University of the East, Caloocan

CBA REVIEW

AUDITING THEORY TESTBANKS / REVIEWERS

1)When an auditor believes that an understanding with the client has not been established, he or she should ordinarily

1. 1. Perform the audit with increase professional skepticism.
   2. Decline to accept or perform the audit.
   3. Assess control risk at the maximum level and perform a primarily substantive audit.
   4. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud.

2. An auditor should design the written audit program so that
   1. All material transactions will be selected for substantive testing.
   2. Substantive tests prior to the balance sheet date will be minimized.
   3. The        audit        procedures            selected           will       achieve          specific          audit objectives.
   4. Each account balance will be tested under either tests of controls or tests of transactions.

3. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
   1. Fictitious            transactions               may         be        recorded           that        cause           an understatement of revenues and overstatement of receivables.
   2. Claim received from customers for goods returned may be intentionally recorded in other customer’s accounts.
   3. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
   4. The failure to prepare shipping documents may cause an overstatement of inventory balances.

4. Accepting an engagement to examine an entity’s financial projection most likely would be appropriate if the projection were to be distributed to
   1. All employees who work for the entity.
   2. Potential            stockholders               who        request           a       prospectus              or       a registration statement.
   3. A bank with which the entity is negotiating for a loan.
   4. All stockholders of record as of the report date.

5. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?
   1. Completeness                                                                   c. Valuation or allocation
   2. Existence or occurrence                                                                d.                      Rights and obligations

6. Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and expenses?
   1. The current year’s accounts receivable with the prior year’s accounts receivable.
   2. The current year’s payroll expense with the prior year’s payroll expense.
   3. The budgeted current year’s sales with the prior year’s sales.
   4. The budgeted current year’s warranty expense with the current year’s contingent liabilities.

7. An auditor is planning an audit engagement for a new client in a business that is unfamiliar to the auditor. Which of the following would be the most useful source of information for the auditor during the preliminary planning stage, when the auditor is trying to obtain a general understanding of audit problems that might be encountered?
   1. Client manuals of accounts and charts of accounts.
   2. Industry Audit Guides.
   3. Prior year documentation of the predecessor auditor.
   4. Latest annual and interim financial statements issued by the client.

8. An auditor’s report on financial statements prepared in accordance with the financial reporting provisions of a contract (that is, a special purpose framework) to comply with the provisions of that contract should include all of the following, except
   1. An opinion as to whether the financial statements are presented fairly, in all material respects, in accordance with the financial reporting provisions of the contract.
   2. A statement that indicates the basis of accounting used.

1. 3. An opinion as to whether the basis of accounting used is appropriate under the circumstances.
   4. Reference to the note to the financial statements that describes the basis of presentation.

9. An entity’s management is responsible for the preparation and fair presentation of the financial statements. Its responsibility includes the following, except
   1.         Designing, implementing, and maintaining internal control relevant to the preparation and presentation of financial statements.
   2.         Making accounting estimates that are reasonable in the circumstances.
   3. Selecting and applying appropriate accounting policies.
   4.         Assessing the risks of material misstatement of the financial statements.

10. Which of the following statements best expresses the objective of the traditional audit of financial statements?
    1.         To express an opinion on the fairness with which the statements present financial position, financial performance, and cash flows in accordance with Philippine Financial Reporting Standards.
    2.         To express an opinion on the accuracy with which the statements present financial position, financial performance, and cash flows in accordance with Philippine Financial Reporting Standards.
    3.         To make suggestions as to the form or content of the financial statements or to draft them in whole or in part.
    4.         To assure adoption of sound accounting policies and the establishment and maintenance of internal control.

11. Which of the following statements concerning related party transactions is correct?
    1.         In the absence of evidence to the contrary, related party transactions should be assumed to be outside the ordinary course of business.
    2.         The audit procedures directed toward identifying related party transactions should include considering whether

transactions are occurring but are not being given proper accounting recognition.

