Chapter 1

1. Which one of the following is not a management expectation for independent auditors?

A participant in management decision making.

2. Which of the following is not part of the systematic process called auditing?

Providing important managerial decisions for a client

3. Which of the following procedures do third-party users of the audit report not expect the
auditor to perform?

Provide a biased evaluation of the financial statements.

4. What is the audit committee of the board of directors of a company responsible for?

Hiring the auditor

5. As it relates to an audit, which of following statement about professional skepticism is true?

Professional skepticism is an attitude.

6. Which one of the following is a factor that creates a need for an independent auditor's
assessment of the financial statement presentation?

Complexity of transactions affecting the financial statements.

Remoteness of the user from the organization.

Both A and C.

7. An integrated audit requires the auditor to assess the effectiveness of internal controls.

True

8. A financial statement audit is a systematic process of objectively obtaining and evaluating

evidence.

True

9. The SEC has authority to establish GAAP for all business enterprises.

False

10. Which of the following is a driver of audit quality?

Audit firm culture.

Engagement team skills and attributes.

Factors outside control of auditors.

A, B, and C only

11. External auditors frequently serve on the audit committees of their clients.

False

12. The Sarbanes-Oxley Act sought to improve audit quality by removing the auditor
independence requirements.

False

13. What must audit firms do to perform financial statement audits for public companies?

Register with the Public Company Accounting Oversight Board.

14. Who are the users of the financial statements?

Management.

Taxing Authorities.

Both A and C

15. Which the following is not a reason for a public company to receive an audit?

Closeness between a user and the organization.

16. In an audit, management is considered the “client”.

False

17. In the United States, what is the most common criteria against which the auditor measures
the fairness of financial statement presentation?

Generally accepted accounting principles.

18. What is the primary objective of the independent auditor’s report on financial statements?

To give credibility to management’s prepared financial statements.

19. The scope of the work to be done by the auditor on the audit is described in which
document?

Engagement letter.

20. Congress authorized which of the following organizations to establish generally accepted
accounting principles?

SEC

21. Auditors should conduct their work with an attitude of professional skepticism.

True

22. The FASB is responsible for creating International Financial Reporting Standards.

False

23. Auditors generally need quantitative and mathematical skillsets more than they need
communication and leadership skills.

False

24. Auditing is the process of attesting to assertions about economic actions and events.

True

25. Which of the following does the public expect of auditors?

Understand and enforce principles that best portray the spirit of FASB concepts.

Be neutral to preparers and users of financial information.

Recognize that the investing public is the primary user of audit services.

Take responsibility for the discovery of fraud.

All of the above are expectations of the public.

26. Who is responsible for internal controls within an organization?

Management

27. A quality audit is one performed “in accordance with generally accepted auditing standards
(GAAS) to provide reasonable assurance that the audited financial statements and related
disclosures are presented in accordance with generally accepted accounting principles (GAAP)
and (2) are not materially misstated whether due to errors or fraud.”

True

28. The Center for Audit Quality has the primary authority to set auditing standards.

False

29. The SEC and PCAOB independence rules for auditors are identical.

False

30. The AICPA has a peer review program that reviews and evaluates the portions of an audit
firm’s accounting and audit practice that are not inspected by the PCAOB.

True

Chapter 2
1. Which of the following is not an element of the Fraud Triangle?

Deception

2. Which of the following actions was a key element of the Enron audit fraud?

Shifting debt to off-balance sheet special entities.

3. Which of the following represents the size of company that has historically committed
fraudulent financial reporting or that has experienced asset misappropriation by its
employees?

All companies.

4. The audit committee should have the authority to hire and fire the external auditor.

True

5. Which action was a key element in the WorldCom audit fraud case?

Recording bartered exchange transactions as revenue.

6. The auditor can be satisfied with less than persuasive evidence in the audit process because
of the belief that management is honest.

False
7. There are many important reasons for diligent audit planning. If an audit firm wrongly skips
the planning stage of an audit, what will be the effect relative to fraud detection?

The firm will not adequately identify the types of fraud that may occur in the client company.

8. Rationalization is one element of the Fraud Triangle.

True

9. Audit committees of publicly traded companies must establish whistleblowing mechanisms

within the company.

True

10. According to the Sarbanes-Oxley Act, which of the following items is the independent
auditor required to report to the audit committee?

Critical accounting policies and practices.

11. Managers of organizations are hired by Boards of Directors to perform responsibilities such
as the implementation of internal control.

