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Reviewer for Auditing Theory

1.

Which of the following eliminates voluminous details from the auditor's working trial
balance by classifying and summarizing similar or related items?
a.
Account analyses.
b.
Lead schedules.
c.
Control accounts.
d.
Supporting schedules.

2.

An auditor who accepts an audit engagement and does not possess the industry expertise
of the business entity should
a.
engage financial experts familiar with the nature of the business entity.
b.
obtain a knowledge of matters that relate to the nature of the entity's business.
c.
refer a substantial portion of the audit to another CPA who will act as the principal
auditor.
d.
first inform management that an unqualified opinion cannot be issued.

3.
a.
b.
c.
d.

Early appointment of the independent auditor will enable


a more thorough examination to be performed.
a proper study and evaluation of internal control to be performed.
sufficient competent evidential matter to be obtained.
a more efficient examination to be planned.

4.

The first standard of fieldwork requires, in part, that audit work be properly planned.
Proper planning as intended by the first standard of fieldwork would occur when the auditor
a.
physically observes the movement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand.
b.
uses negative accounts receivable confirmations instead of positive confirmations
because the latter require mailing of second requests and review of subsequent cash
collections.
c.
compares all cash as of a particular date to avoid performing time-consuming cash
cutoff procedures.
d.
eliminates the possibility of counting inventory items more than once by arranging to
make extensive test counts.

5.

A CPA is conducting the first examination of a non-public company's financial statements.


The CPA hopes to reduce the audit work by consulting with the predecessor auditor and
reviewing the predecessor's working papers. This procedure is
a.
acceptable if the client and the predecessor auditor agree to it.
b.
acceptable if the CPA refers in the audit report to reliance upon the predecessor
auditor's work.
c.
required if the CPA is to render an unqualified opinion.
d.
unacceptable because the CPA should bring an independent viewpoint to a new
engagement.

6.

Before applying principal substantive tests to the details of asset and liability accounts at
an interim date, the auditor should
a.
assess the difficulty in controlling incremental audit risk.
b.
investigate significant fluctuations that have occurred in the asset and liability accounts
since the previous balance-sheet date.
c.
select only those accounts which can effectively be sampled during year-end audit work.
d.
consider the tests of controls that must be applied at the balance-sheet date to extend
the audit conclusions reached at the interim date.

7.

Which of the following is not one of the three main reasons why the auditor should
properly plan engagements?
a.
To enable proper on-the-job training of employees.
b.
To enable the auditor to obtain sufficient competent evidence.
c.
To avoid misunderstandings with the client.
d.
To help keep audit costs reasonable.

8.

Which of the following would not be a consideration of a CPA firm in deciding whether to
accept a new client?
a.
Client's standing in the business community.
b.
Client's financial stability.
c.
Client's relation with its previous CPA firm.
d.
Client's probability of achieving an unqualified opinion.

9.

The working papers are


a.
the property of client.
b.
property of the auditor although prepared by client.
c.
the primary means of documenting that an adequate audit was conducted in accordance
with GAAS.
d.
used primarily as a basis for the partners to review and reward the work of the
managers, seniors, and staff.

10.

Audit programs are modified to suit the circumstances on particular engagements. A


complete audit program for an engagement generally should be developed
a.
prior to beginning the actual audit work.
b.
after the auditor has completed an evaluation of the existing internal accounting control.
c.
after reviewing the client's accounting records and procedures.
d.
when the audit engagement letter is prepared.

11.
a.
b.
c.
d.

Which of the following would ordinarily not be found in the permanent file?
The history of the company.
The name of the predecessor auditor.
A record of the most important accounting policies.
A list of the major lines of business.

12.

Transactions with related parties are important to the auditors because they will be
disclosed in the financial statements if material. Generally accepted accounting principles
would not require disclosure of
a.
the nature of the related-party relationship.
b.
a description of transactions, including dollar amounts.
c.
the amounts due from and to related parties.
d.
Loans to officers during the year which had been repaid before the balance sheet date.

13.

Audit programs generally include procedures to test actual transactions and resulting
balances. These procedures are primarily designed to
a.
gather corroborative evidence.
b.
test the adequacy of internal control.
c.
detect irregularities that result in misstated financial statements.
d.
obtain information of informative disclosures.

14.

Which of the following items would not normally be included, in whole or in part, in the
auditor's permanent file on a client?
a.
The articles of incorporation and bylaws.
b.
Analyses of accounts such as long-term debt and stockholders' equity.
c.
Organization charts and internal control questionnaires.
d.
The audit program.

