Auditing

Standards and related topics

1. Which of the following best describes which is meant by the term generally
accepted auditing standards?
a. Procedures to be used to gather evidence to support financial
statements.
b. Measures of the quality of the auditors performance.
c. Pronouncements issued by the Auditing Standards Board.
d. Rules acknowledged by the accounting profession because of their
universal application.
2. Which of the following statements is correct concerning an auditors
responsibilities regarding financial statements?
a. Making suggestions that are adopted about the form and content of
an entitys financial statements impairs an auditors independence.
b. An auditor may draft an entitys financial statements based on
information from managements accounting system.
c. The fair presentation of audited financial statements in conformity
with GAAP is an implicit part of the auditors responsibility.
d. An auditors responsibilities for audited financial statements are not
confined to the expression of the auditors opinion.
3. The third general standard states that due care is to be exercised in the
performance of an audit. This standard is ordinarily interested to require
a. Thorough review of the existing safeguards over access to assets
and records.
b. Limited review of the indications of employee fraud and illegal acts.
c. Objective review of the adequacy of the technical training and
proficiency of firm personnel.
d. Critical review of the judgment exercised at every level of
supervision.
4. A CPA wishes to determine how various publicly-held companies have
complied with the disclosure requirements of a new financial accounting
standard. Which of the following information sources would the CPA most
likely consult for this information?
a. SEC Statement 10-K guide
b. AICPA Accounting Trends and Techniques
c. SEC Quality Control Review
d. AICPA Codification of Statements on Auditing Standards.
5. One of a CPA firms basic objectives is to provide professional services
that conform with professional standards. Reasonable assurance of
achieving thing basic objective is provided through
a. A system of quality control

b. A system of peer review

c. Continuing professional education
d. Compliance with generally accepted reporting standards
6. Which of the following factors most likely would cause a CPA to not accest
a new audit engagement?
a. The prospective client has already completed its physical inventory
count
b. The CPA lacks an understanding of the prospective clients
operations and industry
c. The CPA is unable the review the predecessor auditors working
papers
d. The prospective client is unwilling to make all financial records
available to the CPA.
7. The primary purpose of establishing quality control policies and
procedures for deciding whether to accept a new client is to
a. Enable the CPA firm to attest to the reliability of the client
b. Satisfy the CPA firms duty to the public concerning the acceptance
of new clients
c. Minimize the likelihood of association with clients whose
management lacks integrity
d. Anticipate before performing any field work whether an unqualified
opinion can be expressed.
8. After field work audit procedures are completed, a partner of the CPA firm
who has not been involved in the audit performs a second or wrap up
working paper review. This second review usually focuses on
a. The fair presentation of the financial statements in conformity with
GAAP
b. Fraud involving the clients management and its employees
c. The materiality of the adjusting entries proposed by the audit staff
d. The communication of internal controls weaknesses to the clients
audit committee.
9. Although the scope of audits of recipients of federal financial assistance in
accordance with federal audit regulations varies, these audits generally
have which of the following elements in common?
a. The auditor is to determine whether the federal financial assistance
has been administered in accordance with applicable laws and
regulations.
b. The materiality levels are lower and are determined by the
government entities that provided the federal financial assistance to
the recipient.

c. The auditor should obtain written management representations that

the recipients internal auditors will report their findings objectively
without fear of political repercussions.
d. The auditor is required to express both positive and negative
assurance that illegal acts that could have a material effect on the
recipients financial statements are disclosed to the inspector
general.
10. In reporting under Government Auditing Standards, an auditor most likely
would be required to report a falsification of accounting records directly to
a federal inspector general when the falsification is
a. Discovered after the auditors report has been made available to
the federal inspector general and the public
b. Reported by the auditor to the audit committee as a significant
deficiency in internal control
c. Voluntarily disclosed to the auditor by low level personnel as a
result of the auditors inquiries
d. Communicated by the auditor to the auditee and the auditee fails to
make a required report of the matter
11. An auditor was engaged to conduct a performance audit of a
governmental entity in accordance with Governmental Auditing Standards.
These standards do not require, a part of this auditors report
a. A statement of the audit objectives and a description of the audit
scope.
b. Indications or instances of illegal acts that could result in criminal
prosecution discovered during the audit
c. The pertinent views of the entitys responsible officials concerning
the auditors findings
d. A concurrent opinion on the financial statements taken as a whole.
12. Which of the following a documentation requirement that and auditor
should follow when auditing in accordance with Governmental Auditing
Standards?
a. The auditor should obtain written representations from
management acknowledging responsibility for correcting instances
of fraud, abuse, and waste
b. The auditors working papers should contain sufficient information
so that supplementary oral explanations are not required
c. The auditors working papers should contain a caveat that all
instances of material errors and fraud may not be identified
d. The auditor should document the procedures that assure discovery
of illegal acts and contingent liability from noncompliance.

Planning
1. An auditors engagement letter most likely would include
a. Managements acknowledgement of its responsibility for
maintaining effective internal control
b. The auditors preliminary assessment of the risk factors relating to
misstatements arising from fraudulent financial reporting
c. A reminder that management is responsible for illegal acts
committed by employees
d. A request for permission to contact the clients lawyer for assistance
in identifying litigation, claims, and assertions
2. An auditor obtains knowledge about a new clients business and its
industry to
a. Make constructive suggestions concerning improvements to the
clients internal control
b. Develop an attitude of professional skepticism concerning
managements financial statements assertions
c. Evaluate whether the aggregation of known misstatements causes
the financial statements taken as a whole to be materially misstated
d. Understand the events and transactions that may have an effect on
the clients financial statements.
3. Which of the following factors most likely would lead a CPA to conclude
that a potential audit engagement should be rejected?
a. The details of most recorded transactions are not available after a
specified period of time
b. Internal control activities requiring the segregation of duties are
subject to management override
c. It is unlikely that sufficient competent evidence is available to
support an opinion on the financial statements
d. Management has a reputation for consulting with several
accounting firms about significant accounting issues.
4. Which of the following procedures would an auditor most likely include in
the planning phase of a financial statement audit?
a. Obtain an understanding of the entitys risk assessment process
b. Identify specific internal control activities designed to prevent fraud
c. Evaluate the reasonableness of the entitys accounting estimates
d. Perform cutoff tests of the entitys sales and purchases.
5. A successor auditor ordinarily should request to review the predecessors
working papers relating to
Contingencies
Internal Controls
a.
yes
yes
b.
yes
no
c.
no
yes

d.