1. 3.         An auditor should determine whether a particular transaction would have occurred if the parties had not been related.
   4.         An auditor should substantiate that related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions.

12. The auditor shall assemble the audit documentation in a/an
    1. Working paper                                                                                          c. Audit file
    2. Workpaper                                                                                 d. Audit memorandum

13. The auditor is required to complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor’s report. The time limit within which to complete the assembly of the audit file is ordinarily
    1. Not more than 30 days after the date of the auditor’s report.
    2. Not more than 60 days after the date of the auditor’s report.
    3. Not more than 90 days after the end of the entity’s reporting period.
    4. Not more than 60 days after the date the entity’s financial statements are authorized for issue.

14. According to Section 9(A) of the IRR, the Commission upon the recommendation of the Board, shall create an auditing standard setting body to be known as the
    1. Auditing and Assurance Standards Council (AASC)
    2. Auditing Standards and Practices Council (ASPC)
    3. Auditing Standards Board (ASB)
    4. Auditing Standards Council (ASC)

15. The following documents shall be submitted by applicants for the CPA licensure examination, except
    1.         Certificate of Live Birth in National Statistics Office (NSO) security paper.
    2.         Marriage contract in NSO security paper for all married applicants.
    3.         Marriage contract in NSO security paper for married female applicants.

1. 4.         Transcript of records with indication therein of date or graduation and Special Order number unless it is not required.

16. The following documents are to be submitted by a foreign applicant whose letter/document and the copy of the law on foreign reciprocity of his/her country/state are satisfactory to the BOA, except
    1. Certificate of Religious Affiliation.
    2. Original or authenticated copy of transcript of records or equivalent document of the course for licensure examination where he/she studied, duly authorized or accredited by his/her country/state.
    3. The original or certified copy of any official documents issued by the Bureau of Immigration and Deportation allowing the applicant to enter and reside in the Philippines.
    4. Certificate of Registration or its equivalent stating that the foreign applicant is duly registered or licensed CPA or its equivalent in his/her country/state.

17. Which part of the Code of Ethics applies to professional accountants in public practice?
    1. Part A                                                                                    c. Part C
    2. Part B                                                                                    d. Part D

18. Which of the following fundamental ethical principles prohibits association of professional accountants with reports, returns, communications or other information that is believed to contain a materially false or misleading statement?
    1. Integrity                                                               c. Professional competence and due care
    2. Objectivity                                                          d. Confidentiality

19. Safeguards created by the profession, legislation or regulation include the following, except
    1. Continuing professional development requirements.
    2. Professional standards.
    3. Firm-wide and engagement specific safeguards.
    4. Educational, training and experience requirements for entry into the profession.

20. On which of the following safeguards a professional accountant in public practice cannot rely solely to reduce threats to an acceptable level?
    1. Safeguards created by the profession, legislation or regulation.
    2. Firm-wide safeguards.
    3. Engagement specific safeguards.
    4. Safeguards within the client’s systems and procedures.

21. If the fee quoted for a professional service is so low, it may be difficult for the CPA to perform the engagement in accordance with applicable technical and professional standards for that price. This situation may create a self-interest threat to
    1. Professional competence and due care                                                                 c. Integrity
    2. Objectivity                                                                                          d.                          Professional behavior

22. Which of the following is not a contingent fee?
    1. A fee that is dependent upon the approval of the assurance client’s loan application
    2. An audit fee that is based on 5% of the client’s adjusted net income for the current year
    3. A fee that is fixed by a court or other public authority
    4. An arrangement whereby no fee will be charged unless a specified finding or result is attained

23. A self-interest threat would be created if the firm, or a member of the assurance team, makes a loan to an assurance client that is not a bank or similar institution, or guarantees such an assurance client’s borrowing. The self-interest threat created would be so significant that no safeguard could reduce the threat to an acceptable level unless the loan or guarantee is
    1. Made under normal lending terms, procedures and requirements
    2. Immaterial to the firm or the member of the assurance team
    3. Immaterial to both or the member of the assurance team and the assurance client
    4. Made under normal lending terms, procedures and requirements and the loan or guarantee is immaterial to both the firm or the member of the assurance team and the assurance client

