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Homework answers / question archive / University of Mindanao - Main Campus (Matina, Davao City) AUDIT 411 1)According to the professions ethical standards, an auditor would be considered independent in which of the following instances? The auditor is the officially appointed stock transfer agent of a client

University of Mindanao - Main Campus (Matina, Davao City) AUDIT 411 1)According to the professions ethical standards, an auditor would be considered independent in which of the following instances? The auditor is the officially appointed stock transfer agent of a client


University of Mindanao - Main Campus (Matina, Davao City)


1)According to the professions ethical standards, an auditor would be considered independent in which of the following instances?

    1. The auditor is the officially appointed stock transfer agent of a client.
    2. The auditor’s checking account that is fully insured by the PDIC is held at a client financial institution.
    3. The client owes the auditor fees for more than two years prior to the issuance of the audit report.
    4. The client is the only tenant in a commercial building owned by the auditor.


  1. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of material misstatements in an entity’s financial statements?
    1. The entity’s industry is experiencing declining customer demand.
    2. Employees who handle cash receipts are not bonded.


    1. Bank reconciliations usually include in-transit deposits.
    2. Equipment is often sold at a loss before being fully depreciated.


  1. 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 an overstatement of receivables.
    2. Claims received from customers for goods returned may be intentionally recorded in other customers’ 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.


  1. In planning an audit, the auditor’s knowledge about the design of relevant controls should be used to
    1. Identify the types of potential misstatements that could occur.
    2. Assess the operational efficiency of internal control.
    3. Determine whether controls have been circumvented by collusion.
    4. Document the assessed level of control risk.



  1. During an engagement to review the financial statements of an audit client, an accountant becomes aware that several leases that should be capitalized are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should
    1. Issue an adverse opinion because of the departure from GAAP.
    2. Express no assurance of any kind on the entity’s financial statements.
    3. Emphasize that the financial statements are for limited use only.
    4. Disclose the departure from GAAP in a separate paragraph of the accountant’s report.


  1. A primary objective of analytical procedures used in the final review stage of an audit is to
    1. Identify account balances that represent specific risks relevant to the audit.
    2. Gather evidence from tests of details to corroborate financial statement assertions.
    3. Detect fraud that may cause the financial statements to be misstated.
    4. Assist the auditor in evaluating the overall financial statement presentation.


  1. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?
    1. Significant related-party transactions are pervasive.
    2. Usual trade credit from suppliers is denied.


    1. Arrearages in preferred stock dividends are paid.
    2. Restrictions on the disposal of principal assets are present.


  1. Accepting an engagement to compile a financial projection most likely would be inappropriate if the projection is to be distributed to
    1. The entity’s principal stockholder, to the exclusion of the other stockholders.
    2. Potential stockholders in an offering statement.
    3. A financial institution in a loan application.
    4. A state or federal regulatory agency.


  1. Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
    1. “We believe that the possible liability to the company is nominal in amount.”
    2. “We believe that the action can be settled for less than the damages claimed.”
    3. “We believe that the plaintiff’s case against the company is without merit.”
    4. “We believe that the company will be able to defend this action successfully.”


  1. After considering management’s plans, an auditor concludes that there is substantial doubt about a client’s ability to continue as a going concern for a reasonable period of time. The auditor’s responsibility includes
    1. Disclaiming an opinion on the financial statements due to the indications of possible financial difficulties.
    2. Indicating to the client’s audit committee whether management’s plans for dealing with the adverse effects of the financial difficulties can be effectively implemented.


    1. Considering the adequacy of disclosure about the client’s possible inability to continue as a going concern.
    2. Issuing a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.


  1. Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
    1. Determine whether inventory ordered before the year-end was included in the physical count.
    2. Inquire about payroll checks that were recorded before year-end but cashed after year-end.
    3. Investigate changes in capital stock recorded after year-end.
    4. Review tax returns prepared by management after year-end.


  1. When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations
    1. Copies of the client’s shipping documents that support the account balances.
    2. Lists of the customers’ recent payments that the client has already recorded.
    3. Client-prepared statements of account that show the details of the account balances.
    4. Copies of the customers’ purchase orders that support the account balances.


