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If the auditor believes there is minimal likelihood that the resolution of an uncertainty will have a
material effect on the financial statements, the auditor would issue a(n)

A. qualified opinion
B. unqualified opinion
C. adverse opinion
D. disclaimer of opinion

19. How is the responsibility of the practitioner affected by an involvement of an expert in an assurance

A. The practitioner should always refer to the work of the expert in his report.
B. The practitioner should divide the responsibility between him and the expert.
C. The auditor should have an understanding of the aspects of the subject matter for which the expert
has used, sufficient to enable the practitioner to accept responsibility for the conclusion on subject
matter being expressed.
D. The practitioner should first obtain a level of knowledge of the business, sufficient to at least equal
the expertise of the expert, so that he can review the results of the work of the expert.

20. The concept of materiality is not used by auditors as a guide to

A. planning the audit program.

B. evaluation of the evidence.
C. application of general standards.
D. making decisions about the audit report.

21. Inherent risk is not a characteristic of the

A. client's business.
B. substantive procedures.
C. major types of transactions.
D. effectiveness of the client's accountants.

22. Which of the following risks is entirely a quality criterion based on professional judgment?

A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk

23. Misstatements must be compared to some measurement base before a decision can be made about the
materiality of the failure to follow GAAP. A commonly accepted measurement base would be

A. net income.
B. total assets.
C. working capital.
D. all of the given choices.
57. The only unqualified reports which use modified wordings are those involving

A. the use of other auditors.

B. material uncertainties.
C. substantial doubt about going concern.
D. lack of consistent application of GAAP.

58. Financial statement assertions include all of the following except:

A. occurrence.
B. presentation and disclosure.
C. consistency and comparability.
D. completeness.

59. Which of the following types of evidence will be gathered in order to test internal controls?

A. Confirmations of accounts receivable with customers.

B. Observation of client personnel receiving inventory shipments.
C. Observation of inventory counts.
D. Inquiry of management regarding significant litigation.

60. If, when performing analytical procedures, an auditor observes that operating income has declined
significantly between the preceding year and the current year, the auditor should next:

A. require that the decline be disclosed in the financial statements.

B. consider the possibility that the financial statements may be materially misstated.
C. inform management that a qualified opinion on the financial statements will be necessary.
D. determine management's responsibility for the decline and discuss the issue with the audit

61. The purpose of analytical procedures in the audit planning stage is to:

A. aid in planning the observation of physical inventory.

B. identify unusual circumstances that the auditor may need to investigate further.
C. flag individual transactions for further review.
D. determine whether sales transactions were approved.

62. Which of the following is not a change that affects consistency and therefore does not require an
explanatory paragraph?

A. Change in accounting principle, such as a change from weighted-average to FIFO.

B. Change in reporting entity, such as the inclusion of an additional company in the combined
financial statements.
C. Change in an accounting estimate, such as a decrease in the life of an asset for depreciation
D. Correction of errors by changing from non-GAAP to GAAP.

63. When there is a subsequent discovery of omitted procedures, although the financial statements are
fairly presented, the auditor may not have met due diligence requirements. The auditor:

A. is under no obligation to perform addition audit procedures.

B. must contact the client and perform the omitted procedures.
C. must notify the SEC of the omitted procedures.
D. immediately resign from the engagement.

64. A statement in a report such as Nothing came to our attention that would lead us to question the
fairness of the presentations is referred to as a(n):

A. unqualified opinion.
B. disclaimer of opinion.
C. negative assurance.
D. positive assurance.

65. In a financial statement audit, management is responsible for all of the following except:

A. the financial statements.

B. for establishing and maintaining internal control.
C. for meeting budget projections.
D. for assuring compliance with laws and regulations.

66. Contingent fee based pricing of accounting services is:

A. Always strictly prohibited in public accounting practice.

B. Allowed in an engagement to compile financial statements..
C. Not prohibited if associated with report based agreed-upon procedures.
D. Always considered an act discreditable to the profession.

67. Adequate planning and design of an audit is necessary for an auditor to restrict which type of
component of audit risk?