24. The        auditor’s           risk        assessment              procedures             should          always include the following, except
    1. Inquiries of management and of others within the entity
    2. Analytical procedures
    3. Observation and inspection
    4. Substantive test procedures and tests of controls

25. The auditor’s risk assessment procedures
    1. By themselves, do not provide sufficient appropriate audit evidence on which to base the audit opinion
    2. Should not consider information obtained from the auditor’s previous experience with entity
    3. Are designed to detect material misstatement at the assertion level of classes of transactions, account balances and disclosures
    4. Are designed to test the effectiveness of the entity’s controls

26. Which of the following statements concerning audit risk and its components is incorrect?
    1. Regardless of the assessed levels of inherent and control risks, the auditor should always perform some substantive procedures for material account balances and classes of transactions
    2. The higher the assessment of inherent and control risks, the more evidence the auditor should obtain from the performance of substantive procedures
    3. The assessed level of inherent risk need not be considered in determining the nature, timing, and extent of substantive procedures required to reduce audit risk to an acceptably low level
    4. After obtaining an understanding of the accounting and internal control systems, the auditor should make a preliminary assessment of control risk, at the assertion level, for each material account balance or class of transactions

27. The following are components of internal control
    1. Control activities                                                              c. Control environment
    2. The entity’s risk assessment process                                                      d. Business risk

28. An entity’s internal control system contains manual elements and often contains automated elements. Manual elements in internal control may be less reliable than automated elements because
    1. Manual control elements can be more easily bypassed, ignored, or overridden and they also more prone to simple errors and mistakes
    2. Manual control elements facilitate the additional analysis of information
    3. Consistency of application of manual control elements can always be assumed
    4. Manual control elements include reliance on systems or programs that are inaccurately processing data, processing inaccurate date, or both

29. Which of the following components of an entity’s internal control includes development and use of training policies that communicate prospective roles and responsibilities to employees?
    1. Monitoring of controls                                                                   c. Control environment
    2. Control activities                                                              d. Information and communication

30. Control activities relate to the following, except
    1. Segregation of duties
    2. Performance reviews
    3. An internal audit function
    4. Authorization

31. Internal control should be designed to provide reasonable assurance that
    1. Management’s planning, organizing, and directing processes are properly evaluated
    2. Management’s plans have not been circumvented by employee collusion
    3. Material errors or fraud will be prevented, or detected and corrected within a timely period by employees in the course of performing their assigned duties
    4. The internal auditing department’s guidance and oversight of management’s performance is accomplished economically and efficiently

32. An audit is conducted on the premise that management and, where appropriate, those charged with governance, have acknowledged and understand that they have responsibilities that are fundamental to the conduct of an audit in accordance with PSAs. Which of t6he following is not one of those responsibilities?
    1. The preparation of financial statements in accordance with relevant pronouncements issued by the ASCC
    2. The establishment and maintenance of an adequate internal control system that is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error
    3. To provide the auditor with access to all information that is relevant to the preparation of the financial statements such as records, documentation, and other matters
    4. To provide the auditor with unrestricted access to persons within the entity from which the auditor determines it necessary to obtain evidence

33. In performing an audit of financial statements, the auditor should obtain a sufficient knowledge of a client’s business and industry to
    1. Develop an attitude of professional skepticism concerning management’s financial statement assertions
    2. Make constructive suggestions concerning improvements to the client’s internal control
    3. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated
    4. Understand the events and transactions that may have an effect on the client’s financial statements

34. The establishment of an overall audit strategy involves

1. Determining the characteristics of the engagement that define its scope
2. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required
3. Considering the important factors that will determine the focus of the engagement team’s efforts.

