I.Modified True / False (60 points, 3 points each) The following statements in this section may be true (T) of false (F). If the statement is true, place a T in the space provided. If it is false, then place an F in the space provided AND you must correct the statement, so that it becomes true. No credit will be given, if a false statement is not corrected.

___F___1. Under the CPAs duty of confidentiality, it is an ethical violation to communicate with the predecessor auditors about a client under any circumstances.

___T___2. An engagement letter ought to include the inherent limitations on an audit examination.

___F___3. A defalcation refers to a management override of internal controls.

misstatements arising from misappropriation of assets (defalcations).

___F___4. The tests aimed directly at the effectiveness of the clients internal control system are known as the substantive procedures.

Substantive procedures is Audit procedures designed to detect material misstatements. Substantive procedures include tests of details (account balances, transactions, and disclosures) and substantive analytical procedures

___T_5. An airplane manufacturer has a perpetual inventory system. In order to verify the inventory for the audit, it would be sufficient to check the manual entries in the inventory records, and document those entries for the audit file .

___F___6. An acceptable system of controls must provide absolute assurances that an organizations objectives will be achieved.

__T____7. An effective Board of Directors exercises oversight over internal control.

___T___8. It is impossible to establish sufficient internal control in an all cash business.

___T___9. The concept of corporate governance encompasses ethical treatment of all major stakeholders.

______10. It is a conflict of interest for auditors to obtain audit evidence from internal auditors.