no

no

6. A successor auditor most likely would make specific inquiries of the

predecessor auditor regarding
a. Specialized accounting principles of the clients industry
b. The competency of the clients internal audit staff
c. The uncertainty inherent in applying sampling procedures
d. Disagreements with management as to auditing procedures
7. In auditing the financial statements of Jamona Corp, Sherman discovered
information leading Sherman to believe that Jamonas prior years
financial statements, which were audited by Dicker, require substantial
revisions. Under these circumstances, Sherman should
a. Notify Jamonas audit committee and stockholders that the prior
years financial statements cannot be relied on
b. Request Jamona arrange a meeting among the three parties to
resolve the matter
c. Notify Dicker about the information and make inquiries about the
integrity of Jamonas management
d. Request Jamona to reissue the prior years financial statements
with the appropriate revisions.
8. Which of the following procedures would an auditor most likely perform in
planning a financial statement audit?
a. Inquiring of the clients legal counsel concerning pending litigation
b. Comparing the financial statements to anticipated results
c. Searching for unauthorized transactions that may aid in detecting
unrecorded liabilities
d. Examining computer generated exception reports to verify the
effectiveness of internal controls.
9. The audit program usually cannot be finalized until the
a. Consideration of the entitys internal control has been completed
b. Engagement letter has been signed by the auditor and the client
c. Search for unrecorded liabilities has been performed and
documented
d. Reportable conditions have been communicated to the audit
committee of the board of directors.
10. The audit work performed by each assistant should be reviewed to
determine whether it was adequately performed and to evaluate whether
a. Audit procedures performed are approved in the professional
standards
b. Auditors system of quality control has been maintained at a high
level

c. Results are consistent with the conclusions to be presented in the

auditors report
d. Audit has been performed by persons having adequate technical
training and proficiency as auditors.
11. The element of the audit planning process most likely to be agreed upon
with the client before implementation of the audit strategy is the
determination of the
a. Evidence to be gathered to provide a sufficient basis for the
auditors opinion
b. Procedures to be undertaken to discover litigation, claims, and
assessments
c. Pending legal matters to be included in the inquiry of the clients
attorney
d. Timing of inventory observation procedures to be performed.
12. In developing a preliminary audit strategy, an auditor should consider
a. Whether the allowance for sampling risk exceeds the achieved
upper precision limit
b. Findings from substantive tests performed at interim dates
c. Whether the inquiry of the clients attorney identifies any litigation,
claims, or assessments not disclosed in the financial statements.
d. The planned assessed level of control risk.
13. An auditor should design the written audit program so that
a. All material transactions will be selected for substantive testing
b. Substantive tests prior to the balance sheet date will be minimized
c. The audit procedures selected will achieve specific audit objectives
d. Each account balance will be tested under either tests of controls or
tests of transactions.
14. The in-charge auditor most likely would have a supervisory responsibility
to explain to the staff assistants
a. That immaterial fraud is not to be reported to the clients audit
committee
b. How the results of various auditing procedures performed by the
assistants should be evaluated
c. Why certain documents are being transferred from the current file
to the permanent file
d. What benefits may be attained by the assistants adherence to
established time budgets.
15. Which of the following statements is not correct about materiality?
a. The concept of materiality recognizes that some matters are
important for fair presentation of financial statements in accordance
with GAAP, while other matters are not important

b. An auditor considers materiality for planning purposes in terms of

the largest aggregate level of misstatements that could be material
to any one of the financial statements
c. An auditors consideration of materiality is influences by the
auditors perception of the needs of a reasonable person who will
rely on the financial statements
d. Materiality judgments are made in light of surrounding
circumstances and necessarily involve both quantitative and
qualitative judgments.
16. Which of the following would an auditor most likely use in determining the
auditors preliminary judgment about materiality?
a. The results of the initial assessment of control risk
b. The anticipated sample size for planned substantive tests
c. The entitys financial statements of the prior year
d. The assertions that are embodied in the financial statements
17. Holding other planning considerations equal, a decrease in the amount of
misstatements in a class of transactions than an auditor could tolerate
most likely would cause the auditor to
a. Apply the planned substantive tests prior to the balance sheet date
b. Perform the planned auditing procedures closer to the balance
sheet date
c. Increase the assessed level of control risk for relevant financial
statement assertions
d. Decrease the extent of auditing procedures to be applied to the
class of transactions.
18. Which of the following procedures would an auditor least likely perform
before the balance sheet date?
a. Confirmation of accounts payable
b. Observation of merchandise inventory
c. Assessment of control risk
d. Identification of related parties.
19. Because an audit in accordance with generally accepted auditing
standards is influenced by the possibility of material misstatements, the
auditor should conduct the audit with and attitude of
a. Objective judgment
b. Conservative advocacy
c. Professional responsiveness
d. Professional skepticism
20. Which of the following factors most likely would heighten an auditors
concern about the risk of fraudulent financial reporting?
a. Large amounts of liquid assets that are easily convertible into cash

b. Low growth and profitability as compared to other entities in the

same industry
c. Financial managements participation in the initial selection of
accounting principles
d. An overly complex organizational structure involve unusual lines of
authority
21. Which of the following statements reflects and auditors responsibility for
detecting errors and fraud?
a. An auditor is responsible for detecting employee errors and simple
fraud, but not for discovering fraud involving employee collusion or
management override
b. An auditor should plan the audit to detect errors and fraud that is
caused by departures from GAAP
c. An auditor is not responsible for detecting errors and fraud unless
the application of GAAS would result in such detection
d. An auditor should design the audit to provide reasonable assurance
of detecting errors and fraud that is material to the financial
statements.
22. An auditor who discovers that a clients employees paid small bribes to
municipal offices most likely would withdraw from the engagement if
a. The payments violated the clients policies regarding the prevention
of illegal acts
b. The client receives financial assistance from a federal government
agency
c. Documentation that is necessary to prove that bribes were paid
does not exist
d. Management fails to take the appropriate remedial action
23. When an auditor becomes aware of a possible illegal act by a client, the
auditor should obtain an understanding of the nature of the act to
a. Evaluate the effect on the financial statements
b. Determine the reliability of managements representations
c. Consider whether other similar acts may have occurred
d. Recommend remedial actions to the audit committee.
24. Which of the following matters would an auditor most likely communicate
to an entitys audit committee?
a. A list of negative trends that may lead to working capital
deficiencies and adverse financial ratios
b. The level of responsibility assumed by management for the
preparation of the financial statements
c. Difficulties encountered in achieving a satisfactory response rate
from the entitys customers in confirming accounts receivable

d. The effect of significant accounting policies adopted by

management in emerging areas for which there is no authoritative
guidance.
Internal Controls - General
1. Which of the following most likely would not be considered an inherent
limitation of the potential effectiveness of an entitys internal control?
a. Incompatible duties
b. Management override
c. Mistakes in judgment
d. Collusion among employees
2. When considering internal control, an auditor should be aware of the
concept of reasonable assurance, which recognizes that
a. Internal control policies and procedures may be ineffective due to
mistakes in judgment and personal carelessness
b. Adequate safeguards over access to assets and records should
permit an entity to maintain proper accountability
c. Establishing and maintaining internal control is an important
responsibility of management
d. The cost of an entitys internal control should not exceed the
benefits expected to be derived
3. Managements attitude toward aggressive financial reporting and its
emphasis on meeting projected profit goals most likely would significantly
influence an entitys control environment when
a. External policies established by parties outside the entity affect its
accounting practices
b. Management is dominated by one individual who is also a
shareholder
c. Internal auditors have direct access to the board of directors and
the entitys management
d. The audit committee is active in overseeing the entitys financial
reporting policies.
4. Which of the following auditor concerns most likely could be so serious
that the auditor concludes that a financial statement audit cannot be
conducted?
a. The entity has no formal written code of conduct
b. The integrity of the entitys management is suspect
c. Procedures requiring segregation of duties are subject to
management override
d. Management fails to modify prescribed controls for changes in
condition.