1. 1. I and II only                                                                                         c. I and III only
   2. II and III only                                                                                      d. I, II and III

35. Which of the following should be included in the audit plan?

1. The nature, timing and extent of planned risk assessment procedures, as determined under PAS 315 (Identifying and Assessing the Risks of Material Misstatements trough Understanding the Entity and its Environment)
2. The nature, timing and extent of planned further audit procedures at the assertion level, as determined under PSA 330 (The Auditor’s Responses to Assessed Risks)

b. I only                                                                                       c. Both I and II

c. II only                                                                                                      d. Neither I nor II

36. Which of the following matters would an auditor most likely consider when establishing the scope of the audit?
    1. The expected audit coverage, including the number and locations of the entity’s components to be included
    2. The entity’s timetable for r4epoting, such as at interim and final stages
    3. The discussion with the status of audit work throughout the engagement and the expected deliverables resulting from the audit procedures
    4. Audit areas where there is a higher risk of material misstatement

37. Audit programs are modified to suit the circumstances of particular engagements. A complete audit progr5am usually should be developed
    1. When the engagement letter is prepared
    2. After obtaining an understanding of the control environment and control activities components of the entity’s internal control
    3. After the auditor has obtained an understanding of the entity and its environment, including its internal control and assessed the risks of material misstatement
    4. Prior to beginning the actual audit work

38. In connection with the planning phase of an audit engagement, which of the following statements is always correct?

1. 1. Final staffing decisions must be made prior to completion of the planning stage
   2. Observation of inventory count should be performed at year- end
   3. A portion             of the audit of a continuing audit client can be performed at interim dates
   4. An engagement should not be accepted after the client’s financial year-end

39. An adequate system of internal controls is most likely to detect a fraud perpetrated by a
    1. Group of employees in collusion
    2. Single employee
    3. Group of managers in collusion
    4. Single manager

40. Controls should be designed to provide reasonable assurance that
    1. Organizational objectives and goals will be achieved economically and efficiently
    2. Management’s plans have not been circumvented by worker collusion
    3. The internal audit activity’s guidance and oversight of management’s performance is accomplished economically and efficiently
    4. Management’s planning, organizing, and directing processes are properly evaluated

41. Criteria that are embodied in laws or regulations, or issued by authorized or recognized bodies of experts that follow a transparent due process are called
    1. Suitable criteria                                                                                 c.                              Specifically developed criteria
    2. Established criteria                                                                          d. General criteria

42. In an assurance engagement, the outcome of the evaluation or measurement of a subject matter against criteria is called
    1. Subject matter information                                                         c. Assurance
    2. Subject matter                                                                                  d. Conclusion

43. The following are characteristics of “direct reporting” assurance engagements, except
    1. The subject matter information is in the form of an assertion by the responsible party that is made available to the intended users
    2. The subject matter information is provided to the intended users in the assurance report
    3.     The practitioner either directly performs the evaluation or measurement of the subject matter or obtains a representation from the responsible party that has performed the evaluation or measurement
    4. The representation of the responsible party that has performed the evaluation or measurement of the subject matter is not available to the intended users

44. What type of assurance engagement is involved when the practitioner expresses a negative form of conclusion?
    1. Reasonable assurance engagement
    2. Negative assurance engagement
    3. Assertion-based assurance engagement
    4. Limited assurance engagement

45. Assurance engagement risk is the risk
    1. That the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated
    2. Of expressing an inappropriate conclusion when the subject matter information is not materially misstated
    3. Through loss from litigation, adverse publicity, or other events arising in connection with a subject matter reported on
    4. Of expressing an inappropriate conclusion when the subject matter information is either materially misstated or not materially misstated

46. The following statements relate to the performance of an assurance engagement other than an audit or review of historical financial information covered by PSAs and PSREs. Which is incorrect?