True

12. Sam Jones, controller of Mitnikco, spends three days researching the accounting statements
to find loopholes in the "rules" and to make a case for recognizing revenue earlier, rather
than in later years. In the end, Sam and the other members of management determine that
they will reduce the company's deferred revenue accounts and begin accounting for all
revenues as agreements are signed. What are the motivations of Mitnikco management
based solely on the information above?

Rationalization.

13. Audit tests do not relate to fraud testing because testing for fraud is conducted in a
separate engagement.

False

14. BruceCo. has accounted for the revenue of Jiffy Mac, Inc., one of its suppliers as though it
were its subsidiary. BruceCo. has probably committed fraud because of its misapplication of
consolidation principles.

True
15. When the risk of fraud is high in financial statements, the auditor should assign less
experienced auditors to the engagement.

False

16. Fraud is an intentional act involving the use of deception that results in a material
misstatement of the financial statements.

True

Chapter 3
1. Which of the following is an example of a detective control in an information system?

Automated reports to management that specifically identify delinquent receivables.

2. The five major components of an organization's internal control are: the control
environment, risk assessment, control activities, information and communication, and
monitoring.

True

3. Which one of the following represents a control deficiency?

A missing control that is required for achievement of objectives.

4. Which COSO component of internal control concerns the process of identifying, capturing,
and exchanging information in a timely fashion to enable accomplishment of the
organization’s objectives?

Information and communication.

5. A walkthrough involves following a transaction back from when it is reflected in the

financial records to when it originated to determine if the controls are effectively designed
and have been implemented.

False

6. Control activities implemented to mitigate transaction processing risk that typically affect
only certain processes, transactions, accounts, and assertions are referred as transaction or
application controls.

False
7. Preventive controls are designed to provide reasonable assurance that the correct program
is used for processing, all transactions are processed, and the transactions update
appropriate files.

False

8. An auditor needs to understand a company’s internal controls in order to anticipate the

types of material misstatements that may occur.

True

9. Transaction oriented controls are designed to ensure that transactions are properly valued.

True

10. Which of the following is not true of the concepts that are embodied in the COSO
framework of internal controls?

The six components of internal control are logically and operationally intertwined.

11. Which of the following is not a major component of an organization’s internal controls?

Control risk.

12. Which of the following is considered to be an entity-wide control?

Controls over management override.

13. Which statement is true concerning the documentation of internal control?

Documentation should be sufficient to support the design and operating effectiveness of

internal controls.

14. Which of the following is an example of a control environment deficiency??

An audit committee that is not viewed as the client of the external auditor.

15. Which one of the following groups is interested in an organization's control structure?

All of the above.

16. Control activities may be implemented at the organizational level and at the transactional
level.

True
17. In addition to controls being specific, they may be broad, such as policies regarding a code
of ethics.

True

18. Which of the following is an example of a physical control to safeguard assets?

Locks on the warehouse doors.

19. Self-checking digit algorithms have been developed to test for transposition errors
associated with identification numbers

True

20. Preventive controls are designed to prevent the occurrence of a misstatement.

True

21. Which of the following services does the PCAOB require auditors of public companies to
perform?

A financial statement audit and an examination of the effectiveness of internal controls.

22. Which of the following is a major component of an organization's internal control structure?

Risk assessment.

23. Which of the following is not one of the underlying principles of an effective control
environment as developed by COSO?

The organization considers the potential for fraud in assessing risks to the achievement of
objectives.

24. A control designed to ensure that sales transactions are generated using the company’s
most current prices would be considered to be which type of control?

A processing control.

25. Managers must use professional judgment to determine whether identified control
deficiencies rise to the level of a significant deficiency or material weakness.

True

26. Performing a walkthrough provides an understanding of the nature of processing in

important accounting applications.
True

27. The information and communication component of internal control includes which of the
following?

The organization obtains or generates and uses relevant, quality information to support the
functioning of other components of internal control.

28. Several significant deficiencies in internal controls may constitute a material weakness.

True

29. All organizations should evaluates and communicates internal control deficiencies in a
timely manner to those parties responsible for taking corrective action, including senior
management and the board of directors, as appropriate.

True

30. Which of the following best represents a walkthrough?

The auditor traces three purchasing transactions from the purchase order to the financial
statement for observation and understanding.

31. A strong control environment can reduce all the financial reporting risks to zero.

False

32. Preventive controls are generally more cost-efficient than detective controls.

True

33. In a large company, who usually monitors the internal control?

Internal auditors.

34. Physical controls to safeguard assets are not intended to include simple controls such as
fences and locks.

False

35. Which of the following is not part of management’s report on internal controls?

A statement indicating the extent of tests performed to assess controls.

36. The quality of an organization's internal controls affect which of the following?
All of the above.

37. A material control weakness is a deficiency in internal control such that a reasonable
probability exists that a material misstatement of the company’s financial statements may
not be prevented or detected on a timely basis..