  1. A CPA started to audit the financial statements of an audit client. After completing certain audit procedures, the client requested the CPA to change the engagement to a review because of a scope limitation. The CPA concludes that there is reasonable justification for the change. Under these circumstances, the CPA’s review report should include a


    1. Statement that a review is substantially less in scope than an audit.
    2. Reference to the scope limitation that caused the changed engagement.
    3. Description of the auditing procedures that were completed before the engagement was changed.
    4. Reference to the CPA’s justification for agreeing to change the engagement.


  1. Before accepting an engagement to audit a new client, a CPA is required to obtain
    1. An assessment of fraud risk factors likely to cause material misstatements.
    2. An understanding of the prospective client’s industry and business.
    3. The prospective client’s signature to a written engagement letter.
    4. The prospective client’s consent to make inquiries of the predecessor, if any.


  1. The purpose of tracing a sample of inventory tags to a client’s computerized listing of inventory items is to determine whether the inventory items
    1. Represented by tags were included on the listing.
    2. Included on the listing were properly counted.
    3. Represented by tags were reduced to the lower of cost or market.
    4. Included in the listing were properly valued.


  1. Which of the following actions should a CPA firm take to comply with the quality control standards?
    1. Establish procedures that comply with the standards of the Sarbanes-Oxley Act.
    2. Use attributes sampling techniques in testing internal controls.
    3. Consider inherent risk and control risk before determining detection risk.
    4. Establish policies to ensure that the audit work meets applicable professional standards.


  1. After an audit report is issued, an auditor discovers that an important audit procedure was not performed. Which of the following procedures is acceptable in this situation?
    1. No further action is necessary if the audit report can still be supported.
    2. Let the current report stand and correct material errors on the next audit report.
    3. Immediately notify known users of the omitted audit procedure.
    4. Require that the client notify financial statement users of the omitted procedures.


  1. An auditor has identified the controller’s review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?
    1. Observation and inspection of records.        c. Confirmation and reperformance.
    2. Inquiry and inspection of records.                    d. Analytical procedures and reperformance.


  1. Which of the following is a definition of control risk?
    1. The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls.
    2. The risk that the auditor will not detect a material misstatement.
    3. The risk that the auditor’s assessment of internal controls will be at less than the maximum level.
    4. The susceptibility of material misstatement assuming there are no related internal control policies or procedures.



  1. Each of the following types of controls is considered to be an entity-level control, except those
    1. Relating to the control environment.
    2. Pertaining to the company’s risk assessment process.
    3. Regarding the company’s annual stockholder meeting.
    4. Addressing policies over significant risk management practices.


  1. Which of the following statements would not normally be included in a representation letter for a review of interim financial information?
    1. To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet and through the date of this letter that would require adjustment to or disclosure in the interim financial information.
    2. We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.
    3. We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.
    4. We have made available to you all financial records and data.


  1. When performing a review of interim financial information, an accountant would typically do each of the following, except
    1. Consider the results from the latest audit.
    2. Test controls related to the preparation of annual financial information.
    3. Perform analytical procedures.
    4. Make inquiries of management.


  1. Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer’s audit committee?
    1. Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present.
    2. The firm must address all independence impairment issues on the date of the audit opinion.
    3. Communications related to independence may occur in any form prior to issuance for the financial statements.
    4. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.


  1. A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences, except
    1. As a principal financial officer, principal accounting officer, controller, public accountant, or auditor.
    2. Serving on at least one other issuer’s audit committee or disclosure committee of the board of directors.
    3. Actively supervising a principal financial officer or principal accounting officer.
    4. Assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements.


  1. An entity’s comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor’s report was qualified, the successor should


    1. Issue an updated comparative audit report indicating the division of responsibility.
    2. Explain to the client that comparative financial statements may not be presented under these circumstances.
    3. Express an opinion only on the current year’s financial statements and make no reference to the prior year’s statements.
    4. Indicate the substantive reasons for the qualification in the predecessor auditor’s opinion.


  1. How does an auditor make the following representations when issuing the standard auditor’s report on comparative financial statements?

Consistent application of accounting principles           Examination of evidence on a test basis

    1. Implicitly                                                                                                      Explicitly
    2. Explicitly                                                                                                       Implicitly
    3. Implicitly                                                                                                      Implicitly
    4. Explicitly                                                                                                       Explicitly


  1. Which of the following statement is correct concerning analytical procedures used in planning an audit engagement?
    1. They often replace the test of controls that are performed to assess control risk.
    2. They usually use financial and nonfinancial data aggregated at a high level.
    3. They usually involve the comparison of assertions developed by management to ratios calculated by an auditor.
    4. They are often used to develop an auditor’s preliminary judgment about materiality.