A. Control risk.
B. Detection risk.
C. Sufficiency risk.
D. Inherent risk.

68. Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise
in the industry in which the client operates, the CPA should

A. reduce audit risk by lowering the preliminary levels of materiality.

B. Design special substantive tests to compensate for the lack of industry expertise.
C. Engage financial experts familiar with the nature of the industry.
D. Obtain a knowledge of matters that relates to the nature of the entitys business.

69. An auditor anticipates of assessing control risk at a low level in a computerized environment. Under
these circumstances, on which of the following procedures would the auditor initially focus?

A. Output control procedures.

B. General control procedures.
C. Application control procedures.
D. Program control procedures.

70. Engagement risk is influenced by the risks associated with the following, except:

A. The sufficiency and appropriateness of the evidence likely to be available.

B. The nature and extent of the process used to collect and evaluate evidence.
C. The identified user of the assurance engagement report.
D. The nature and form of the subject matter.

71. Discussions with the owner-manager of an audit client reveal to the auditor that the company is more
concerned with minimizing their income tax payments than maximizing income. Based on this
information, which management assertion will the auditor be most concerned about verifying with
regard to sales revenue?

A. Existence and occurrence.

B. Completeness.
C. Rights and obligations.
D. Valuation.

72. Which of the following primary assertions is satisfied when an auditor observes the client's physical
count of inventory:

A. Valuation
B. Completeness
C. Existence
D. Rights and obligations

73. Which of the following acts are considered fraudulent?

I. Alteration of records or documents.
II. Misinterpretation of facts.
III. Misappropriation of assets.
IV. Recording of transactions without substance.
V. Clerical mistakes.

A. III only
B. I and III only
C. I, III, and IV only
D. All the given acts are fraudulent

74. Which of the following statements best represents the reason why auditors prepare engagement letters
to be signed by their clients:

A. They provide documentation of management's responsibility for the financial statements.

B. They document the audit fees and deadlines that have been agreed upon with their clients.
C. They communicate and clarify the expectations and responsibilities of both the client and the
D. They help to limit auditor liability in the event of misunderstandings.

75. Which of the following series of steps represent the correct sequence of evidence as represented in the
audit testing hierarchy?

A. risk assessment, tests of controls, tests of details, substantive analytical procedures.

B. risk assessment, tests of controls, substantive analytical procedures, tests of details.
C. tests of controls, risk assessment, tests of details, substantive analytical procedures.
D. tests of controls, risk assessment, substantive analytical procedures, tests of details.
1. The control environment includes which of the following?

A. Control activities.
B. Management philosophy and operating style.
C. Assessing activity level risks.
D. Application level controls.

2. Which of the following would an audit of a company's internal control include?

A. An engagement to perform internal audit procedures.

B. Implementation of key financial controls.
C. Concluding on the accuracy of the statements of cash flows.
D. Testing of management's risk assessment procedures.

3. Which one of the following is considered an adequate documentation in an internal control system?

A. The accounting clerk initials the bank reconciliation.

B. The mailroom mails commissions checks.
C. Invoices are prepared without sequential numbering.
D. Fixed assets are assigned useful lives at random.
4. A material weakness in the design of the operation of controls that is discovered in an audit of internal
controls results in:

A. not submitting a management letter.

B. an unfavorable opinion.
C. the firing of the auditors.
D. adjusting audit journal entries.

5. As the acceptable level of detection risk decreases, an auditor may:

A. reduce substantive testing by relying on the assessments of inherent risk and control risk.
B. postpone the planned timing of substantive tests from interim dates to the year-end.
C. eliminate the assessed level of inherent risk from consideration as a planning factor.
D. lower the assessed level of control risk from the maximum level to below the maximum.

6. In an audit of financial statements, an auditor's primary consideration regarding internal control is

whether the control:

A. reflects management's philosophy and operating style.

B. affects management's financial statement assertions.
C. provides adequate safeguards over access to assets.
D. enhances management's decision-making processes.

7. 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
D. identifying specific internal controls relevant to specific assertions.
8. In planning an audit, the auditor's knowledge about the design of relevant internal controls 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.

9. To determine whether the client's system of internal control is operating effectively in minimizing an
error of failure to invoice a shipment, the auditor would select a sample of transactions from the
population represented by the

A. Customer order file.

B. Bill of lading file.
C. Open invoice file.
D. Sales invoice file.

10. Tracing copies of sales invoices to shipping documents will provide evidence that all

A. Shipments to customers were recorded as receivables.

B. Billed sales were shipped.
C. Debits to the subsidiary accounts receivable ledger are for sales shipped.
D. Shipments to customers were billed.