False

38. Requiring two signatures on any check in excess of $10,000 is an example of which type of
control?

Preventive control

39. A well-controlled organization has an appropriate structure and clearly defined lines of
responsibility and authority where everyone in the organization has equal responsibility for
the effective operation of internal control.

False

Chapter 4
1. Which of the following concepts represents the most expansive aspect of liability for
auditors?

Foreseeable Party.

2. The AICPA's Code of Professional Conduct defines an indirect financial interest as an

investment of one percent or less of a client's organization, and because the amount is so
small it is considered immaterial

False

3. According to the Sarbanes-Oxley Act, which of the following services may an auditor
perform without impairing their independence?

Tax Services

4. Under common law, which standard may a client sue an auditor for failure to demonstrate
due care?

All of the above.

5. Class action lawsuits are designed to encourage multiple lawsuits arising from the same
claim.
False

6. Confidentiality is the cornerstone of the auditing profession.

False

7. Under Rule 201, what best describes how an AIPCA member should act?

All of the above

8. According to the framework for professional decision making, the first step in decision-
making is to structure the audit problem

True

9. Negligence is the failure to exercise minimal care.

False

10. Liability concepts developed through court decisions are referred to as statutory law.

False

11. Which of the following represents a situation in which auditors may disclose client
information to outside parties?

Complying with a validly issued and enforceable subpoena or summons.

12. A CPA firm may include the name of only one past owner in the firm name.

False

13. Public confidence is mostly maintained by the public accounting profession through
integrity based on personal moral standards and it is reinforced by codes of conduct.

True

14. The concept of the Third-Party Beneficiary Test was established by which court case?

Ultramares Corp. v. Touche.

15. A member of the AICPA must safeguard the confidentiality of client information. Which of
the following is not a valid reason to disclose information to non-clients?

To explain to members of the press whether a client is likely to miss payroll in the forthcoming
periods.
16. According to Rights Theory, the highest-order rights include rights granted by the
government, such as civil rights, legal rights, rights to own property, and license privileges.

False

17. An ethical dilemma occurs in a situation in which moral duties or obligations conflict.

True

18. Which term best describes a situation in which an individual is morally or ethically required
to do something that conflicts with his or her immediate self-interest?

An ethical dilemma.

19. A new staff member on an audit engagement may own stock in that client until the audit
report is issued.

False

20. Commissions and referral fees are allowed to audit firms as long as the audit client is
informed of the fees.

False

21. Rights theory focuses on evaluating actions in terms of the fundamental rights of the parties
involved.

True

22. Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley's five-year-old daughter owns
shares of stock in McBurgers Corporation, then what is Pulley considered to have?

An direct financial interest in McBurgers Corporation.

23. What is the purpose of an ethical framework?

To provide a defined methodology to aid the user in making complex ethical decisions.

24. Which of the following is not an aspect of Rule 201 of the General Standards of the Code of
Professional Conduct?

A member firm must not advertise services to competing clients.

25. Utilitarian theory is an approach for addressing ethical problems by identifying a hierarchy
of rights that should be considered in solving ethical dilemmas.
False

26. The auditor is permitted to violate the confidentiality rule in providing relevant information
to an inquiry by a major shareholder of the client.

False

27. Which of the following represents a situation in which an auditor is independent of its
client?

The audit fee paid by the client represents 10% of the auditor’s annual gross revenue.

28. Which of following is not part of the ethical framework derived from utilitarianism and
rights theories?

Identification of the legal issues.

29. Rule 102 on integrity and objectivity only applies to covered members as defined by the
AICPA.

False

30. Which of the following employment positions could an auditor’s spouse hold in a client
without violating the independence requirements?

Order entry staff.

31. In federal lawsuits, Congress has limited the extent of joint and several liability damages to
the actual percentage of responsibility if auditors are found liable for less than 75% of
damages.

False

32. A contingency fee is a situation in which no fee will be charged unless a specified finding or
result is attained.

True

33. Gross negligence is a failure to use even minimal care or evidence of activities that show a
recklessness or careless disregard for the truth.

True

34. Which of the following is not one of the reasons for increased litigation related to audits?
Increased complexity of accounting standards.

35. Independence is required for which of the following types of services?

Audit work.

36. An auditor who is professionally skeptical will do which of the following?

All of the above.

37. Among immediate family members, whose ownership of client’s stock is not considered the
same as the covered member’s ownership?

Grandfather

38. Commissions and referral fees are not permitted for which types of services?

Reviews

Audits

Both B and C.