1. 1. Those persons who are perform the engagement should collectivity possess the necessary professional competence
   2. The practitioner is not allowed to use the work of persons from other professional disciplines
   3. The practitioner should consider materiality and assurance engagement risk when planning and performing an assurance engagement
   4. The assurance report should be in writing and should contain a clear expression of the practitioner’s conclusion about the subject matter information

47. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as a result of the following factors, except
    1. The use of selective testing
    2. The fact that much of the evidence available assurance knowledge is persuasive rather than conclusive
    3. The practitioner may not have the required assurance knowledge and skills to gather and evaluate evidence
    4. The use of judgment in gathering and evaluating evidence and forming conclusions based on that evidence

48. The Philippine Standards on Quality Control (PSQCs) are to be applied to
    1. Assurance engagements only
    2. Review engagements only
    3. Compilation and review engagements only
    4. All services that fall under the AASC’s engagement standards

49. The overall objectives of the auditor in conducting an audit of financial statements are

1. To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether caused by fraud or error
2. To report on the financial statements
3. To obtain conclusive rather than persuasive evidence
4. To detect all misstatements, whether due to fraud or error
   1. I and II only                                                                                         c. I, II and III only
   2. II and IV only                                                                                      d. I, II, III and IV

50. The auditor is required to maintain professional skepticism throughout the audit. Which of the following statements concerning professional skepticism is false?
    1. A belief that management and those charged with governance are honest and have integrity relieves the auditor of the need to maintain professional skepticism
    2. Maintaining professional skepticism throughout the audit reduces the risk of using inappropriate assumptions in determining the nature, timing and extent of the audit procedures and evaluating the results thereof
    3. Professional skepticism is necessary to the critical assessment of audit evidence
    4. Professional skepticism is an attitude that includes questioning contradictory audit evidence obtained

51. Professional judgment
    1. Should be exercised in planning and performing an audit of financial statements but need not be documented
    2. Can be used as the justification for the decisions made by the auditor that are not supported by the facts and circumstances of the engagement
    3. Is necessary in the evaluation of management’s judgments in applying the entity’s applicable financial reporting framework
    4. Is not used in making decisions about materiality and audit risk

52. The internal auditing profession has advanced primarily as a result of
    1. Increased interest by Bachelor of Science in Accountancy (BSA) graduates and experienced auditors
    2. Job qualification specifications that included added emphasis on background knowledge and skills
    3. The limitation of financial statement audit scope
    4. Increased complexity and sophisticated of business operations

53. As       defined         in      PSA         500,                                           is        an       individual           or

organization possessing the expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements

1. 1. Auditor’s expert                                                               c. Auditor’s internal expert

1. 2. Management’s expert                                                                  d. Auditor’s external expert

54. Which of the following statements concerning the management’s expert’s competence, capabilities and objectivity is correct?
    1. Objectivity relates to the ability of the management’s expert to exercise the competence in the circumstances
    2. Competence relates to the possible effects that bias, conflict of interest or the influence of others may have on the professional or business judgment of the management’s expert
    3. Capability relates to the nature and level of expertise of the management’s expert
    4. The management’s expert’s competence, capabilities and objectivity are important factors in relation to the reliability of any information prepared by the management’s expert

55. Audit evidence is information used to draw reasonable conclusions on which to base the auditor’s opinion. Audit evidence is obtained by performing

1. Risk assessment procedures
2. Further audit procedures

a. I only         b. II only                                            c. Either I or II                                    d. Both I and II

56. Which           of       the        following            would          least          likely          affect          the appropriateness of evidence available to an auditor?
    1. The sampling method employed by the auditor to obtain a sample of such evidence
    2. The relevance of such evidence to the financial statement assertion being verified
    3. The relationship of the preparer of such evidence to the entity being audited
    4. The timeless of such evidence

57. The objective of tests of details of transactions performed as substantive tests is to
    1. Attain assurance about the reliability of the accounting system
    2. Evaluate            whether          management’s                policies           and        procedures operated effectively

1. 3. Detect material misstatements in the financial statements
   4. Comply with generally accepted auditing standards

