasonable assurance that
A: Controls have not been circumvented by collusion.
B: Misstatements have been prevented or detected.
C: Operational efficiency has been achieved in accordance with management plans.
D: Management cannot override the structure.

76 -Which of the following statements concerning control risk is correct?

A: Assessing control risk and obtaining an understanding of an entity’s internal control may be
performed concurrently.
B: When control risk is at the maximum level, an auditor is required to document the basis for
that assessment.
C: Control risk may be assessed sufficiently low to eliminate substantive testing for significant
transaction classes.
D: When assessing control risk an auditor should not consider evidence obtained in prior audits
about the operation of internal control.

77 -An auditor uses the knowledge provided by the understanding of internal control and the assessed
level of control risk primarily to
A: Determine whether procedures and records concerning the safeguarding of assets are reliable.
B: Ascertain whether the opportunities to allow any person to both perpetrate and conceal
irregularities are minimized.
C: Modify the initial assessments of inherent risk and preliminary judgments about materiality
levels.
D: Determine the nature, timing, and extent of substantive tests for financial statement assertions.

78 -When tests of controls reveal that controls are not operating as anticipated, it is most likely that
the assessed level of control risk will:
A: Be less than the planned assessed level of control risk.
B: Equal the planned assessed level of control risk.
C: Be greater than the planned assessed level of control risk.
D: Be less than the actual control risk.

79 -Which of the following is a step in an auditor's decision to assess control risk at below the
maximum?
A: Apply analytical procedures to both financial data and nonfinancial information to detect
conditions that may indicate weak controls.

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B: Perform tests of details of transactions and account balances to identify potential errors and
irregularities.
C: Identify specific controls that are likely to detect or prevent material misstatements.
D: Document that the additional audit effort to perform tests of controls exceeds the potential
reduction in substantive testing.

80 -Which of the following is not a reason an auditor should obtain an understanding of the
components of an entity's internal control in planning an audit?.
A: Identify the types of potential misstatements that can occur.
B: Design substantive tests.
C: Consider the operating effectiveness of internal control.
D: Consider factors that affect the risk of material misstatements.

81 -The auditor would be least likely to be concerned about internal control as it relates to
A: Land and buildings.
B: Common stock.
C: Shareholder meetings.
D: Minutes of board of directors’ meetings.

82 -Which of the following would not typically be a control relied upon during an audit?
A: Use of the double-entry system.
B: An internal audit staff.
C: Competent personnel.
D: A comparison-shopping staff.

83 -Which of the following computer documentation would an auditor most likely utilize in obtaining
an understanding of internal control?
A: Systems flowcharts.
B: Record counts.
C: Program listings.
D: Record layouts.

84 - One important reason why a CPA, during the course of an audit engagement, prepares internal
control flowcharts is to
A: Reduce the need for inquiries of client personnel concerning the operations of internal control.
B: Depict the organizational structure and document flow in a single chart for review and reference
purposes.
C: Assemble the internal control findings into a comprehensible format suitable for analysis.
D: Prepare documentation that would be useful in the event of a future consulting engagement.

85 -When preparing a record of a client's internal control, the independent auditor sometimes uses a
flowchart, which can best be described as a
A: Pictorial presentation of the flow of instructions in a client’s internal computer system.
B: Diagram which clearly indicates an organization’s internal reporting structure.
C: Graphic illustration of the flow of operations which is used to replace the auditor’s internal control
questionnaire.
D: Symbolic representation of a system or series of sequential processes.

86 -When obtaining and documenting an understanding of internal control, the auditor would
ordinarily prepare and obtain answers to an internal control questionnaire based upon a tentative
flowchart of the system. The next step should ordinarily be to
A: Determine the extent of audit work necessary to form an opinion.
B: Arrive at a decision regarding the operating effectiveness of internal control.
C: Gather enough evidence to determine if internal control is functioning as described by performing
additional tests of controls.
D: Assess control risk based upon the understanding of internal control.

