NOTE: THIS IS AUDITING

1. A client sells expensive flat screen televisions. The client has limited security and performs only annual inventory counts. Which of the following is true? Select all that apply.

A. the risk of material misstatement will likely be assessed as high

B. the auditor will likely assess control risk as high

C. the auditor will likely assess inherent risk as low

D. a combined audit strategy will likely be chosen

E. the auditor will follow a substantive audit strategy

2. Why is an auditor concerned with the profitability ratios of an entity? A. to identify significant trends that appear unusual

B. to determine if the company is in the right industry

C. to understand if the entity is able to meet its short-term debt obligations

D. allows the auditor to determine if the company pays dividends regular

3. Which of the following would most likely be the most appropriate basis for determining materiality in a non-profit organization?

A. gross profit

B. total liabilities

C. total assets

D. net income before tax

4. Which of the following would be considered a non-recurring item that may need to be normalized when determining materiality? Select all that apply. A. discontinued operations

B. management bonuses

C. unusual gains or losses

D. management salaries

E. interest expense on loan repayments

5. Which of the following would be considered a non-recurring item that may need to be normalized when determining materiality? Select all that apply. A. discontinued operations

B. management bonuses

C. unusual gains or losses

D. management salaries

E. interest expense on loan repayments

6. If the auditor determines an acceptable audit risk is .05%, and assesses the inherent and control risks both as high, what may the detection risk be set at? A. 0.0005%

B. 10%

C. 50%

D. 0.05%

7. Keith Fiorino, a manager at Cox, Durham, & Elliott, CPA's was given the mandate to deal with the following risks: fraud risks, complex transactions, and significant related party A. transactions. How would you classify these risks?

B. significant risk

C. control risk

D. inherent risk

E. audit risk

8. If there is a risk that management's assertion that recorded inventory exists is not valid, the auditor will

A. not adjust their audit strategy.

B. spend more time testing for the existence of recorded inventory.

C. spend more time testing for the completeness of inventory.

D. spend less time testing for the existence of recorded inventory.

9. Which of the following is not an example of an analytical procedure?

A. comparison of financial data to budgets

B. comparison of financial data to non-financial data

C. comparison of financial data to industry averages

D. comparison of financial data to invoices

10. An auditor has gained a detailed understanding of the client's system of internal controls and has conducted extensive tests of those controls. She later assesses control risk as low. What is she planning to perform?

A. a substantive audit strategy

B. an audit of financial controls

C. a modified audit strategy

D. a combined audit strategy

11. Which of the following key performance indicators (KPIs) would likely be the most important for an entity in the finance industry? A. inventory margins

B. revenue per customer

C. risk-weighted assets

D. inventory turnover

12. Which of the following would most likely be the most appropriate basis for determining materiality in a publicly listed enterprise? A. total liabilities

B. net income before tax

C. total assets

D. total equity

13. An example of a qualitative material item is

A. sales incorrectly recorded twice.

B. a related party transaction.

C. interest expenses as being 6% of total sales.

D. an incorrect value reported for an asset.

4. Analytical procedures involve identifying fluctuations in accounts. For example, if an auditor is aware that the client has issued a significant amount of equity in the previous financial year, the auditor would expect the debt to equity ratio to A. decrease.

B. double.

C. remain unchanged.

D. increase.

15. An entity has a bank loan with a debt covenant stating that the current asset ratio must be more than 1.5:1. This circumstance will directly impact A. performance materiality.

B. overall materiality.

C. the basis for determining materiality.

D. specific materiality.

16. An auditor accepts a new audit engagement for a new entity that has little revenue and has recognized a loss in the past year. What is typically the most appropriate basis for determining materiality? A. total revenues

B. net income before tax

C. total assets

D. gross profit

17. A client engages in numerous foreign exchange transactions and the auditor considers that there is a risk these transactions are incorrectly stated. During the assessment, the auditor also determines that the internal controls in place help mitigate the possibility that transactions are valued incorrectly. How will the auditor assess inherent and control risk? A. inherent risk as low and control risk as low

B. inherent risk as high and control risk as low

C. inherent risk as low and control risk as high

D. inherent risk as high and control risk as high

18. If an entity's earnings per share (EPS) ratio or price-earnings (PE) ratio is declining, auditors will likely consider the possibility that

A. the entity will sell off redundant assets to improve profitability.

B. management may be under pressure to manipulate earnings in order to increase earnings.

C. management may be under pressure to manipulate earnings in order to decrease earnings.

D. shareholders will be looking to invest more money into the company.