  1. When assessing internal auditors’ objectivity, an independent auditor should
    1. Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.
    2. Review the internal auditors’ reports to determine that their conclusions are consistent with the work performed.
    3. Verify that the internal auditors’ assessment of control risk is comparable to the independent auditor’s assessment.
    4. Evaluate the quality of the internal auditors’ working paper documentation and their recent audit recommendations.


  1. During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing

Tests of controls               Substantive tests

    1. Yes                                                 Yes
    2. Yes                                                 No
    3. No                                                  Yes
    4. No                                                  No


  1. In auditing contingent liabilities, which of the following procedures would an auditor most likely perform?
    1. Confirm the details of outstanding purchase orders.
    2. Apply analytical procedures to accounts payable.
    3. Read the minutes of the board of directors’ meetings.
    4. Perform tests of controls on the cash disbursement activities.


  1. An auditor believes there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. In evaluating the entity’s plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity’s plans to
    1. Purchase production facilities currently being leased from a third party.
    2. Postpone expenditures to upgrade its information technology system.
    3. Pay cash dividends that are in arrears to the preferred stockholders.
    4. Increase the useful lives of plant assets for depreciation purposes.


  1. An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. The entity’s financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor’s report is required to include an explanatory paragraph that specifically uses the phrase(s)

“Except for the effects of such adjustments” “Possible discontinuance of the entity’s operations”

    1. Yes                                                                                                                 Yes
    2. Yes                                                                                                                 No
    3. No                                                                                                                  Yes
    4. No                                                                                                                  No



  1. A portion of a client’s inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?
    1. Observation.                                              c. Confirmation.
    2. Calculation.                                                 d. Inspection.


  1. A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming any required disclosures are made, which of the following reports may the CPA issue without violating independence rules?
    1. Compilations.                                            c. Reviews.
    2. Audits.                                                          d. Agreed-upon procedures.


  1. A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA’s minor child. The trust securities are not material to the CPA’s wealth but are material to the child’s personal net worth. According to the Philippine Code of Ethics for CPAs, would this action impair the CPA’s independence with the client?
    1. No, because the CPA would not have a direct financial interest in the client.
    2. Yes, because the stock would be a direct financial interest and materiality is a factor.


    1. Yes, because the stock would be an indirect financial interest and materiality is not a factor.
    2. Yes, because the stock would be a direct financial interest and materiality is not a factor.


  1. Which of the following analytical procedures most likely would be used during the planning stage of an audit?
    1. Comparing current year to prior year sales volumes.
    2. Reading the financial statements and notes and considering the adequacy of evidence.
    3. Comparing the current year ratio of aggregate salaries paid to the number of employees to the prior year’s ratio.
    4. Reading the letter from the client’s attorney and considering the threat of litigation.


  1. Which of the following should an auditor do when control risk is assessed at the maximum level?
    1. Perform fewer substantive tests of details.
    2. Perform more tests of controls.
    3. Document the assessment.
    4. Document the control structure more extensively.


  1. The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may
    1. Allow the internal auditor to perform tests of internal controls.
    2. Allow the internal auditor to audit a major subsidiary of the company.
    3. Not assign any task to the internal auditor because of the internal auditor’s lack of independence.
    4. Allow the internal auditor to perform analytical procedures, but not be involved with any test of details.


  1. An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks?
    1. Incorrect rejection.                                                 c. Incorrect acceptance.
    2. Assessing control risk too low.                           d.  Assessing control risk too high.


  1. According to the Philippine Code of Ethics for CPAs, which of the following actions by a CPA most likely involves an act discreditable to the profession?
    1. Refusing to provide the client with copies of the CPA’s workpapers.
    2. Auditing financial statements according to governmental standards despite the client’s preferences.
    3. Accepting a commission from a nonattest function client.
    4. Retaining client records after the client demands their return.


  1. When planning a review of an audit client’s interim financial statements, which of the following procedures should the accountant perform to update the accountant’s knowledge about the entity’s business and its internal control?
    1. Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year-end.
    2. Inquire of the entity’s outside legal counsel about the status of an previous pending litigation and any new litigation involving the entity.


    1. Select a sample of material revenue transactions occurring during the interim period and examine supporting documentation.
    2. Consider the results of audit procedures performed with respect to the current year’s financial statements.


