Question 1

An auditor's primary consideration regarding an entity's internal controls is whether they

a. Prevent management override.

b. Relate to the control environment.

c. Reflect management's philosophy and operating style.

d. Affect the financial statement assertions.

Question 2

Which of the following statements about internal control is correct?

a. A properly maintained internal control system reasonably ensures that collusion among employees cannot occur.

b. The establishment and maintenance of internal control is an important responsibility of the internal auditor.

c. An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance.

d. The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system.

Question 3

Which of the following is not a component of an entity's internal control system?

a. Control risk.

b. The entity's risk assessment process.

c. Control activities.

d. Control environment

Question 4 In which of the following situations would an auditor most likely use a reliance strategy?

a. The client has been slow to update its IT system to reflect changes in billing practices.

b. The auditor hired an IT specialist whose report to the auditor reveals that the specialist did not perform sufficient procedures to allow the auditor to properly assess the effect of the IT system on control risk.

c. A client receives sales orders, bills customers, and receives payment based only on information generated from its IT systemno paper trail is generated.

d. The auditor has been unable to ascertain whether all changes to a client's IT system were properly authorized.

Question 5

After obtaining an understanding of an entity's internal control system, an auditor may set control risk at the maximum level for some assertions because he or she:

a. Believes the internal controls are unlikely to be effective.

b. Determines that the pertinent internal control components are not well documented.

c. Performs tests of controls to restrict detection risk to an acceptable level.

d. Identifies internal controls that are likely to prevent material misstatements.

Question 6

Regardless of the assessed level of control risk, an auditor would perform some

a. Tests of controls to determine the effectiveness of internal controls.

b. Analytical procedures to verify the design of internal controls.

c. Substantive procedures to restrict detection risk for significant transaction classes.

d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

Question 7

Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of an internal control?

a. Inquiry of client personnel.

b. Re-computation of the control by the auditor.

c. Observation of client personnel.

d. Walkthrough.

Question 8

Audit evidence concerning proper segregation of duties ordinarily is best obtained by:

a. Inspection of third-party documents containing the initials of those who applied control activities.

b. Direct personal observation by the auditor of the employee who applies control activities.

c. Preparation of a flowchart of duties performed and available personnel.

d. Making inquiries of co-workers about the employee who applies control activities.

Question 9

Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's audit committee because they represent:

a. Disclosures of information that significantly contradict the auditor's going concern assumption.

b. Material fraud or illegal acts perpetrated by high-level management.

c. Significant deficiencies in the design or operation of the internal control structure.

d. Manipulation or falsification of accounting records or documents from which financial statements are prepared.

Question 10

Assessing control risk below maximum involves all of the following except:

a. Identifying specific controls to rely on.

b. Concluding that controls are ineffective.

c. Performing tests of controls.

d. Analyzing the achieved level of control risk after performing tests of controls.

Question 11

Which of the following procedures would an auditor most likely rely on to verify management's assertion of completeness?

a. Reviewing standard bank confirmations for indications of cash manipulations.

b. Comparing a sample of shipping documents to related sales invoices.

c. Observing the client's distribution of payroll checks.

d. Confirming a sample of recorded receivables by direct communication with the debtors.

Question 12

Which of the following statements concerning audit evidence is correct?

a. To be appropriate, audit evidence should be either persuasive or relevant but need not be both.

b. The measure of the reliability of audit evidence lies in the auditor's judgment.

c. The difficulty and expense of obtaining audit evidence concerning an account balance is a valid basis for omitting the test.

d. A client's accounting data may be sufficient audit evidence to support the financial statements.

Question 13

Which of the following types of audit evidence is the least persuasive?

a. Pre-numbered purchase order forms.

b. Bank statements obtained from the client.

c. Test counts of inventory performed by the auditor.

d. Correspondence from the client's attorney about litigation.

Question 14

Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the most persuasive type of evidence?

a. Bank statements obtained from the client.

b. Computations made by the auditor.

c. Prenumbered client sales invoices.

d. Vendors' invoices included in the client's files.

Question 15

An auditor would be least likely to use confirmations in connection with the examination of:

a. Inventory.

b. Refundable income taxes.

c. Long-term debt.

d. Stockholders' equity.

Question 16

The current file of the auditor's working papers should generally include

a. A flowchart of the accounting system.

b. Organization charts.

c. A copy of the financial statements.

d. Copies of bond and note indentures.

Question 17

The permanent file section of the working papers that is kept for each audit client most likely contains:

a. Review notes pertaining to questions and comments regarding the audit work performed.

b. A schedule of time spent on the engagement by each individual auditor.

c. Correspondence with the client's legal counsel concerning pending litigation.

d. Narrative descriptions of the client's accounting system and control procedures.

Question 18

An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n)

a. Lead schedule.

b. Supporting schedule.

c. Audit control account.

d. Working trial balance.

Question 19

In testing the existence assertion for an asset, an auditor ordinarily works from the:

a. Financial statements to the potentially unrecorded items.

b. Potentially unrecorded items to the financial statements.

c. Accounting records to the supporting documents.

d. Supporting documents to the accounting records.

Question 20

Management makes assertions about components of the financial statements. A possible management assertion regarding rights and obligations is:

a. Assets, liabilities, equity revenues, and expenses are appropriately valued and are allocated to the proper accounting period.

b. Amounts shown in the financial statements are properly presented and disclosed.

c. The assets are the rights of the entity, and the liabilities are its obligations.

d. The assets and liabilities exist, and the recorded transactions have occurred.