15.

When a company changes auditors, SAS No. 7 requires communication between the
predecessor and successor auditors. The burden of initiating the communication rests with
the
a.
predecessor.
b.
client.
c.
successor.
d.
SEC.

16.

A measure of how willing the auditor is to accept that the financial statements may be
materially misstated after the audit is completed and an unqualified opinion has been issued
is the
a.
inherent risk.
b.
acceptable audit risk.
c.
statistical risk.
d.
financial risk.

17.

A measure of the auditor's assessment of the likelihood that there are material
misstatements in an account before considering the effectiveness of the client's internal
control is
a.
control risk.
b.
acceptable audit risk.
c.
statistical risk.
d.
inherent risk.

18.

Investigation of new clients and reevaluation of existing ones is an essential part of


deciding
a.
inherent risk.
b.
acceptable audit risk.
c.
statistical risk.
d.
financial risk.

19.
a.
b.
c.
d.

The largest portion of the auditor's working papers is the


lead schedules.
adjusting and reclassification entries.
supporting schedules.
working trial balance.

a.
b.
c.
d.

The current file of the auditor's working papers generally should include
a flowchart of the internal controls.
organization charts.
a copy of the financial statements.
copies of bond and note indentures.

a.
b.
c.
d.

Which of the following would not be classified as a related-party transaction?


An advance of one week's salary to an employee.
Sales of merchandise between affiliated companies.
Loans or credit sales to the principal owner or client.
Exchanges of equipment between two companies owned by the same person.

a.
b.
c.
d.

Which of the following would not be found in the corporate charter?


The kinds and amount of capital stock authorized.
The date of incorporation.
The types of business activity that the corporation is allowed to conduct.
The rules and procedures adopted by the stockholders.

20.

21.

22.

23.

During the course of an audit engagement an auditor prepares and accumulates audit
working papers. The primary purpose of the audit working papers is to
a.
aid the auditor in adequately planning the work.
b.
provide a point of reference for future audit engagements.
c.
support the underlying concepts included in the preparation of the basic financial
statements.
d.
support the auditor's opinion.

24.

Ordinarily, the working papers can be provided to someone else only with the express
permission of the client. This is the case even if
a.
the papers are subpoenaed by a court.
b.
the papers are used as a part of an AICPA quality review program.
c.
the papers are requested as evidence in an AICPA Trial Board hearing.
d.
the papers are transferred as a result of a CPA selling his/her practice to another CPA
firm.

25.

The purpose of an engagement letter is to


a.
reduce the CPA firm's responsibility to external users of the audited financial statements.
b.
reduce the terms of the engagement to writing in order to minimize misunderstandings.
c.
notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
d.
satisfy the Statute of Frauds which requires that contracts for professional services must
be in writing to be enforceable.

26.
a.
b.
c.
d.
27.

Which of the following is not an inherent risk that is common to all clients in certain
industries?
a.
Potential inventory obsolescence in the fashion clothes industry.
b.
Reserve for loss in the casualty insurance industry.
c.
Accounts receivable collection in the consumer loan industry.
d.
Brand loyalty in the cosmetics industry.

28.
all
a.
b.
c.
d.
29.

The auditor is likely to accumulate more evidence when the audit is for a company
whose stock is publicly held.
which has extensive indebtedness.
which is to be sold in the near future.
All three of the above.

One means of informing the client that the auditor is not responsible for the discovery of
acts of fraud is the
engagement letter.
representation letter.
responsibility letter.
client letter.

Which of the following is the most likely first step an auditor would perform at the
beginning of an initial audit engagement?
a.
Prepare a rough draft of the financial statements and of the auditor's report.
b.
Study and evaluate the system of internal administrative control.
c.
Tour the client's facilities and review the general records.
d.
Consult with and review the work of the predecessor auditor prior to discussing the
engagement with the client management.

30.
a.
b.
c.
d.

The permanent section of the auditor's working papers generally should include
time and expense reports.
a copy of the engagement letter.
a copy of key customer confirmations.
names and addresses of all audit staff personnel on the engagement.

a.
b.
c.
d.

Which of the following would you expect to find in a corporation's bylaws?


The kinds and amounts of capital stock authorized.
The date of incorporation.
The rules and procedures adopted by the stockholders of the corporation.
The types of business activities that the corporation is authorized to conduct.