58. In determining whether transactions have been recorded, the direction of the audit testing should be from the
    1. General journal entries                                                                 c.           General                ledger balances
    2. Original source documents                                                          d.             Adjusted                  trial balance

59. Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion?
    1. Materiality                                                                          c. Auditor judgment
    2. Audit risk                                                                             d. Reasonable assurance

60. An auditor who uses the work of an expert may refer to and identify the expert in the auditor’s report if the
    1. Expert is employed by the entity
    2. Expert’s           work        provides           the       auditor         greater          assurance             of reliability
    3. Auditor expresses a qualified opinion or an adverse opinion related to the work of the expert
    4. Auditor indicates a division of responsibility related to the work of the expert

61.)          When an auditor increases the assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the

a.) Tests of controls b.) Extent of tests of details c.) Tolerable risk d.) Population size

62.) Xavier, CPA is currently auditing the financial statements of the Polk Corporation. At the moment, Xavier is assessing the control risk surrounding the recognition of sales revenue. The CPA has become concerned that revenues are understated. The CPA thinks the company may be shipping merchandise to false customers with no sales invoice (or other record) being prepared. If true, company

employees are using this scheme to steal goods from the company. In assessing the possibility of this problem, which of the following is the auditor most likely to do?

1. Take a sample of sales invoices and match those documents to the appropriate bill of lading or other shipping document.
2. Take a sample of receiving reports and match those documents to the appropriate sales invoice.
3. Take a sample of cash receipts and match those payments to the appropriate sales invoice.
4. Take a sample of bills of lading (or other shipping document) and match those documents to the appropriate sales invoice.

63.) An auditor is assessing the level of inherent risk in an audit engagement and finds that it is higher than expected. Which of the following results is most likely?

1. The acceptable level of audit risk should be raised.
2. The desired level of detection risk should be reduced
3. The acceptable level of audit risk should be lowered
4. The desired level of control risk should be reduced.

64.) Epptons, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. The internal control structure at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Epptons would most likely

1. Send negative confirmation requests.
2. Send positive confirmation requests.
3. Inspect the internal records such as copies of the tax invoices that were mailed to the residents.
4. Examine evidence of subsequent cash receipts

65.) Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process?

1. Parallel simulation.
2. Generalized audit software programming.
3. Test data approach.
4. Integrated test facility.

66.) Tests of controls may include which of the following types of evidence?

1. 1. Inquiry.
   2. Observation.
   3. Inspection.
   4. All of the above.

67.) In accordance with SAS No. 105, which of the following correctly denotes the revised wording of the first general standard of auditing?

1. 1. 1. The audit must be performed by a person or persons with a college degree in accounting.
      2. The audit must be performed by a person or persons who are partners in a CPA firm.
      3. The audit must be performed by a person or persons having adequate technical training and proficiency as an auditor.
      4. The audit should be performed by a person or persons having adequate technical training and proficiency as an auditor.

68.) When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and

1. Recalculating payroll accruals.
2. Observing the distribution of paychecks.
3. Footing and cross footing the payroll register.
4. Inspecting payroll tax returns.

69.) Which of the following procedures would be most effective in reducing attestation risk?

1. Discussion with responsible individuals.
2. Examination of evidence.
3. Inquiries of senior management.
4. Analytical procedures.

70.) Significant deficiencies and material weaknesses in internal control of a public company must be reported to which of the following?

1. Members of management who are responsible for the related area of the company.
2. Audit Committee of the company's board of directors
3. The Public Company Accounting Oversight Board.
4. None of the above is correct.

71.) An auditor most likely would assess control risk at the maximum if the payroll department supervisor is responsible for

1. 1. Comparing payroll registers with original batch transmittal data.
   2. Authorizing payroll rate changes for all employees.
   3. Examining authorization forms for new employees.
   4. Hiring all subordinate payroll department employees.

72.) In the early stages of an audit engagement, the independent CPA must obtain a general understanding of internal control. Which of the following is not studied as part of that step in the audit process?