  1. An accountant has been engaged to compile pro forma financial statements. During the accountant’s acceptance procedures, it is discovered that the accountant is not independent with respect to the company. What action should the accountant take with regard to compilation?
    1. The accountant should discuss the lack of independence with legal counsel to determine whether it is appropriate to accept the engagement.
    2. The accountant should disclose the lack of independence in the accountant’s compilation report.
    3. The accountant should withdraw from the engagement.
    4. The accountant should compile the pro forma statements but should not provide a compilation report.


  1. In an accountant’s review of interim financial information, the accountant typically performs each of the following, except
    1. Reading the available minutes of the latest stockholders’ meeting.
    2. Applying financial ratios to the interim financial information.
    3. Inquiring of the accounting department’s management.
    4. Obtaining corroborating external evidence.


  1. According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations?
    1. The auditor’s cousin has an insurance policy obtained from the issuer before it became an audit client.
    2. The auditor has an automobile loan at standard terms from the audit client that is collateralized by the automobile.
    3. The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client.
    4. The auditor’s grandparent was in an accounting role at the audit client and ended employment before the period under audit began.


  1. A listing of all the things which the auditor will do to gather sufficient, competent evidence is the:
    1. Audit strategy.                                                          c. Audit program.
    2. Audit procedure.                                                     d. Audit risk model.


  1. Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, represent the auditor’s:
    1. Audit strategy.                                                          c. Tests of controls.
    2. Risk assessment procedures.                             d. Tests of transactions.


  1. When the auditor finds that there are missing controls in an area of the accounting system, the audit program in that area would be modified in such a way as to:
    1. Increase the amount of tests of controls.
    2. Increase the reliance on tests of controls.
    3. Cause the issuance of a qualified or adverse opinion.


    1. Eliminate the need for a test of controls.


  1. Which of the following is not appropriate for purposes of testing the effectiveness of controls?
    1. Make inquiries of client personnel.                  c. Evaluate prior experience with the client.
    2. Observe control-related activities.                   d. Reperform client procedures.


  1. Which of the following is not a direct result of performing analytical procedures?
    1. Identify areas of potential misstatements.   c. Reduce detailed audit tests.
    2. Understand the client’s business.                    d. Identify specific errors in the accounts.


  1. What type of test is used to obtain more types of evidence than any other?
    1. Substantive tests of transactions.                     c. Tests of controls.
    2. Analytical procedures.                                           d.  Tests of details.


  1. Only                   involve physical examination and confirmation.
    1. tests of controls                                       c.  tests of transactions
    2. tests of balances                                      d. analytical procedures


  1. Documentation is used in every type of test except                  .
    1. tests of controls                                       c.  tests of transactions
    2. analytical procedures                             d. tests of details



  1. An exception in a test of control indicates the                  of misstatements.
    1. the amount                                                                                c.   the likelihood
    2. the amount, likelihood, and classification                      d. the amount and the classification


  1. Which of the following is not a valid basis for omitting an audit test?
    1. the difficulty and expense involved in testing a particular item.
    2. the relative risk involved.
    3. the degree of reliance on the relevant internal controls.
    4. the relationship between the cost of obtaining evidence and its usefulness.


  1. Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion?
    1. The audit program.                                                                 c.  The auditor’s judgment.
    2. Generally accepted auditing standards.                         d.  The auditor’s working papers.


  1. The reliance placed on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily:
    1. parallel.                        b.   inverse.                         c.   direct.                             d. equal.


  1. When controls are deemed ineffective and assessed control risk is at the maximum for a private company, there will be                                     emphasis placed on tests of controls.


    1. No                  b. relatively little            c. moderate                     d. heavy


  1. Tests of controls address each of the following questions except:
    1. How were the procedures performed?
    2. Why were the procedures performed?
    3. Were the necessary procedures performed?
    4. Who performed the procedures?


  1. Which of the following audit tests would be regarded as a test of controls?
    1. Comparison of the inventory pricing to vendors’ invoices.
    2. Tests of the signatures on canceled checks to board of directors’ authorizations.
    3. Tests of the additions to property, plant, and equipment by physical inspections.
    4. Review of the specific items making up the balance in a given general ledger account.


