Question 1

Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?

Accepted Answer

A)  Potential for fraud. 
B)  The company is close to violating loan covenants. 
C)  Firm policy sets materiality at 4% of pretax income. 
D)  A small misstatement would interrupt an earnings trend. 
A)  Potential for fraud. 
B)  The company is close to violating loan covenants. 
C)  Firm policy sets materiality at 4% of pretax income. 
D)  A small misstatement would interrupt an earnings trend. C

Question 2

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if

Accepted Answer

A)  The payments violated the client's policies regarding the prevention of illegal acts. 
B)  The client receives financial assistance from a federal government agency. 
C)  Documentation that is necessary to prove that the bribes were paid does not exist. 
D)  Management fails to take the appropriate remedial action. 
A)  The payments violated the client's policies regarding the prevention of illegal acts. 
B)  The client receives financial assistance from a federal government agency. 
C)  Documentation that is necessary to prove that the bribes were paid does not exist. 
D)  Management fails to take the appropriate remedial action. D

Question 3

All of the following refer to an internal auditor's competence except:

Accepted Answer

A)  The party in the entity to which the internal auditor reports. 
B)  The quality of internal audit documents and reports. 
C)  Professional certification. 
D)  Supervision and review of internal audit activities. 
A)  The party in the entity to which the internal auditor reports. 
B)  The quality of internal audit documents and reports. 
C)  Professional certification. 
D)  Supervision and review of internal audit activities. A

Question 4

Evaluating a prospective client requires the following step(s):

Accepted Answer

A)  Communicate with the predecessor auditor. 
B)  Preplan the audit. 
C)  Establish the terms of the engagement. 
D)  None of the above. 
A)  Communicate with the predecessor auditor. 
B)  Preplan the audit. 
C)  Establish the terms of the engagement. 
D)  None of the above.

Question 5

The external auditor is required to make a number of important communications to the audit committee during or at the end of the audit engagement.

Accepted Answer

A) True 
 B)False

Question 6

The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants

Accepted Answer

A)  That immaterial fraud is not to be reported to the client's audit committee. 
B)  How the results of various auditing procedures performed by the assistants should be evaluated. 
C)  How the overall audit strategy will allow the firm to reach a sufficiently low level of audit risk. 
D)  How overall materiality was selected. 
A)  That immaterial fraud is not to be reported to the client's audit committee. 
B)  How the results of various auditing procedures performed by the assistants should be evaluated. 
C)  How the overall audit strategy will allow the firm to reach a sufficiently low level of audit risk. 
D)  How overall materiality was selected.

Question 7

Which of the following matters generally is included in an auditor's engagement letter?

Accepted Answer

A)  Management's responsibility for the entity's compliance with laws and regulations. 
B)  The factors to be considered in setting preliminary judgments about materiality. 
C)  Management's liability for illegal acts committed by its employees. 
D)  The auditor's responsibility to guarantee accuracy of the financial statements. 
A)  Management's responsibility for the entity's compliance with laws and regulations. 
B)  The factors to be considered in setting preliminary judgments about materiality. 
C)  Management's liability for illegal acts committed by its employees. 
D)  The auditor's responsibility to guarantee accuracy of the financial statements.

Question 8

The existence of a related party transaction may be indicated when another entity

Accepted Answer

A)  Sells real estate to the corporation at a price that is comparable to its appraised value. 
B)  Absorbs expenses of the corporation under audit. 
C)  Borrows from the corporation at a rate of interest which equals the current market rate. 
D)  Lends to the corporation at a rate of interest which equals the current market rate. 
A)  Sells real estate to the corporation at a price that is comparable to its appraised value. 
B)  Absorbs expenses of the corporation under audit. 
C)  Borrows from the corporation at a rate of interest which equals the current market rate. 
D)  Lends to the corporation at a rate of interest which equals the current market rate.

Question 9

Which of the following is the most important qualitative factor that auditors should consider when making materiality judgments?

Accepted Answer

A)  A misstatement exceeded five percent of net income. 
B)  The auditor also provides consulting services to the audit client. 
C)  The misstatement will cause the client to fail to meet an earnings forecast. 
D)  The audit committee is not well-educated about the accounting principle in question. 
A)  A misstatement exceeded five percent of net income. 
B)  The auditor also provides consulting services to the audit client. 
C)  The misstatement will cause the client to fail to meet an earnings forecast. 
D)  The audit committee is not well-educated about the accounting principle in question.

Question 10

All companies must have an audit committee.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?

Accepted Answer

A)  Analysis of balance sheet accounts. 
B)  Analysis of income statement accounts. 
C)  All matters of continuing accounting significance. 
D)  Facts that might bear on management integrity. 
A)  Analysis of balance sheet accounts. 
B)  Analysis of income statement accounts. 
C)  All matters of continuing accounting significance. 
D)  Facts that might bear on management integrity.

Question 12

To emphasize auditor independence from management,publicly traded corporations are required to

Accepted Answer

A)  Appoint a partner of the CPA firm conducting the examination to the corporation's audit committee. 
B)  Establish a policy of discouraging social contact between employees of the corporation and the independent auditors. 
C)  Request that a representative of the independent auditor be on hand at the annual stockholders' meeting. 
D)  Have the independent auditor report to an audit committee of independent members of the board of directors. 
A)  Appoint a partner of the CPA firm conducting the examination to the corporation's audit committee. 
B)  Establish a policy of discouraging social contact between employees of the corporation and the independent auditors. 
C)  Request that a representative of the independent auditor be on hand at the annual stockholders' meeting. 
D)  Have the independent auditor report to an audit committee of independent members of the board of directors.