31.

32.

Which of the following would not usually be included in the minutes of the board of
directors and/or stockholders?
a.
The duties and powers of the corporate officers.
b.
Declaration of dividends.
c.
Authorization of long-term loans.
d.
Authorization of individuals to sign checks.

33.

The purpose of the requirement in SAS No. 7 of having communication between the
predecessor and successor auditor is
a.
to allow predecessor to disclose information which would otherwise be confidential.
b.
to help the successor auditor to evaluate whether to accept the engagement.
c.
to help the client by facilitating the change of auditors.
d.
to ensure that information which is provided to the SEC on Form 8-K will be accurate.

34.
a.
b.
c.
d.

An auditor should examine minutes of the board of directors' meetings


through the date of the financial statements.
through the date of the audit report.
only at the beginning of the audit.
on a test (sample) basis.

35.

An extensive understanding of the client's business and industry and knowledge about
the company's operations are essential for doing an adequate audit. For a new client, most
of this information is obtained
a.
from the predecessor auditor.
b.
from the Securities and Exchange Commission.
c.
from the permanent file.
d.
at the client's premises.

36.

Most auditors assess inherent risk as high for related parties and related-party
transactions because
a.
of the accounting disclosure requirement.
b.
of the lack of independence between the parties.
c.
both a and b.
d.
it is required by generally accepted accounting principles.

37.

Which of the following would not fit the description of a related-party transaction?
a.
An unusually large sale of merchandise to the company's best and largest customer.
b.
Sales of merchandise between a parent company and its subsidiary.
c.
Exchanges of equipment between two companies owned by the same person.
d.
Loans to corporate officers at market rates of interest with a regular repayment
schedule.

38.
a.
b.
c.

One of the first things that the auditor will do after accepting a new client is
communicate with the client's predecessor auditor.
contact the client's attorney to discover legal obligations.
study the client's internal controls.

d.
39.

tour the client's facilities.

The first standard of field work recognizes that early appointment of the independent
auditor has many advantages to the auditor and the client. Which of the following
advantages is least likely to occur as a result of early appointment of the auditor?
a.
The auditor will be able to plan the audit work so that it may be done expeditiously.
b.
The auditor will be able to complete the audit work in less time.
c.
The auditor will be able to better plan for the observation of the physical inventories.
d.
The auditor will be able to perform the examination more efficiently and will be finished
at an early date after the year-end.
40.
The predecessor auditor is required to respond to the request of the successor
auditor for information, but the response can be limited to stating that no information will be
provided when
a.
predecessor auditor has poor relations with successor auditor.
b.
client is dissatisfied with predecessor's work.
c.
there are legal problems between client and predecessor.
d.
predecessor believes that client lacks integrity.

41.
a.
b.
c.
d.

Permanent files contain all the data


about the most recent audits.
about the current audit and financial statements.
of a historical or continuing nature about the client.
of a historical or continuing nature pertinent to the current audit.

42.

With respect to records in a CPA's possession, rules of conduct provide that


a.
copies of client records incorporated into audit working papers must be returned to the
client upon request.
b.
worksheets in lieu of a general ledger belong to the auditor and need not be furnished to
the client upon request.
c.
an extensive analysis of inventory prepared by the client at the auditor's request
belongs to the auditor and needs not be furnished to the client upon request.
d.
the auditor who returns copies of client records must return the original records upon
request.

43.

An example of a reclassification entry would be an entry


a.
to reduce inventory when client failed to write down its obsolete raw materials.
b.
to change material credit balances in accounts receivable accounts to accounts payable
accounts.
c.
to increase the allowance for doubtful accounts when it was discovered that a customer
had filed for bankruptcy protection under Chapter 11.
d.
to increase the federal income tax liability account when it was discovered that client
would be in a higher tax bracket than originally estimated.

44.

The engagement letter


a.
affects the CPA firm's responsibility to external users of audited financial statements.

b.
can be used to alter the auditor's responsibilities under generally accepted auditing
standards.
c.
can affect legal responsibilities to the client.
d.
is useful only if it is an audit engagement, but has no effect for review or compilation
services.
45.

The first standard of field work, which states that the work is to be adequately planned
and assistants, if any, are to be properly supervised, recognizes that
a.
early appointment of the auditor is advantageous to the auditor and the client.
b.
acceptance of an audit engagement after the close of the client's fiscal year is generally
not permissible.
c.
appointment of the auditor subsequent to the physical count of inventories requires a
disclaimer of opinion.
d.
performance of substantial parts of the examination is necessary at interim dates.