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87 -A primary objective of procedures performed to obtain an understanding of internal control is to
provide an auditor with
A: Evidential matter to use in reducing detection risk.
B: Knowledge necessary to plan the audit.
C: A basis from which to modify tests of controls.
D: Information necessary to prepare flowcharts.

88 -Assurance services performed for decision makers may address the

Quality of information Context of information

A. Yes Yes
B. Yes No
C. No Yes
D. No No
A: A.
B: B.
C: C.
D: D.

89 -Which of the following is least likely to include a reference to the use of a specialist?
A: Unqualified opinion.
B: Adverse opinion.
C: "Except for" qualified opinion.
D: "Subject to" qualified opinion.

90 -Miller Co. uses the first-in, first-out method of costing for its international subsidiary’s inventory
and the last-in, first-out method of costing for its domestic inventory. Under these circumstances,
Miller should issue an auditor’s report with an
A: "Except for" qualified opinion.
B: Unqualified opinion.
C: Explanatory paragraph as to consistency.
D: Opinion modified as to consistency.

91 -For an entity’s financial statements to be presented fairly in conformity with generally accepted
accounting principles, the principles selected should
A: Be applied on a basis consistent with those followed in the prior year.
B: Be approved by the Auditing Standards Board or the appropriate industry subcommittee.
C: Reflect transactions in a manner that presents the financial statements within a range of acceptable
limits.
D: Match the principles used by most other entities within the entity’s particular industry.

92 -Which of the following representations does an auditor make explicitly and which implicitly
when issuing an unqualified opinion?
Conformity with GAAP Adequacy of disclosure
A. Explicitly Explicitly
B. Implicitly Implicitly
C. Implicitly Explicitly
D. Explicitly Implicitly
A: A.
B: B.
C: C.
D: D.

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93 -Does an auditor make the following representation explicitly or implicitly when issuing the
standard auditor’s report on comparative financial statements?
Consistent application Examination of
of accounting principles evidence on a test basis
A. Explicitly Explicitly
B. Implicitly Implicitly
C. Implicitly Explicitly
D. Explicitly Implicitly

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

94 -How are management’s responsibility and the auditor’s responsibility represented in the standard
auditor’s report?

Management’s responsibility Auditor’s responsibility

A. Explicitly Explicitly
B. Implicitly Implicitly
C. Implicitly Explicitly
D. Explicitly Implicitly
A: A.
B: B.
C: C.
D: D.

95 -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’ auditor’s report will probably contain
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.

96 -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 client’s
financial statements considered as a whole?
A: Adverse.
B: Unaudited.
C: Qualified.
D: Unqualified.

97 -When an auditor submits a document containing audited financial statements to a client, the
auditor has a responsibility to report on
A: Only the basic financial statements included in the document.
B: The basic financial statements and only that additional information required to be presented in
accordance with provisions of the Financial Accounting Standards Board.
C: All of the information included in the document.
D: Only that portion of the document which was audited.

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98 - The auditor’s judgment concerning the overall fairness of the presentation of financial position,
results of operations, and statement of cash flows is applied within the framework of
A: Quality control.
B: Generally accepted auditing standards which include the concept of materiality.
C: The auditor’s consideration of the audited company’s internal control.
D: Generally accepted accounting principles.

99 -The fourth reporting standard requires the auditor’s report to either contain an expression of
opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an
opinion cannot be expressed. The objective of the fourth standard is to prevent
A: The CPA from reporting on one basic financial statement and not the others.
B: The CPA from expressing different opinions on each of the basic financial statements.
C: Misinterpretations regarding the degree of responsibility the auditor is assuming.
D: Management from reducing its final responsibility for the basic financial statements.

100 -An investor is reading the financial statements of the Stankey Corporation and observes that the
statements are accompanied by an auditor’s unqualified report. From this the investor may conclude
that
A: Any disputes over significant accounting issues have been settled to the auditor’s satisfaction.
B: The auditor is satisfied that Stankey is financially sound.
C: The auditor has ascertained that Stankey’s financial statements have been prepared accurately.
D: Informative disclosures in the financial statements but not necessarily in Stankey’s footnotes are
to be regarded as reasonably adequate.

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