Question 13

When a CPA is approached to perform an audit for the first time,the CPA should make inquiries of the predecessor auditor.This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining

Accepted Answer

A)  Whether the predecessor's work should be utilized. 
B)  Whether, in the predecessor's opinion, the financial statements are materially correct. 
C)  Whether, in the predecessor's opinion, the company's internal controls have been satisfactory. 
D)  Whether the engagement should be accepted. 
A)  Whether the predecessor's work should be utilized. 
B)  Whether, in the predecessor's opinion, the financial statements are materially correct. 
C)  Whether, in the predecessor's opinion, the company's internal controls have been satisfactory. 
D)  Whether the engagement should be accepted.

Question 14

Under the Sarbanes-Oxley Act,the audit committee of a public company has the following requirement(s):

Accepted Answer

A)  Each member of the committee must be a board member and shall be independent. 
B)  The audit committee must preapprove all audit and nonaudit services. 
C)  The audit committee must establish and maintain procedures to handle all issues that relate to accounting, internal control, and auditing. 
D)  All of the above. 
A)  Each member of the committee must be a board member and shall be independent. 
B)  The audit committee must preapprove all audit and nonaudit services. 
C)  The audit committee must establish and maintain procedures to handle all issues that relate to accounting, internal control, and auditing. 
D)  All of the above.

Question 15

In assessing whether to accept a client for an audit engagement,a CPA should consider

Accepted Answer

A)  The current financial health of the prospective client. 
B)  The integrity of management. 
C)  The CPA's overall engagement risk. 
D)  All of the above should be considered. 
A)  The current financial health of the prospective client. 
B)  The integrity of management. 
C)  The CPA's overall engagement risk. 
D)  All of the above should be considered.

Question 16

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?

Accepted Answer

A)  The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques. 
B)  Management's disregard of its responsibility to maintain an adequate control environment. 
C)  The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions. 
D)  Management's refusal to permit the CPA to perform substantive procedures before the year-end. 
A)  The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques. 
B)  Management's disregard of its responsibility to maintain an adequate control environment. 
C)  The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions. 
D)  Management's refusal to permit the CPA to perform substantive procedures before the year-end.

Question 17

An entity's financial statements were misstated over a period of years due to large amounts of revenue being recorded in journal entries that involved debits and credits to an illogical combination of accounts.The auditor could most likely have been alerted to this fraud by

Accepted Answer

A)  Scanning the general journal for unusual entries. 
B)  Performing a revenue cutoff test at year-end. 
C)  Tracing a sample of journal entries to the general ledger. 
D)  Examining documentary evidence of sales returns and allowances recorded after year-end. 
A)  Scanning the general journal for unusual entries. 
B)  Performing a revenue cutoff test at year-end. 
C)  Tracing a sample of journal entries to the general ledger. 
D)  Examining documentary evidence of sales returns and allowances recorded after year-end.

Question 18

In assessing the competence of an internal auditor,an independent CPA most likely would obtain information about the

Accepted Answer

A)  Quality of the internal auditor's work. 
B)  Organization's commitment to integrity and ethical values. 
C)  Influence of management on the scope of the internal auditor's duties. 
D)  Organizational levels to which the internal auditor reports. 
A)  Quality of the internal auditor's work. 
B)  Organization's commitment to integrity and ethical values. 
C)  Influence of management on the scope of the internal auditor's duties. 
D)  Organizational levels to which the internal auditor reports.

Question 19

When the prospective client has previously been audited,auditing standards require that the successor auditor make certain inquiries of the predecessor auditor before accepting the engagement.

Accepted Answer

A) True 
 B)False

Question 20

An auditor has withdrawn from an audit engagement of a publicly held company after finding fraud that may materially affect the financial statements.The auditor should set forth the reasons and findings in correspondence with the

Accepted Answer

A)  Securities and Exchange Commission. 
B)  Client's legal counsel. 
C)  Stock exchanges where the company's stock is traded. 
D)  Audit committee of the board of directors. 
A)  Securities and Exchange Commission. 
B)  Client's legal counsel. 
C)  Stock exchanges where the company's stock is traded. 
D)  Audit committee of the board of directors.

Exam 3: Audit Planning,Types of Audit Tests,and Materiality

Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if

All of the following refer to an internal auditor's competence except:

Evaluating a prospective client requires the following step(s):

The external auditor is required to make a number of important communications to the audit committee during or at the end of the audit engagement.

The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants

Which of the following matters generally is included in an auditor's engagement letter?

The existence of a related party transaction may be indicated when another entity

Which of the following is the most important qualitative factor that auditors should consider when making materiality judgments?

All companies must have an audit committee.

Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?

To emphasize auditor independence from management,publicly traded corporations are required to

When a CPA is approached to perform an audit for the first time,the CPA should make inquiries of the predecessor auditor.This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining

Under the Sarbanes-Oxley Act,the audit committee of a public company has the following requirement(s):

In assessing whether to accept a client for an audit engagement,a CPA should consider

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?

An entity's financial statements were misstated over a period of years due to large amounts of revenue being recorded in journal entries that involved debits and credits to an illogical combination of accounts.The auditor could most likely have been alerted to this fraud by

In assessing the competence of an internal auditor,an independent CPA most likely would obtain information about the

When the prospective client has previously been audited,auditing standards require that the successor auditor make certain inquiries of the predecessor auditor before accepting the engagement.

An auditor has withdrawn from an audit engagement of a publicly held company after finding fraud that may materially affect the financial statements.The auditor should set forth the reasons and findings in correspondence with the

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Risk Assessment

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Assurance,Attestation,and Internal Auditing Services

Auditing the Financinginvesting Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment

Auditing the Financinginvesting Process: Long-Term Liabilities, Stockholders Equity, and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professional Conduct,Independence,and Quality Control

Legal Liability

Assurance,Attestation,and Internal Auditing Services

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