5. Which of the following is a management control method that most likely

could improve managements ability to supervise company activities
effectively?
a. Monitoring compliance with internal control requirements imposed
by regulatory bodies.
b. Limiting direct access to assets by physical segregation and
protective devices
c. Establishing budgets and forecasts to identify variances from
expectations
d. Supporting employees with the resources necessary to discharge
their responsibilities.
6. Which of the following is not a component of an entitys internal control?
a. Control risk
b. Control activities
c. The information and communication
d. The control environment
7. When obtaining an understanding of an entitys internal control
procedures, an auditor should concentrate on the substance of the
procedures rather than their form because
a. The procedures may be operating effectively but may not be
documented
b. Management may implement procedures whose costs exceed their
benefits
c. The procedures may be so inappropriate that no reliance is
contemplated by the auditor
d. Management may establish appropriate procedures but not enforce
compliance with them.
8. An auditor should obtain sufficient knowledge of an entitys accounting
system to understand the
a. Safeguards used to limit access to computer facilities
b. Process used to prepare significant accounting estimates
c. Procedures used to assure proper authorization of transactions
d. Policies used to detect the concealment of fraud.
9. An auditor uses the knowledge provided by the understanding of internal
control and the final assessed level of control risk primarily to determine
the nature, timing, and extent of the
a. Tests of controls
b. Compliance tests
c. Attribute tests
d. Substantive tests

10. An auditor would most likely be concerned with internal control policies
and procedures that provide reasonable assurance about the
a. Methods of assigning production tasks to employees
b. Appropriate prices the entities should charge for its products
c. Efficiency of managements decision-making process
d. Entitys ability to process and summarize financial data
11. In planning an audit, the auditors knowledge about the design of relevant
internal control policies and procedures should be used to
a. Identify the types of potential misstatements that could occur
b. Assess the operational efficiency of internal control
c. Determine whether controls have been circumvented by collusion
d. Document the assessed level of control risk.
12. In planning an audit of certain accounts, an auditor may conclude that
specific procedures used to obtain an understanding of an entitys internal
control need not be included because of the auditors judgments about
materiality and assessments of
a. Control risk
b. Detection risk
c. Sampling risk
d. Inherent risk
13. In assessing control risk, an auditor ordinarily selects from a variety of
techniques, including
a. Inquiry and analytical procedures
b. Reperformance and observation
c. Comparison and confirmation
d. Inspections and verification
14. An auditor assesses control risk because it
a. Is relevant to the auditors understanding of the control environment
b. Provides assurances that the auditors materiality levels are
appropriate
c. Indicates to the auditor where inherent risk may be the greatest
d. Affects the level of detection risk that the auditor may accept.
15. Assessing control risk at below the maximum level most likely would
involve
a. Performing more extensive substantive tests with larger sample
sizes than originally planned
b. Reducing inherent risk for most of the assertions relevant to
significant account balances
c. Changing the timing of substantive tests by omitting interim-date
testing and performing the tests at year end

d. Identifying specific internal control policies and procedures relevant

to specific assertions.
16. An auditor may compensate for a weakness in internal control by
increasing the
a. Level of detection risk
b. Extent of tests of controls
c. Preliminary judgment about audit risk
d. Extent of analytical procedures
17. Which of the following types of evidence would an auditor most likely
examine to determine whether controls are operating as designed?
a. Confirmation of receivables verifying account balances
b. Letters of representations corroborating inventory pricing
c. Attorneys responses to the auditors inquiries
d. Clients records documenting the us of computer programs
18. To obtain evidential matter about control risk, an auditor selects tests from
a variety of techniques including
a. Inquiry
b. Analytical procedures
c. Calculation
d. Confirmation
19. Which of the following is least likely to be evidence the auditor examines
to determine whether controls are operating effectively?
a. Records documenting usage of computer programs
b. Canceled supporting documents
c. Confirmations of accounts receivable
d. Signatures on authorization forms
20. Which of the following fraudulent activities most likely could be perpetrated
due to the lack of effective internal controls in the revenue cycle?
a. Fictitious transactions may be recorded that cause an
understatement of revenues and an overstatement of receivables
b. Claims received from customers for goods returned may be
intentionally recorded in other customers accounts
c. Authorization of credit memos by personnel who receive cash may
permit the misappropriation of cash.
d. The failure to prepare shipping documents may cause an
overstatement of inventory balances.
21. Tracing shipping documents to prenumbered sales invoices provides
evidence that
a. No duplicate shipments or billings occurred
b. Shipments to customers were properly invoiced

c. All goods ordered by customers were received

d. All prenumbered sales invoices were accounted for
22. An auditor suspects that a clients cashier is misappropriating cash
receipts for personal use by lapping customer checks received in the mail.
In attempting to uncover this embezzlement scheme, the auditor would
most likely compare the
a. Dates checks are deposited per bank statements with the dates
remittance credits are recorded
b. Daily cash summaries with the sums of the cash receipts journal
c. Individual bank deposit slips with the details of the monthly bank
statements
d. Dates uncollectible accounts are authorized to be written off with
the dates the write-offs are actually recorded
23. Which of the following procedures most likely would not be a control
designed to reduce the risk of misstatements in the billing process?
a. Comparing control totals for shipping documents with
corresponding totals for sales invoices
b. Using computer programmed controls on the pricing and
mathematical accuracy of sales invoices
c. Matching shipping documents with approved sales orders before
invoice preparation
d. Reconciling the control totals for sales invoices with the accounts
receivable subsidiary ledger
24. Which of the following audit procedures would an auditor most likely
perform to test controls relating to managements assertions concerning
the completeness of sales transactions?
a. Verify that extensions and footings on the entitys sales invoices
and monthly customer statements have been recomputed
b. Inspect the entitys reports of prenumbered shipping documents
that have not been recorded in the sales journal
c. Compare the invoiced prices on prenumbered sales invoices to the
entitys authorized price list
d. Inquire about the entitys credit granting policies and consistent
application of credit checks.
Internal Control Transaction Cycles
1. Proper segregation of functional responsibilities in an effective internal
control structure calls for separation of the functions of
a. Authorization, payment, and recording.
b. Authorization, recording, and custody.
c. Custody, execution and reporting.
d. Authorization, execution, and payment.