Chapter 5

1. Which of the following is not a typical accounting cycle?

Internal Controls.

2. The AICPA principles governing an audit explicitly state that an audit has inherent
limitations prohibiting an auditor from obtaining reasonable assurance that the statements
are free from misstatement.

False

3. Which of the following is a procedure that requests a direct written response to the auditor
from a third party?

Confirmation

4. Recalculation involves independently performing procedures or controls that were originally

performed by the client, such as reperforming a bank reconciliation.

False
5. Which one of the following is a requirement pf the reporting standards included in the
generally accepted auditing standards?

The auditor will state explicitly whether the financial statements are fairly presented in
accordance with the applicable financial reporting framework.

6. Which of the following would not be a factor in whether a control weakness would be
considered to be a material weakness as opposed to a significant deficiency?

The nature of the client’s industry.

7. The purpose of the audit program is to list the audit procedures to be followed in gathering
audit evidence and to help those in charge of the audit to monitor the progress and
supervise the work.

True

8. The PCAOB’s general standards provide guidance to audit firms in selecting and training
their professionals.

True

9. Which auditing standards apply to private companies?

The AICPA Standards.

10. Physically examining a client’s assets is an audit procedure.

True

11. An auditor should give equal emphasis to all management assertions when testing accounts.

False

12. Auditors are responsible for having the appropriate competence and capabilities to perform
the audit, should comply with ethical requirements, and maintain professional skepticism
throughout the audit.

True

13. Assertions are relevant to the audit process because they are the representations of
management embodied in the financial statements.

True
14. The auditing standards issued by the PCAOB are identical to the auditing standards issued
by the AICPA.

False

15. Which of the following is the primary assertion related to testing inventory on hand to see if
it includes consignment goods ?

Rights and Obligations

16. With a substantive audit strategy, what is an auditor likely to do?

Limit the testing of internal controls.

17. The proper supervision of audit assistants is a requirement found in which section of the
Generally Accepted Auditing Standards?

Standards of Fieldwork.

18. Which of the following would not affect an auditor's judgment concerning internal controls?

The level of inherent risk.

19. Which of the following statements is correct concerning the auditor’s opinion on internal
control effectiveness?

The report does not discuss whether the control weaknesses were first identified by
management or the auditor.

20. With a dual purpose test, what is an auditor likely to do?

Perform a substantive procedure concurrently with a test of a control.

21. Which statement is correct?

The extent and results of control tests performed by the auditor will influence the substantive
procedures to be performed.

22. When assessing the effectiveness of controls for relevant assertions the auditor tests only
transaction controls.

False

23. Test of controls are a type of substantive procedure.

False
24. There is an inverse relationship between the assessment of risk of material misstatement in
an account and the amount of evidence required.

False

25. Which of the following terms describes procedures designed to detect material
misstatements in accounts ?

Substantive procedures.

26. Which of the following is not a question an auditor considers in deciding whether to pursue
a lower control risk approach prior to substantive testing?

Does the control promote operational efficiency?

27. The effectiveness of entity-wide controls may reduce the extent of testing of transaction
controls.

True

28. U.S. auditing standards recommend that a successor auditor on an initial audit obtain client
permission to communicate with the predecessor auditor.

False

29. In performing substantive tests on account balances, the auditor performs tests for all five
assertions.

False

30. For an integrated audit, the auditor’s opinion about internal control effectiveness is based
on control effectiveness at year-end as opposed to throughout the year.

True

31. Audit procedures can be classified as risk assessment procedures, test of controls or
substantive tests.

True

32. Which type of audit documentation is required by PCAOB standards?

A specific form of documentation is not required.

33. Research indicates that weaknesses in control components other than control activities do
not cause fraud and other misstatements in financial statements.

False

34. An Integrated Audit requires the issuance of separate reports for the opinions expressed on
the financial statements and on internal control..

False

35. The reporting standards of the ten generally accepted audit standards of the PCAOB
includes consistency, disclosure, and due professional care.

False

36. Inherent risk refers to the susceptibility of an assertion about a class of transaction, account
balance, or disclosure to a misstatement that could be immaterial, either individually or
when aggregated with other misstatements, before consideration of any related controls.

False

37. At what level does the auditor assess the risk of material misstatement?

The financial statement level.

The assertion level.

Both A and C.

38. Which of the following assertions would the auditor usually consider most relevant for
accounts payable?

Completeness.

39. The ten standards of auditing, adopted by the PCAOB encompass three broad categories
including: general standards, fieldwork standards and reporting standards.

True

40. If the auditor assesses internal controls to be effective, less substantive testing is likely.

False

41. The auditor is not required to test every control related to relevant assertions in a
significant account.
True