11. Controls over approving credit relate to the:

A. Completeness assertion.
B. Rights and obligation.
C. Valuation or allocation.
D. Occurrence.

12. The following are the four steps that an auditor undertakes in assessing control risk

A. Determine what control procedures are used by the entity

B. Identify the systems control objectives
C. Design tests of controls
D. Consider the potential errors or irregularities that could result

In what order would an auditor perform these steps?


13. Which of the following statements is correct concerning an auditor's assessment of control risk?
A. Assessing control risk may be performed concurrently during an audit while obtaining an
understanding of the entity's internal control.
B. Evidence about the operation of controls in prior audits may not be considered during the current
year's assessment of control risk.
C. The basis for an auditor's conclusions about the assessed level of control risk should be documented
if the control risk is assessed at the maximum level.
D. The lower the assessed level of control risk, the less assurance the evidence must provide that the
controls are operating effectively.

14. After assessing control risk at below the maximum level, an auditor desires to seek a further reduction
in the assessed level of control risk. At this time, the auditor would consider whether:

A. it would be efficient to obtain an understanding of the entity's information system relevant to

financial reporting.
B. the entity's internal controls have been placed in operation.
C. the entity's internal controls pertain to any financial statement assertions.
D. additional evidential matter sufficient to support a further reduction is likely to be available.

15. Proper authorization of write-offs of uncollectible accounts should be approved in which of the following

A. Accounts receivable
B. Credit
C. Accounts payable
D. Treasury

16. Which of the following controls most likely could prevent EDP personnel from modifying programs to
bypass programmed controls?

A. Periodic management review of computer utilization reports and systems documentation

B. Segregation of duties within EDP for computer programming and computer operations
C. Participation of user department personnel in designing and approving new systems
D. Physical security of EDP facilities in limiting access to EDP equipment

17. Misstatements in a batch computer system caused by incorrect programs or data may not be detected
immediately because:

A. errors in some transactions may cause rejection of other transactions in the batch.
B. the identification of errors in input data typically is not part of the program.
C. there are time delays in processing transactions in a batch system.
D. the processing of transactions in a batch system is not uniform.

18. Which of the following input controls is a numeric value computed to provide assurance that the
original value has not been altered in construction of transmission?
A. Hash total
B. Parity checks
C. Encryption
D. Check digit

19. Which of the following tasks could not be performed by generalized audit software?

A. Choosing a sample of accounts receivable for confirmation

B. Footing the bank reconciliation
C. Summarizing data
D. Reading the minutes of the board of directors' meeting

20. Which of the following tasks may be performed by generalized audit software?

A. Selection of a sample
B. Extraction of information
C. Obtaining file statistics
D. All of the given tasks may be performed

21. It involves the application of audit procedures to less than 100 percent of items within an account
balance or class of transactions.

A. Analytical procedures
B. Substantive testing
C. Audit sampling
D. Tests of controls

22. The likelihood of an account balance or class of transactions to misstatements that could be material,
individually or when aggregated with misstatements in other balances or transaction classes, assuming
there were no related internal controls.

A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk

23. If the auditor is concerned that a population may contain exceptions, the determination of a sample size
sufficient to include at least one such critical exception is a characteristic of:

A. Random sampling
B. Variable sampling
C. Discovery sampling
D. Probability-proportional-to-size sampling
24. Uncertainties that still exist even if the auditor examines 100 percent of an account balance is

A. Sampling risk
B. Nonsampling risk
C. Inherent risk
D. Control risk

25. As the expected population deviation rate increases (all other factors remaining the same).

A. The sample size should increase.

B. The sample size should decrease.
C. The sample size should remain constant.
D. The change in the sample size cannot be determined.

A: Prepare qualified opinion due to material limitation but not pervasive. 25 points
B. As the independent auditor for Jansin Company, you completed the audit engagement for the year ended August 31,
2005 on October 1, 2005. Jansin Companys audit revealed no irregularities in the accounting system and you have
concluded that managements financial statements are presented fairly in all material respects in conformity with GAAP.

Produce an audit report for this client addressed to the Board of Directors and company shareholders.