2. Sound internal control procedures dictate that immediately upon receiving

checks from customers by mail, a responsible employee should
a. Add the checks to the daily cash summary.
b. Verify that each check is supported by a pre-numbered sales
invoice.
c. Prepare a duplicate listing of checks received.
d. Record the checks in the cash receipts journal.
3. Which of the following controls most likely would be effective in offsetting
the tendency of sales personnel to maximize sales volume at the expense
of high bad debt write-offs?
a. Employees responsible for authorizing sales and bad debt writeoffs are denied access to cash.
b. Shipping documents and sales invoices are matched by an
employee who does not have authority to write off bad debts.
c. Employees involved in the credit-granting function are separated
from the sales function.
d. Subsidiary accounts receivable records are reconciled to the
control account by an employee independent of the authorization of
credit.
4. Which of the following procedures would an auditor most likely perform to
test controls relating to managements assertion about the completeness
of cash receipts for cash sales at a retail outlet?
a. Observe the consistency of the employees use of cash registers
and tapes.
b. Inquire about employees access to recorded but undeposited cash.
c. Trace the deposits in the cash receipts journal to the cash balance
in the general ledger.
d. Compare the cash balance in the general ledger with the bank
confirmation request.
5. Tracing shipping documents to prenumbered sales invoices provides
evidence that
a. No duplicate shipments or billings occurred.
b. Shipments to customers were properly invoiced.
c. All goods ordered by customers were shipped.
d. All prenumbered sales invoices were accounted for.
6. Which of the following internal control procedures is not usually performed
in the vouchers payable department?
a. Matching the vendors invoice with the related receiving report
b. Approving vouchers for payment by having an authorized employee
sign the vouchers
c. Indicating the asset and expense accounts to be debited

d. Accounting for unused prenumbered purchase orders and receiving

reports
7. For effective internal control, the accounts payable department generally
should
a. Stamp, perforate, or otherwise cancel supporting documentation
after payment is mailed.
b. Ascertain that each requisition is approved as to price, quantity, and
quality by an authorized employee.
c. Obliterate the quantity ordered on the receiving department copy of
the purchase order.
d. Establish the agreement of the vendors invoice with the receiving
report and purchase order.
8. Which of the following questions would most likely be included in an
internal control questionnaire concerning the completeness assertion for
purchases?
a. Is an authorized purchase order required before the receiving
department can accept a shipment or the vouchers payable
department can record a voucher?
b. Are purchase requisitions prenumbered and independently
matched with vendor invoices?
c. Is the unpaid voucher file periodically reconciled with inventory
records by an employee who does not have access to purchase
requisitions?
d. Are purchase orders, receiving reports, and vouchers prenumbered
and periodically accounted for?
9. To provide assurance that each voucher is submitted and paid only once,
an auditor most likely would examine a sample of paid vouchers and
determine whether each voucher is
a. Supported by a vendors invoice.
b. Stamped paid by the check signer.
c. Prenumbered and accounted for.
d. Approved for authorized purchases.
10. When the shipping department returns nonconforming goods to a vendor,
the purchasing department should send to the accounting department the
a. Unpaid voucher.
b. Debit memo.
c. Vendor invoice.
d. Credit memo.
11. The authority to accept incoming goods in receiving should be based on
a(an)
a. Vendors invoice.

b. Materials requisition.
c. Bill of lading.
d. Approved purchase order.
12. An auditor generally tests the segregation of duties related to inventory by
a. Personal inquiry and observation.
b. Test counts and cutoff procedures.
c. Analytical procedures and invoice recomputation.
d. Document inspection and reconciliation.
13. Which of the following internal control procedures most likely would
prevent direct labor hours from being charged to manufacturing overhead?
a. Periodic independent counts of work in process for comparison to
recorded amounts
b. Comparison of daily journal entries with approved production orders
c. Use of time tickets to record actual labor worked on production
orders
d. Reconciliation of work-in-process inventory with periodic cost
budgets
14. Sound internal control procedures dictate that defective merchandise
returned by customers should be presented initially to the
a. Accounts receivable supervisor.
b. Receiving clerk.
c. Shipping department supervisor.
d. Sales clerk.
15. The objectives of the internal control for a production cycle are to provide
assurance that transactions are properly executed and recorded, and that
a. Production orders are prenumbered and signed by a supervisor.
b. Custody of work in process and of finished goods is properly
maintained.
c. Independent internal verification of activity reports is established.
d. Transfers to finished goods are documented by a completed
production report and a quality control report.
Substantive tests and tests for fraud
1. When auditing financial statements and finding indications of a possible
misappropriation of assets, independent auditors should
A) Investigate fully to determine the total amount of the misappropriation.
B) Determine which accounts are affected and the amount by which they are
overstated or understated.
C) Determine the methods by which the misappropriation was carried out.
D) Identify a person(s) who are likely responsible for the misappropriation and
obtain evidence about some other fraud indications in their work.

E) All of the above.

2. When a fraud perpetrator embezzles company funds from an electric utility
company employer for the purpose of paying expenses of an anti-nuclear protest
organization, the fraudster's motive is said to be
A) Psychotic
B) Egocentric
C) Ideological
D) Economic
3. An unenlightened management can increase the probability of fraud in the
company by
A) Diversifying authority throughout divisions and subsidiaries in the
organization.
B) Measuring performance and awarding bonuses based on short-term
operating results.
C) Giving employees performance feedback that considers positive and
constructive praise along with critical and negative observations on their
work.
D) Establishing work teams that share responsibilities, performance, and
bonuses based on collective efforts.
4. Which of the following is not considered one of the three factors increasing the
probability of fraud?
A) Motive.
B) Lack of training.
C) Opportunity.
D) Rationalization.
5. Which of the following is ordinarily considered an "extended procedure" in
external auditors' independent audits of financial statements?
A) Send positive confirmations on recorded customer accounts receivable
balances.
B) Perform physical observation and test-count during the client's inventorytaking.
C) Measure the time lag between the date of recording cash receipts in the
books to the date of deposit credit in the bank.
D) Conduct interviews with the client's sales billing personnel to learn about
sales recording control procedures.
6. A payroll manager was including fictitious employees on the payroll each month
and taking the checks for himself. An audit procedure that would most likely lead
to discovering this would be
A) recalculating the payroll amounts.
B) comparing the total payroll amount to the journal entry.
C) a surprise payroll distribution.
D) making sure all checks clear the bank.
7. If the amount of a check is altered by an employee after it has cleared the bank,
the change can be detected by