  1. After finishing the review phase of the study and evaluation of internal control in an audit, the auditor should perform tests of controls on:
    1. those controls that the auditor wants and plans to rely upon.
    2. those controls in which material weaknesses were identified.
    3. those controls that have a material effect upon the financial statement balances.
    4. a random sample of the controls that were reviewed.


  1. At what point in the audit are tests of details most appropriately designed?
    1. Engagement evaluation.


    1. Planning.
    2. Testing.
    3. Communication of material weaknesses.


  1. In valuing inventory, the auditor must consider all but which of the following factors?
    1. The valuation method must be in accordance with GAAP.
    2. The valuation method must be applied on a consistent basis.
    3. The inventory must be valued at the lower of cost or market.
    4. All inventory must be valued using the same valuation method under GAAP.


  1. Controls which provide a means of ensuring that the physical counts are properly summarized, priced at the same amount as the unit records, correctly extended and totaled, and included in the general ledger at the proper amount are known as:
    1. standard cost controls.
    2. pricing internal controls.
    3. compilation internal controls.
    4. count quantity internal controls.
  2. When an outside specialist has assumed full responsibility for taking the client’s physical inventory, reliance on the specialist’s report is acceptable if:
    1. The auditor’s report contains a reference to the assumption of full responsibility.
    2. The auditor is satisfied through application of appropriate procedures as to the reputation and competence of the specialist.
    3. The auditor conducted the same audit tests and procedures as would have been applicable if the client’s employees took the physical inventory.


    1. Circumstances made it impracticable or impossible for the auditor either to do the work personally or observe the work done by the inventory firm.


  1. To best ascertain that a company has properly included merchandise that it owns in its ending inventory, the auditor should review and test the:
    1. Terms of the open purchase orders.
    2. Purchase cutoff procedures.
    3. Contractual commitments made by the purchasing department.
    4. Purchase invoices received on or around year-end.


  1. Hardy Company mass-produces eight different products. The controller who is interested in strengthening internal controls over the accounting for materials used in production would be most likely to implement a(n):
    1. Perpetual inventory system.
    2. Job order cost accounting system.
    3. Economic order quantity system.
    4. Separation of duties among production personnel.


  1. Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items?
    1. The cycle basis is used for physical counts.
    2. Supplies of relatively little value are expensed when purchased.
    3. Perpetual inventory records are maintained only for items of significant value.
    4. The storekeeper is responsible for maintenance of perpetual inventory records.


  1. When auditing a public warehouse, which of the following is the most important audit procedure with respect to disclosing unrecorded liabilities?
    1. Observation of inventory.
    2. Review of outstanding receipts.
    3. Inspection of receiving and issuing procedures.
    4. Confirmation of negotiable receipts with holders



  1. Which of the following statements is not correct?
    1. Analytical procedures used in the planning phase of the audit are primarily directed at understanding the client’s business and directing the auditor’s attention to areas that may contain possible misstatements.
    2. Analytical procedures used in the completion phase are primarily aimed at assessing going concern and secondarily aimed at directing the auditor’s attention to areas that may contain possible misstatements.
    3. Analytical procedures must be used in the planning and completion phases of the audit, and are optional in the testing phase.
    4. Analytical procedures used in the completion phase are primarily aimed at directing the auditor’s attention to areas that may contain possible misstatements and secondarily aimed at assessing going concern


  1. When are auditors likely to encounter judgment problems in the use of analytical procedures?


    1. Whenever the auditor places reliance on management’s explanations for unusual fluctuations in account balances without first developing independent expectations.
    2. Whenever the auditor allows unaudited balances to unduly influence his/her expectations of current balances.
    3. Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when trying to explain what caused them.
    4. The auditor is likely to encounter judgment problems in each of the above instances.


  1. Which of the following is not a primary consideration when assessing inherent risk?
    1. Nature of client’s business.
    2. Existence of related parties.
    3. Frequency and intensity of management’s review of accounting transactions and records.
    4. Susceptibility to defalcation.


  1. Which of the following is an example of the concept of inherent risk?
    1. Humans make more errors than computers; therefore, a manual accounting system is riskier than a computerized system.
    2. Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on the financial statements is reduced.
    3. Loans receivable for a finance company are less likely to be collectible than those of a bank.
    4. Audits with larger sample sizes are less risky than those with smaller sample sizes



  1. Which of the following is not one of the levels of an absence of internal controls?
    1. Major deficiency.
    2. Material weakness.
    3. Significant deficiency.
    4. Control deficiency.