1. Control environment
2. Risk assessment
3. Control activities
4. Internal independence

73.) Which of the following best describes proper internal control over payroll?

1. The payment of cash to employees should be replaced with payment by checks.
2. The confidentiality of employee payroll data should be carefully protected to prevent fraud.
3. The duties of hiring, payroll computation, and payment to employees should be segregated.
4. The preparation of the payroll must be under the control of the personnel department.

74.) The primary purpose of an auditor's consideration of internal control is to provide a basis for

1. Determining whether procedures and records that are concerned with the safeguarding of assets are reliable.
2. Constructive suggestions to clients concerning improvements in internal control.
3. Determining the nature, extent, and timing of audit tests to be applied.
4. To express an opinion.

75.) Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to management and those in charged with governance?

1. Management's failure to renegotiate unfavorable long- term purchase commitments.
2. Recurring operating losses that may indicate going concern problems.
3. Evidence of a lack of objectivity by those responsible for accounting decisions.
4. Management's current plans to reduce its ownership equity in the entity.

76.) In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to

1. Determine whether control procedures are suitably designed to prevent or detect material misstatements.
2. Perform tests of controls to evaluate the effectiveness of the entity's accounting system.

3. Search for significant deficiencies in the operation of the internal control structure.
4. Document the auditor's understanding of the entity's internal control structure

77.) A CPA is performing an audit examination of Malfoy, Inc. The CPA has already done the work necessary to gain a general understanding of the company’s internal control. The CPA is now looking at the internal control policies and procedures within the accounting system specifically for accounts receivable. The CPA has decided to perform test of controls in this area. Which of the following is least likely to be true?

1. The system contains an excess number of possible problems so that testing is required.
2. The internal control system appears to be well designed.
3. The CPA hopes to reduce the necessary amount of substantive testing.
4. The CPA hopes to reduce overall audit time.

78.) Mr. A makes a 3,000 payment on Monday to Acme Company. The money is stolen by one of Acme’s employees. On Friday, Ms. B makes a 3,000 payment to Acme Company. The same employee credits this payment to Mr. A’s account (rather than to Ms. B’s account) so that a second bill will not be sent to him. Several days

later, a payment is received from Mr. C and it is posted to Ms. B’s account. What is this type of theft known as?

1. Posting Fraud
2. Reconciliation Shortage
3. Lapping
4. Receivable Management Deficiency (RMD)

79.) Effective internal control over purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has

1. The authority to make purchases of requisitioned materials and services.
2. A direct reporting responsibility to the controller of the organization.
3. The responsibility of reviewing purchase orders issued by user departments
4. The ability to prepare payment vouchers based on the information on a vendor's invoice.

80.) An auditor uses the assessed level of control risk to

1. Determine the acceptable level of detection risk for financial statement assertions.
2. Evaluate the effectiveness of the entity's internal control policies and procedures.
3. Identify transactions and account balances where inherent risk is at the maximum.
4. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.

81.) In reporting on an entity's internal control structure over financial reporting, a practitioner should include a paragraph that describes the

1. Inherent limitations of any internal control structure.
2. Documentary evidence regarding the control environment factors.
3. Changes in the internal control structure since the prior report.
4. Potential benefits from the practitioner's suggested improvements.

82.) An auditor uses the knowledge provided by the understanding of internal control and the assessed level of control risk primarily to

1. Determine whether procedures and records concerning the safeguarding of assets are reliable.
2. Determine the nature, timing, and extent of substantive tests for financial statement assertions.
3. Modify the initial assessments of inherent risk and preliminary judgments about materiality levels.
4. Ascertain whether the opportunities to allow any person to both perpetrate and conceal irregularities are minimized.

83.)          The auditor should use the risk assessment to determine:

1. Whether to accept the engagement.

2. The type of opinion to issue in the Audit Report.
3. The size of the audit team.
4. The nature, timing, and extent of further audit procedures to be performed.