A) comparing the amount written on the check face to the amount written in the
cash disbursements journal.
B) comparing the magnetic imprint of the amount paid to the amount written on
the check face.
C) examining the endorsement on the back of the check.
D) comparing the check number on the face of the check to the check number in
the cash disbursements journal.
8. Which of the following would be consistent with an employee taking cash receipts
from customers on account?
A) The total of the accounts receivable subsidiary ledger balances is less than
the accounts receivable control account.
B) The total of the accounts receivable subsidiary ledger balances is greater
than the accounts receivable control account.
C) Total cash receipts from customers for the month are less than credit sales
for the month.
D) Total cash receipts from customers for the month are greater than credit
sales for the month.
9. An audit program of substantive tests for cash would not include
A) request a cutoff bank statement be mailed to the client.
B) request client to prepare bank reconciliations.
C) prepare a schedule of interbank transfers for a period of ten business days
before and after year-end date.
D) obtain a written client representation concerning compensating balance
agreements.
10. In the audit of cash the auditor obtains a bank cutoff statement primarily to
A) identify old outstanding checks that the client may exclude from the year-end
bank reconciliation in order to misappropriate cash.
B) obtain sufficient information to reconcile the client's bank account as of yearend.
C) obtain direct confirmation of the client's bank balances as of year-end.
D) test the propriety of items appearing on the client's year-end bank
reconciliation.
11. Auditors ordinarily send a standard confirmation request to all banks with which
the client has done business during the year under audit, regardless of the yearend balances. A purpose of this procedure is to
A) provide the data necessary to prepare a proof of cash.
B) request that a cutoff bank statement and related checks be sent to the audit.
C) detect kiting activities that may otherwise not be discovered.
D) seek information about contingent liabilities and security agreements.
12.

Scanning sales invoices for missing numbers in the sequence would be a

procedure intended to satisfy what control assertion?
A) Completeness.
B) Valuation or allocation.
C) Existence or occurrence.
D) Presentation and disclosure.

13. Vouching debits from a sample selection of customers' accounts receivable

records to supporting sales invoices is an audit procedure designed to obtain
evidence about the control assertion of
A) Existence or occurrence.
B) Completeness.
C) Rights and obligations.
D) Valuation or allocation.
14. Alpha Brewery Corporation recorded sales through January 4, 2005, dating them
December 31, 2004. This situation is an example of a violation of which of the
following control assertions?
A) Existence or occurrence.
B) Completeness.
C) Presentation and disclosure.
D) Valuation or allocation.
15. Confirmations of accounts receivable provide the most evidence for which of the
following assertions?
A) Existence.
B) Valuation or Allocation.
C) Rights and obligations.
D) Completeness.
16. If the auditor obtains sufficient competent evidence on the client's accounts
receivable balance by alternative procedures because it is impracticable to
confirm accounts receivable, the auditor's opinion should be unqualified and
could be expected to
A) Disclose the fact that alternative procedures were used due to client imposed
scope limitation.
B) Disclose in the opinion paragraph that confirmation of accounts receivable
was impracticable.
C) Not mention the alternative procedures.
D) Include an explanatory paragraph that discloses the performance of
alternative procedures.
17. Which of the following is not a valid reason for an auditor deciding not to send
accounts receivable confirmations:
A) The balance is immaterial.
B) Confirmations would be ineffective.
C) The client requests alternative procedures be performed instead.
D) Other procedures provide sufficient competent evidence.
18. When an account receivable is considered uncollectible the person who
generally authorizes the writeoff is the client's
A) Credit manager.
B) Treasurer.
C) Accountant.
D) Internal auditor.

19. Which of the following audit procedures is the most effective in testing sales for
understatement?
A) Analyze the aged trial balance of recorded accounts receivable.
B) Confirm recorded accounts receivable.
C) Trace a sample of shipping documents to sales invoices recorded in the
sales journal.
D) Vouch a sample of recorded sales from the sales journal to shipping
documents.
20. To determine whether sales transactions have been recorded in the proper
accounting period the auditor performs cutoff tests. Which of the following best
describes the overall approach used when performing cutoff tests?
A) Ascertain that management has included in the representation letter a
statement that transactions have been accounted for in the proper
accounting period.
B) Analyze transactions occurring within a few days before and after yearend.
C) Confirm yearend transactions with regular customers.
D) Examine cash receipts in the subsequent period.
21. The most effective audit procedure for determining the collectibility of an account
receivable is the
A) Review of the subsequent cash collections.
B) Examination of the related sales invoice(s).
C) Confirmation of the account.
D) Review of authorization of credit sales to the customer and the previous
history of collections.
22. In determining the adequacy of the allowance for uncollectible accounts, the least
valuable evidence would be obtained from
A) an aging schedule of past due accounts which the auditor has tested.
B) correspondence with the client's collection agency.
C) financial statements of individual customers.
D) no reply to negative confirmations.
23. An auditor confirms a representative number of open accounts receivable as of
December 31 and investigates respondents' exceptions and comments. By this
procedure, the auditor would be most likely to learn of which of the following?
A) one of the cashiers has been covering a personal embezzlement by lapping.
B) one of the sales clerks has not been preparing charge slips for credit sales to
family and friends.
C) one of the IS control clerks has been removing all sales invoices applicable to
his account from the data file.
D) the credit manager has misappropriated remittances from customers whose
accounts have been written off.
24. The auditor decided to test accounts payable by sending open ended (blank)
confirmations to selected vendors. The auditor's best approach in selecting the
vendor accounts to confirm is to
A) select vendor accounts with large balances.
B) select vendor accounts at random in order to apply a statistical sampling
procedure.

C) select vendor accounts based on the number of purchases from vendors

during the year.
D) select vendor accounts that are past due.
25. What evidence is appropriate to determine whether recorded purchase
transactions are valid and the vendors charged the correct prices?
A) Purchase requisitions and accounts payable entries.
B) Receiving reports and purchase orders.
C) Purchase requisitions and purchases orders.
D) Purchase orders and bid quotes.
26. Purchase cutoff procedures should be designed to produce evidence of whether
merchandise is included in the inventory of the client company if the company
A) has paid for the merchandise.
B) has physical possession of the merchandise.
C) holds legal title to the merchandise.
D) holds the shipping documents for the merchandise issued in the company's
name.
27. Which of the following accounts would most likely be reviewed by the auditor to
gain reasonable assurance that additions to the equipment (fixed asset) account
are not understated?
A) Depreciation expense.
B) Gain on disposal of equipment.
C) Accounts payable.
D) Repairs and maintenance expense.
28. Which of the following would not be included in the supporting documents for a
voucher.
A) Purchase order.
B) Vendor invoice.
C) Receiving report.
D) Blank check.
29. A voucher would typically contain
A) a purchase requisition, purchase order, vendor invoice, receiving report, and
check copy.
B) a purchase requisition, purchase order, sales invoice, receiving report, and
check copy.
C) a purchase requisition, sales order, sales invoice, receiving report, and check
copy.
D) a purchase requisition, sales order, vendor invoice, receiving report, and
check copy.
30. When using confirmations to provide evidence about the completeness assertion
for accounts payable, the appropriate population most likely would be
A) vendors with whom the entity has previously done business.
B) amounts recorded in the accounts payable subsidiary ledger.
C) payees of checks drawn in the month after the year-end.
D) invoices filed in the entity's open invoice file.