  1. Which of the following is the correct definition of “control deficiency?”
    1. A control deficiency exists if the design or operation of controls does not permit company personnel to prevent or detect misstatements on a timely basis.
    2. A control deficiency exists if one or more deficiencies exist that adversely affect a company’s ability to prepare external financial statements reliably.
    3. A control deficiency exists if the design or operation of controls results in a more than remote likelihood that controls will not prevent or detect misstatements.
    4. A control deficiency exists if the design or operation of controls results in a more than probable likelihood that controls will prevent or detect misstatements.


  1. A(n)                  deficiency exists if a necessary control is missing or not properly formulated.
    1. control
    2. significant
    3. design


    1. operating


  1. The primary emphasis by auditors is on controls over:
    1. classes of transactions.
    2. account balances.
    3. both a and b, because they are equally important.
    4. both a and b, because they vary from client to client.


  1. An auditor should consider two key issues when obtaining an understanding of a client’s internal controls. These issues are:
    1. the effectiveness and efficiency of the controls.
    2. the frequency and effectiveness of the controls.
    3. the design and utilization of the controls.
    4. The implementation and efficiency of the controls.



  1. Hanlon Corp. maintains a large internal audit staff that reports directly to the chief financial officer. Audit reports prepared by the internal auditors indicate that the system is functioning as it should and that the accounting records are reliable. An independent auditor will probably:
    1. eliminate tests of controls.
    2. increase the depth of the study and evaluation of administrative controls.
    3. avoid duplicating the work performed by the internal audit staff.
    4. place limited reliance on the work performed by the internal audit staff.


  1. Which of the following is not a likely source of information to assess fraud risks?
    1. Communications among audit team members.
    2. Inquiries of management.
    3. Analytical procedures.
    4. Consideration of fraud risks discovered during recent audits of other clients.


  1. Auditors usually evaluate the effectiveness of:
    1. hardware controls before general controls.


    1. sales-cycle controls before application controls.
    2. general controls before applications controls.
    3. applications controls before the control environment.


  1. Controls which are designed to assure that the information processed by the computer is authorized, complete, and accurate are called:
    1. input controls.
    2. processing controls.
    3. output controls.
    4. general controls.


  1. Programmers should be allowed access to:
    1. user controls.
    2. general controls.
    3. systems controls.
    4. applications controls.



  1.                 tests determines that every field in a record has been completed.
    1. Validation
    2. Sequence
    3. Completeness
    4. Programming


  1. In an IT-intensive environment, most processing controls are:
    1. input controls.
    2. operator controls.
    3. programmed controls.
    4. documentation controls.


  1. Which of the following is not a processing control?
    1. Control totals.
    2. Logic tests.
    3. Check digits.
    4. Computations tests.


  1. 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. Integrated test facility.
    4. Test data approach.


  1. Firewalls are used to protect:
    1. erroneous internal handling of data.
    2. against insufficient documentation of transactions.
    3. illogical programming commands.
    4. unauthorized use of system resources.


  1. In an IT system, automated equipment controls or hardware controls are designed to:
    1. correct errors in the computer programs.
    2. monitor and detect errors in source documents.
    3. detect and control errors arising from the use of equipment.
    4. arrange data in a logical sequential manner for processing purposes.



  1. While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. Which of the following is not likely to be an acceptable reaction to this discovery?
    1. Perform expanded audit tests in the relevant areas
    2. Increase detection risk in the relevant areas
    3. Increase the sample size
    4. Take no action until tests of other audit areas are completed


  1. When selecting a stratified sample, the sample size is:
    1. determined for the unstratified population and then apportioned to each stratum.
    2. determined for each stratum and selected from that stratum.
    3. determined for each stratum and selected randomly from the entire unstratified population.
    4. always larger than if unstratified sampling had been used.


  1. In monetary-unit sampling, the values of the estimated likely maximum misstatements are referred to as the:
    1. point estimates.
    2. precision intervals.
    3. confidence intervals.
    4. misstatement bounds.


  1. When using monetary-unit sampling, evaluating the likelihood of unrecorded items in the population is:
    1. unnecessary.
    2. impossible.
    3. possible but difficult.
    4. an automatic outcome of the process.


  1. Acceptable risk of incorrect rejection affects auditors’ action only when they conclude that a population is:
    1. fairly stated.
    2. acceptable.
    3. not fairly stated.
    4. acceptable after certain adjustments


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