46.
a.
b.
c.
d.

The least effective method of identifying related parties would be


an inquiry of management.
a review of SEC filings.
a review of the purchases and sales journals for the period under audit.
an examination of stockholders' listings to identify principal stockholders.

47.

Which of the following is not a document or record that should be examined early in the
engagement?
a.
Management letter.
b.
Corporate charter and bylaws.
c.
Contracts.
d.
Minutes of board of directors' and stockholders' meetings.

48.

Which of the following is not a potential effect of an auditor's decision that a lower
acceptable audit risk is appropriate?
a.
More evidence is required.
b.
Less evidence is required.
c.
Special care is required in assigning experienced staff.
d.
Review of the working papers by personnel who were not assigned to the engagement.

49.

The official record of the meetings of the board of directors and stockholders is contained
in the corporate
a.
bylaws.
b.
charter.
c.
minutes.
d.
license.

50.

Which of the following is a basic tool used by the auditor to control the audit work and
review the audit progress?
a.
Audit program.
b.
Engagement letter.
c.
Time and expense summary.

d.
51.

Progress flowchart.

Companies filing with the SEC are required by FASB 14 to


a.
prepare financial statements for each different segment of the business.
b.
disclose segment information for different lines of business in the financial statements.
c.
disclose if there are segments of the business, but they are not required to disclose the
percentage of revenue generated by each segment.
d.
disclose segment information on the 10-K filed with the SEC, but it is not required on the
financial statements which are published in the annual report.

52.
a.
b.
c.
d.

Reclassification entries are recorded in the


sales journal.
cash receipts journal.
general journal.
financial statements but not in the general ledger.

53.

An auditor searching for related party transactions should obtain an understanding of


each subsidiary's relationship to the total entity because
a.
the business structure may be deliberately designed to obscure related-party
transactions.
b.
this may reveal whether particular transactions would have taken place if the parties
had not been related.
c.
intercompany transactions may have been consummated on terms equivalent to arm'slength transactions.
d.
this may permit the audit of intercompany account balances to be performed as of
concurrent dates.

54.

Since SAS No. 21 requires audit testing of segment information if client has different lines
business, it is important for the auditor to
visit all the different business locations before the audit is completed.
identify the segments early.
develop an audit program for each line of business.
have an office in each city where a business segment is located.

of
a.
b.
c.
d.
55.

After preliminary audit arrangements have been made, an engagement confirmation


letter should be sent to the client. The letter usually would not include
a.
a reference to the auditor's responsibility for the detection of errors or irregularities.
b.
an estimation of the time to be spent on the audit work by audit staff and management.
c.
a statement that management advisory services would be made available upon request.
d.
a statement that a management letter will be issued outlining comments and
suggestions as to any procedures requiring the client's attention.

56.
a.
b.
c.
d.

Which of the following would not be included in the auditor's working papers?
The accounting manual.
The results of the preceding year's audit.
Descriptive information about the internal control structure.
A time budget for the various audit areas.

57.

58.
59.

It is easier and more common to implement increased evidence accumulation for inherent
risk than for acceptable audit risk because
a.
inherent risk can usually be isolated to one or two accounts.
b.
inherent risk applies to the entire audit.
c.
acceptable audit risk and sample sizes are set statistically.
d.
acceptable audit risk does not impact on the amount of evidence which must be
accumulated.
Discuss the purpose of an audit engagement letter.
Define the term "related party" and discuss why an auditor should identify the client's
related parties early in the audit.

ANSWERS

58.
59.

1 - 10.
11 - 20.
21 - 30.
31 - 40.
41 - 50.

b, b, d, a, a,
b, d, a, d, c,
a, d, d, d, b,
c, a, b, b, d,
d, c, b, c, a,

a, a, d, c, b
b, d, b, c, c
d, d, a, c, b
c, a, d, b, c
c, a, b, c, a

51 - 57.

b, d, b, b, c, a, a

The purpose of an audit engagement letter is to establish a clear understanding between


the auditor and the client of the terms of the engagement.
A related party is an affiliated company, principal owner of the client company, or any
other party with which the client deals where one of the parties can influence the
management or operating policies of the other. Auditors need to be aware of who are the
client's related parties early in the audit to enable the auditor to identify related-party
transactions, especially those that have not been disclosed.