31. Which of the following procedures would an auditor most likely perform in
searching for unrecorded payables?
A) Reconcile receiving reports with related cash payments made just prior to
year-end.
B) Contrast the ratio of accounts payable to purchases with the prior year's ratio.
C) Vouch a sample of creditor balances to supporting invoices, receiving reports,
and purchase orders.
D) Compare cash payments occurring after the balance sheet date with the
accounts payable trial balance.
32. An auditor most likely would extend substantive tests of payroll when
A) payroll is extensively audited by the state government.
B) payroll expense is substantially higher than in the prior year.
C) overpayments are discovered in performing tests of transaction.
D) employees complain to management about too much overtime.
33. An auditor most likely would perform substantive tests of details on payroll
transactions and balances when
A) cutoff tests indicate a substantial amount of accrued payroll expense.
B) the assessed level of control risk relative to payroll transactions is low.
C) analytical procedures indicate unusual fluctuations in recurring payroll
entries.
D) accrued payroll expense consists primarily of unpaid commissions.
34. If a control total were computed on each of the following data items, which would
best be identified as a hash total for a payroll IS application?
A) Total debits and total credits.
B) Net pay.
C) Department numbers.
D) Hours worked.
35. An auditor vouched data for a sample of employees in a payroll register to
approved clock card data to provide assurance that
A) payments to employees are computed at authorized rates.
B) employees work the number of hours for which they are paid.
C) segregation of duties exists between the preparation and distribution of the
payroll.
D) internal controls relating to unclaimed payroll checks are operating effectively.
36. In determining the effectiveness of an entity's policies and procedures relating to
the existence or occurrence assertion for payroll transactions, an auditor most
likely would inquire about and
A) observe the segregation of duties concerning personnel responsibilities and
payroll disbursement.
B) inspect evidence of accounting for prenumbered payroll checks.
C) recompute the payroll deductions for employee fringe benefits.
D) verify the preparation of the monthly payroll account bank reconciliation.
37. Which of the following is not an acceptable method of determining inventory cost
under GAAP?
A) FIFO.

B) LIFO.
C) Standard Cost.
D) All the above are acceptable.
38. Inventory count tags are controlled
A) to prevent counting errors.
B) to test cut-off.
C) to prevent subsequent addition of goods to the inventory.
D) for all the above reasons.
39. Counting inventory on the warehouse floor and tracing the count to the inventory
compilation provides evidence to support which management assertion?
A) Existence or occurrence.
B) Completeness.
C) Rights and obligations.
D) Valuation or allocation.
40. Substantive tests of account balances in the payroll cycle are likely to include the
following procedures, except
A) Analytical review procedures.
B) Recalculation of accruals.
C) Comparison of accruals to subsequent payments.
D) Detail vouching of payroll expense entries.
41. The focus of controls in the finance and investment cycle is on
A) proper authorizations and competent personnel.
B) computer controls over transactions.
C) physical security of assets.
D) prenumbered documents.
42. The focus of substantive tests in the finance and investment cycle is
A) reconciliation of detailed listings with general ledger amounts.
B) proper cut-off.
C) search for unrecorded items.
D) gaining an understanding and verifying amounts and calculations.
43. Compensating controls in the finance and investment cycle.
A) feature segregation of duties by upper management.
B) feature involvement of two or more persons handling important
responsibilities.
C) include involvement by the external auditor.
D) include all the above.
44. Which of the following is not a relevant aspect of controls over estimates
A) external auditor involvement in developing assumptions.
B) adequate review by appropriate levels of authority.
C) comparison of prior estimates with subsequent results.
D) all the above are relevant aspects.
45. Loan covenants

A)
B)
C)
D)

describe the collateral of the loan.

require the borrower to maintain certain financial characteristics.
describe the lender's responsibilities.
include all the above.

46. Related party transactions

A) must be valued as if they were arm's length.
B) must be assumed to be valued differently than if they were arm's length.
C) must be disclosed in the financial statements.
D) must be disclosed in the financial statements and the auditor's report.
48. Appropriate audit inquiries regarding estimates include all of the following except
A) Who prepares the estimates?
B) Why are they prepared?
C) What data are used?
D) When are they prepared?
49. Which of the following is not an off-balance-sheet item?
A) Purchase commitment.
B) Capitalized lease.
C) Loan commitment
D) Synthetic lease.
Audit Reporting and Required Communications
1. Small and Tall, CPAs, completed the December 31, 2005 audit of Big Company
on February 10, 2006. After the report was issued, it came to the attention of
Small and Tall, CPAs, that an outstanding lawsuit against Big Company was
settled for materially more than recorded in the December 31, 2005 financial
statements. The amount recorded in the financial statements represented the
best estimate of management and the company's attorneys at the time the audit
was completed. Based on this new information, Small and Tall, CPAs should
A) Determine whether persons are currently relying on the audit report.
B) Advise the client to make appropriate changes in the financial statements
and reissue them.
C) Notify each member of the board of directors of Big Company.
D) Take no action since the event took place after the audit report was issued.
2. After the fieldwork is completed, a partner of the CPA firm who has not been
involved in the audit performs a second-partner documentation review. This
second review usually focuses on
A) The fair presentation of the financial statements in conformity with GAAP.
B) Irregularities involving the client's management and its employees.
C) The materiality of the adjusting entries proposed by the audit staff.
D) The communication of internal control deficiencies to the client's audit
committee.
3. An entity's income statements were misstated due to the recording of journal
entries that involved debits and credits to an unusual combination of expense

and revenue accounts. The auditor most likely could have detected this
irregularity by
A) Tracing a sample of journal entries to the general ledger.
B) Evaluating the effectiveness of the internal control policies and procedures.
C) Investigating the reconciliations between controlling accounts and subsidiary
records.
D) Performing analytical procedures designed to disclose differences from
expectations.
4. The primary reason an auditor requests letters of inquiry be sent to a client's
attorneys is to provide the auditor with
A) The probable outcome of asserted claims and pending or threatened
litigation.
B) Corroboration of the information furnished by management about litigation,
claims, and assessments.
C) The attorneys' opinions of the client's historical experiences in recent similar
litigation.
D) A description and evaluation of litigation, claims, and assessments that
existed at the balance sheet date.
5. Subsequent to the issuance of an auditor's report, the auditor became aware of
facts existing at the report date that would have affected the report had the
auditor then been aware of such facts. After determining that the information is
reliable, the auditor should next
A) Determine whether there are persons relying or likely to rely on the financial
statements who would attach importance to the information.
B) Request that management disclose the newly discovered information by
issuing revised financial statements.
C) Issue revised pro forma financial statements taking into consideration the
newly discovered information.
D) Give public notice that the auditor is no longer associated with financial
statements.
6. Analytical procedures used in the overall review stage of an audit generally
include
A) Considering unusual or unexpected account balances that were not
previously identified.
B) Performing tests of transactions to corroborate management's financial
statement assertions.
C) Gathering evidence concerning account balances that have not changed
from the prior year.
D) Retesting control procedures that appeared to be ineffective during the
assessment of control risk.
7. Auditors try to identify predictable relationships when using analytical
procedures. Relationships involving transactions from which of the following

accounts most likely would yield the highest level of evidence?