84.) After obtaining an understanding of an entity's internal control and assessing control risk, an auditor may next

1. Perform tests of controls to verify management's assertions that are embodied in the financial statements.
2. Apply analytical procedures as substantive tests to validate the assessed level of control risk.
3. Evaluate whether the internal control structure policies and procedures detected material misstatements in the financial statements.
4. Consider whether evidential matter is available to support a further reduction in the assessed level of control risk.

85.) Which of the following is not a component of an entity's internal control?

1. The control environment.
2. Risk assessment.
3. Information and communication.
4. Control risk.

86.) Which of the following is responsible for establishing internal controls for a public company?

1. Management.
2. Management and auditors.
3. Committee on Sponsoring Organizations.

4. Financial statement auditors.

87.) The auditor's study of a public company's internal control is:

1. Recommended by the PICPA.
2. Required by GAAS.
3. Required by PICAP.
4. Required by the Sarbanes-Oxley Act.

88.) The auditor's study of a private company's internal control is:

5. Recommended by the PICPA.
6. Required by GAAS.
7. Required by PICAP.
8. Required by the Sarbanes-Oxley Act.

89.) Which of management's concerns with respect to implementing internal controls is the auditor primarily concerned?

1. Reliability of financial reporting.
2. Efficiency of operations.
3. Compliance wit applicable laws and regulations.
4. Effectiveness of operations.

90.) When an auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be:

1. Testing controls.
2. Vouching.
3. Tracing.
4. Performing a walk-through.

91.) The primary emphasis by auditors by auditor when assessing internal control is on controls over:

1. Account balances.
2. Classes of transactions.
3. Both A and B, because they are equally important.
4. Both A and B, because they vary from client to client.

92.) Narrative, flowcharts, and internal control questionnaires are three common methods of:

1. Documenting the auditor's understanding of internal controls.
2. Designing the audit manual and procedures.
3. Testing the internal controls.
4. Documenting the auditor's understanding of the client's organizational structure.

93.) In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would

1. Perform test counts of inventory during the entity's physical count.
2. Analyze inventory turnover statistics to identify slow- moving and obsolete items.
3. Review the entity's descriptions of inventory policies and procedures.
4. Analyze monthly production reports to identify variances and unusual transactions.

94.) The auditor who becomes aware of a reportable condition in internal control is required to communicate this to the

1. Senior management and board of directors.
2. Board of directors and internal auditors.
3. Internal auditors and senior management.
4. Audit committee or its equivalent.

95.) After obtaining an understanding of internal control and assessing control risk, an auditor decide to perform tests of controls.

The auditor most likely decided that

1. It would be efficient to perform tests of controls that would result in a reduction in planned substantive tests.
2. There were many internal control structure weaknesses that could allow errors in the accounting systems.

3. Additional evidence to support a further reduction in control risk is not available.
4. An increase in the assessed level of control risk is justified for certain financial statement assertions.

96.) When management is evaluating the design of internal control, management evaluates whether the control can do all but which of the following?

1. Correct material misstatements.
2. Prevent material misstatements.
3. Detect material misstatements.
4. None of the above is correct.

97.) Which of the following may increase risk to an organization?

1. Quality of personnel.
2. Presence of new information technologies.
3. Geographic dispersion of the company operations.
4. All of the above.

98.) Risk assessment for financial reporting is management’s process for identifying, analyzing, and responding to risks relevant to the preparation of financial statements in conformity with:

1. Generally Accepted Accounting Standards
2. Generally Accepted Auditing Standards.
3. PCAOB Auditing Standards.
4. Generally Accepted Accounting Principles

99.) An auditor is currently assessing control risk and finds that it is lower than had been anticipated. How does this discovery impact the work of the auditor?

1. 1. The acceptable level of audit risk can be raised.
   2. The acceptable level of inherent risk can be lowered.
   3. The acceptable level of audit risk can be lowered.