A) Accounts receivable.
B) Interest expense.
C) Accounts payable.
D) Travel and entertainment expense.
8. On March 15, 2006, Kent, CPA, issued an unqualified opinion on a client's
audited financial statements for the year ended December 31, 2005. On May 4,
2006, Kent's internal inspection program disclosed that engagement personnel
failed to observe the client's physical inventory. Omission of this procedure
impairs Kent's present ability to support the unqualified opinion. If the
stockholders are currently relying on the opinion, Kent should first
A) Advise management to disclose to the stockholders that Kent's unqualified
opinion should not be relied on.
B) Undertake to apply alternative procedures that would provide a satisfactory
basis for the unqualified opinion.
C) Reissue the auditor's report and add an explanatory paragraph describing the
departure from generally accepted auditing standards.
D) Compensate for the omitted procedure by performing tests of controls to
reduce audit risk to a sufficiently low level.
9. Which of the following procedures should an auditor generally perform regarding
subsequent events?
A) Compare the latest available interim financial statements with the financial
statements being audited.
B) Send second requests to the client's customers who failed to respond to
initial accounts receivable confirmation requests.
C) Communicate material weaknesses in internal control to the client's audit
committee.
D) Review the cut-off bank statements for several months after the year-end.
10. Which of the following procedures would an auditor most likely perform in
obtaining evidence about subsequent events?
A) Determine that changes in employee pay rates after year-end were properly
authorized.
B) Recompute depreciation charges for plant assets sold after year-end.
C) Inquire about payroll checks that were recorded before year-end but cashed
after year-end.
D) Investigate changes in long-term debt occurring after year-end.
11. Which of the following pairs of accounts would an auditor most likely analyze on
the same audit documentation?
A) Notes receivable and interest income.
B) Accrued interest receivable and accrued interest payable.
C) Notes payable and notes receivable.
D) Interest income and interest expense.

12. Which of the following is an audit procedure that an auditor most likely would
perform concerning litigation, claims, and assessments?
A) Request the client's attorney to evaluate whether the client's pending
litigation, claims, and assessments indicate a going concern problem.
B) Examine the legal documents in the client's attorney's possession concerning
litigation, claims, and assessments to which the attorney has devoted
substantive attention.
C) Discuss with management its policies and procedures adopted for evaluating
and accounting for litigation, claims, and assessments.
D) Confirm directly with the client's attorney that all litigation, claims, and
assessments have been recorded or disclosed in the financial statements.
13. Which of the following procedures would an auditor most likely perform to obtain
evidence about the occurrence of subsequent events?
A) Confirming a sample of material accounts receivable established after yearend.
B) Comparing the financial statements being reported on with those of the prior
period.
C) Investigating personnel changes in the accounting department occurring after
year-end.
D) Inquiring as to whether any unusual adjustments were made after year-end.
14. Which of the following events occurring after the issuance of an auditor's report
most likely would cause the auditor to make further inquiries about the previously
issued financial statements?
A) An uninsured natural disaster occurs that may affect the entity's ability to
continue as a going concern.
B) A contingency is resolved that had been disclosed in the audited financial
statements.
C) New information is discovered concerning undisclosed lease transactions of
the audited period.
D) A subsidiary is sold that accounts for 25% of the entity's consolidated net
income.
15.The scope (middle, second) paragraph of the standard audit report does not include
the statement
A) "in conformity with generally accepted accounting principles."
B) "audit provides a reasonable basis for an opinion."
C) "an audit includes assessing the accounting principles used."
D) "perform the audit to obtain reasonable assurance."
16. The opinion paragraph of the auditor's report incorporates all of the following
standards, except that the
A) financial statements are presented in accordance with GAAP.
B) informative disclosures are adequate unless otherwise stated.

C) financial statements are management's responsibility.

D) report identifies circumstances in which principles have not been consistently
observed.
17. When an auditor qualifies an opinion because of inadequate disclosure, the
auditor should describe the nature of the omission in a separate explanatory
paragraph and modify the
Introductory
Paragraph
A)
B)
C)
D)

Yes
Yes
No
No

Scope
Paragrap
h
Yes
No
Yes
No

18. When disclaiming an opinion due to a client-imposed scope limitation, an auditor

should indicate in a separate paragraph why the audit did not comply with
generally accepted auditing standards. The auditor should also omit the
Scope
Paragraph
A)
B)
C)
D)

Yes
Yes
No
No

Opinion
Paragrap
h
Yes
No
Yes
No

19. Under which of the following circumstances would a disclaimer of opinion not be
appropriate?
A) The financial statements fail to contain adequate disclosure of related party
transactions.
B) The client refuses to permit its attorney to furnish information requested in a
letter of audit inquiry.
C) The auditor is engaged after fiscal year-end and is unable to observe
physical inventories or apply alternative procedures to verify their balances.
D) The auditor is unable to determine the amounts associated with illegal acts
committed by the client's management.
20. When audited financial statements are presented in a client's document
containing other information, the auditor should
A) perform inquiry and analytical procedures to ascertain whether the other
information is reasonable.
B) add an explanatory paragraph to the auditor's report without changing the
opinion on the financial statements.

C) perform the appropriate substantive audit procedures to corroborate the other

information.
D) read the other information to determine that it is consistent with the audited
financial statements.
21. Which of the following audit procedures most likely would assist an auditor in
identifying conditions and events that may indicate substantial doubt about an
entity's ability to continue as a going concern?
A) Inspecting title documents to verify whether any assets are pledged as
collateral.
B) Confirming with third parties the details of arrangements to maintain financial
support.
C) Reconciling the cash balance per books with the cut-off bank statement and
the bank
confirmation.
D) Comparing the entity's depreciation and asset capitalization policies to other
entities in the industry.
22. Reference in a principal auditor's report to the fact that part of the audit was
performed by another auditor most likely would be an indication of
A) divided responsibility between the auditors who conducted the audits of the
components of the overall financial statements.
B) lack of materiality of the portion of the financial statements audited by the
other auditor.
C) principal auditor's recognition of the other auditor's competence, reputation,
and professional certification.
D) different opinions the auditors are expressing on the components of the
financial statements that each audited.
23. An auditor includes a separate paragraph in an otherwise unmodified report to
emphasize that the entity being reported on had significant transactions with
related parties. The inclusion of this separate paragraph
A) is considered an "except for" qualification of the opinion.
B) violates generally accepted auditing standards if this information is already
disclosed in footnotes to the financial statements.
C) necessitates a revision of the opinion paragraph to include the phrase "with
the foregoing explanation."
D) is appropriate and would not otherwise affect the unqualified opinion.
24. When there has been a change in accounting principles, but the effect of the
change on the comparability of the financial statements is not material, the
auditor should
A) refer to the change in an explanatory paragraph.
B) explicitly concur that the change is preferred.
C) not refer to consistency in the auditor's report.
D) refer to the change in the opinion paragraph.

25. When financial statements contain a departure from GAAP because, due to
unusual circumstances, the statements would otherwise be misleading, the
auditor should explain the unusual circumstances in a separate paragraph and
express an opinion that is
A) unqualified.
B) qualified.
C) adverse.
D) qualified or adverse, depending on materiality.
26. In which of the following circumstances would an auditor be most likely to
express an adverse opinion?
A) The chief executive officer refuses the auditor access to minutes of board of
directors' meetings.
B) Tests of controls show that the entity's internal control structure is so poor
that it cannot be relied upon.
C) The financial statements are not in conformity with the FASB Statements
regarding the capitalization of leases.
D) Information comes to the auditor's attention that raises substantial doubt
about the entity's ability to continue as a going concern.
27. In which of the following circumstances would an auditor most likely add an
explanatory paragraph to the standard report while not affecting the auditor's
unqualified opinion?
A) The auditor is asked to report on the balance sheet, but not on the other
basic financial statements.
B) There is substantial doubt about the entity's ability to continue as a going
concern.
C) Management's estimates of the effects of future events are unreasonable.
D) Certain transactions cannot be tested because of management's records
retention policy.
28. Green, CPA, was engaged to audit the financial statements of Essex Co. after its
fiscal year had ended. The timing of Green's appointment as auditor and the
start of fieldwork made confirmation of accounts receivable by direct
communication with the debtors ineffective. However, Green applied other
procedures and was satisfied as to the reasonableness of the account balances.
Green's auditor's report most likely contained a(an)
A) unqualified opinion.
B) unqualified opinion with an explanatory paragraph.
C) qualified opinion due to a scope limitation.
D) qualified opinion due to a departure from generally accepted auditing
standards.
29. In which of the following situations would an auditor ordinarily choose between
expressing an "except for" qualified opinion or an adverse opinion?

A) The auditor did not observe the entity's physical inventory and is unable to
become satisfied as to its balance by other audit procedures.
B) The financial statements fail to disclose information that is required by
generally accepted accounting principles.
C) The auditor is asked to report only on the entity's balance sheet and not on
the other basic financial statements.
D) Events disclosed in the financial statements cause the auditor to have
substantial doubt about the entity's ability to continue as a going concern.
30. An auditor concludes that a client's illegal act, which has a material effect on the
financial statements, has not been properly accounted for or disclosed.
Depending on the materiality of the effect on the financial statements, the auditor
should express either a(an)
A) adverse opinion or a disclaimer of opinion.
B) qualified opinion or an adverse opinion.
C) disclaimer of opinion or an unqualified opinion with a separate explanatory
paragraph.
D) unqualified opinion with a separate explanatory paragraph or a qualified
opinion.
31. An auditor would not normally issue a qualified opinion when
A) an accounting principle at variance with GAAP is used.
B) the auditor lacks independence with respect to the audited entity.
C) a scope limitation prevents the auditor from completing an important audit
procedure.
D) the auditor's report refers to the work of a specialist.
32. Which of the following phrases would an auditor most likely include in the
auditor's report when expressing a qualified opinion because of inadequate
disclosure?
A) Subject to the departure from generally accepted accounting principles, as
described above.
B) With the foregoing explanation of these omitted disclosures.
C) Except for the omission of the information discussed in the preceding
paragraph.
D) Does not present fairly in all material respects.
33. When reporting on comparative financial statements, an auditor ordinarily should
change the previously issued opinion on the prior-year's financial statements if
the
A) prior year's financial statements are restated to conform to generally
accepted accounting principles.
B) auditor is a predecessor auditor who has been requested by a former client to
reissue the previously issued report.
C) prior year's opinion was unqualified and the opinion on the current year's
financial statements is modified due to a lack of consistency.

D) prior year's financial statements are restated following a pooling of interests

in the current year.
34. According to the profession's ethical standards, an auditor would be considered
independent in which of the following instances?
A) The auditor is the officially appointed stock transfer agent of a client.
B) The auditor's checking account that is fully insured by a federal agency is
held at a client financial institution.
C) The client owes the auditor fees for more than two years prior to the issuance
of the audit report.
D) The client is the only tenant in a commercial building owned by the auditor.
35. Which of the following is required for a CPA firm to designate itself as "Members
of the American Institute of Certified Public Accountants" on its letterhead?
A) All owners must be members.
B) The owners whose names appear in the firm name must be members.
C) At least one of the owners must be a member.
D) The firm must be a dues paying member.
36. In which of the following circumstances would a CPA who audits XM Corporation
lack independence?
A) The CPA and XM's president are both on the Board of Directors of COD
Corporation.
B) The CPA and XM's president each own 25% of FOB Corporation, a closely
held company.
C) The CPA has an automobile loan from XM, a financial institution. The loan is
collateralized by the automobile.
D) The CPA reduced XM's usual audit fee by 40% prior to the audit because
XM's financial condition was unfavorable.
37. According to the ethical standards of the profession, which of the following acts is
generally prohibited?
A) Purchasing a product from a third party and reselling it to a client.
B) Writing a financial management newsletter promoted and sold by a
publishing company.
C) Accepting a commission for recommending a product to an audit client.
D) Accepting engagements obtained through the efforts of third parties.
38. According to the ethical standards of the profession, which of the following acts is
generally prohibited?
A) Issuing a modified report explaining a failure to follow a governmental
regulatory agency's standards when conducting an attest service for a client.
B) Revealing confidential client information during a quality review of a
professional practice by a team from the state CPA society.
C) Accepting a contingent fee for representing a client in an examination of the
client's federal tax return by an IRS agent.

D) Retaining client records after an engagement is terminated prior to

completion and the client has demanded their return.
39. Which of the following statements include in the advertising of a CPA firm is
permissible according to Rule 502, Advertising and Other Forms of Solicitation.
A) "Bob Bullet, CEO of A-One Corp, states that we are the best auditors his
company has ever used."
B) "We provide the best audit coverage of any firm in the state."
C) "We audit the five largest manufacturing companies in the state."
D) "We have several tax partners that work closely with Judges and IRS
attorneys on high-profile legal issues"
40. To which group can a CPA provide audit documentation without being
subpoenaed and without the client's consent?
A) The IRS
B) The FASB
C) Another CPA firm performing a peer review
D) Another CPA firm considering the purchase of the auditing firm.