Audit Planning

1. Which of the following is ordinarily considered a test of internal control

procedures?
a. Send confirmation letters to banks.
b. Count and list cash on hand.
c. Examine signatures on checks.
d. Obtain or prepare reconciliations of bank accounts as of the balance sheet date.

2. When obtaining an understanding of an entity's control environment, an auditor

should concentrate on the substance of management's policies and procedures rather
than their form because
a. The auditor may believe that the policies and procedures are inappropriate for
that particular entity.
b. The board of directors may not be aware of management's attitude toward the
control environment.
c. Management may establish appropriate policies and procedures but not act on
them.
d. The policies and procedures may be so weak that no reliance is contemplated by
the auditor.

3. After the study and evaluation of a client's internal control policies and
procedures has been completed, an auditor might decide to
a. Increase the extent of substantive testing in areas where the internal control
policies and procedures are strong.
b. Reduce the extent of control testing in areas where the internal control policies
and procedures are strong.
c. Reduce the extent of both substantive and control testing in areas where the
internal control policies and procedures are strong.
d. Increase the extent of substantive testing in areas where the internal controls
are weak.

4. A conceptually logical approach to the auditor's evaluation of internal accounting

control consists of the following four steps:
I. Determine whether the necessary procedures are prescribed and are being followed
satisfactorily.
II. Consider the types of errors and fraud that could occur.
III. Determine the internal control policies and procedures that should prevent
or detect errors and fraud.
IV. Evaluate any weakness to determine its effect on the nature, timing, or extent
of auditing procedures to be applied and suggestions to be made to the client.

What should be the order in which these four steps are performed?
a. III, IV, I, II c. II, III, I, IV
b. III, I, II, IV d. II, I, III, IV

5. An auditor evaluates the existing internal control in order to

a. Determine the extent of substantive tests which must be performed.
b. Determine the extent of control tests which must be performed.
c. Ascertain whether irregularities are probable.
d. Ascertain whether any employees have incompatible functions.

6. The auditor is studying internal control policies and procedures within the sales,
shipping, and billing subset of the revenue cycle. Which of the following conditions
suggests a need for additional testing of controls?
 a. Internal control is found to be weak with regard to shipping and billing.
b. Internal control over sales, billing, and shipping appears strong, but 80% of
sales revenue is attributable to three major customers.
c. Internal control over billing and shipping is thought to be strong and the
auditor considers additional testing of selected controls will result in a major
reduction in substantive testing.
d. Internal control over the recording of sales is found to be weak and the sales
are evenly divided among a large number of customers.

7. A secondary objective of the auditor's study and evaluation of internal control is

that the study and evaluation provide
a. A basis for constructive suggestions concerning improvements in internal
control.
b. A basis for reducing the auditor's assessed level of control risk below the
maximum level.
c. An assurance that the records and documents have been maintained in accordance
with existing company policies and procedures.
d. A basis for determination of the resultant extent of the tests to which auditing
procedures are to be restricted.

8. In studying the design and implementation of a client's internal controls, the

auditor needs to identify necessary control points. Controls existing at these
points may be classified as "accuracy" controls and "safeguard" controls. Which
of the following controls may be regarded as a safeguard control?

a. In processing sales orders, the computer is programmed to compare the customer's

credit limit minus the prior balance with the current sales order amount.
b. Sales prices are stored in computer memory and are automatically applied as
stock numbers are entered from customer orders.
c. Although the payroll is prepared manually, a second employee recalculates gross
pay, withholdings, and net pay.
d. Negotiable securities are kept in a locked vault and are accessible only by the
treasurer accompanied by one of her assistants.

9. The auditor's review of the client's internal control is documented in order to

substantiate
a. Conformity of the accounting records with generally accepted accounting
principles.
b. Representation as to adherence to requirements of management.
c. Representation as to compliance with generally accepted auditing standards.
d. The fairness of the financial statement presentation.

10. An internal control questionnaire indicates that an approved receiving report is

required to accompany every check request for payment of merchandise. Which of the
following procedures provides the greatest assurance that this control is operating
effectively?
a. Select and examine canceled checks and ascertain that the related receiving
reports are dated no earlier than the checks.
b. Select and examine canceled checks and ascertain that the related receiving
reports are dated no later than the checks.
c. Select and examine receiving reports and ascertain that the related canceled
checks are dated no earlier than the receiving reports.
d. Select and examine receiving reports and ascertain that the related canceled
checks are dated no later than the receiving reports.
11. When considering internal control, an auditor must be aware of the concept of
reasonable assurance which recognizes that
a. The employment of competent personnel provides assurance that the objectives of
internal control will be achieved.
b. The establishment and maintenance of a system of internal control is an important
responsibility of the management and not of the auditor.
c. The cost of internal control should not exceed the benefits expected to be
derived from internal control.
d. The segregation of incompatible functions is necessary to obtain assurance that
the internal control is effective.

12. In connection with the examination of financial statements by an independent

auditor, the client suggests that members of the internal audit staff be utilized
to minimize audit costs. Which of the following tasks could most appropriately be
delegated to the internal audit staff?
a. Selection of accounts receivable for confirmation, based upon the internal
auditor's judgment as to how many accounts and which accounts will provide
sufficient coverage.
b. Preparation of schedules for negative accounts receivable responses.
c. Evaluation of the internal control for accounts receivable and sales.
d. Determination of the adequacy of the allowance for doubtful accounts.

13. An auditor uses the knowledge provided by the understanding of internal control and
the final assessed level of control risk primarily to determine the nature, timing,
and extent of the
a. Attribute tests. c. Tests of controls.
b. Compliance tests. d. Substantive tests.

14. Flowcharting as a means of internal control evaluation provides the following

advantage over the use of questionnaires and descriptive narratives:
a. Ease of preparation.
b. Comprehensive coverage of controls.
c. Simplicity.
d. Ease in following information flow.

15. Which of the following factors most likely affects the auditor's judgment about the
quantity, type, and content of working papers?
a. The effectiveness of the existing internal control.
b. The content of the client's representation letter.
c. The timing of substantive tests completed prior to the balance sheet date.
d. The usefulness of the working papers as a reference source for the client.

16. If the independent auditors decide that the work performed by the internal auditor
may have a bearing on their own procedures, they should consider the internal
auditor's
a. Competence and objectivity. c. Independence and review skills.
b. Efficiency and experience. d. Training and supervisory skills.

17. An auditor's purpose for further testing of internal control procedures is to

a. Provide a basis for reducing the assessed level of control risk below that which
resulted from the auditor's initial understanding of internal control.
b. Reduce the risk that errors or fraud which are not prevented or detected by
internal control are not detected by the independent audit.
c. Provide assurance that transactions are executed in accordance with management's
authorization and accessed to assets is limited by a segregation of functions.
 d. Provide assurance that transactions are recorded as necessary to permit the
preparation of the financial statements in conformity with GAAP.

18. Control testing is performed in order to determine whether or not

a. The assessed level of control risk can be reduced.
b. Necessary controls are absent.
c. Incompatible functions exist.
d. Material dollar errors exist.

19. The independent auditor should acquire an understanding of the internal audit
function as it relates to the independent auditor's study and evaluation of internal
control because
a. The audit programs, working papers, and reports of internal auditors can often
be used as a substitute for the work of the independent auditor's staff.
b. The procedures performed by the internal audit staff may eliminate the
independent auditor's need for an extensive study and evaluation of internal
control.
c. The work performed by internal auditors may be a factor in determining the
nature, timing, and extent of the independent auditor's procedures.
d. The understanding of the internal audit function is an important substantive
test to be performed by the independent auditor.

20. Which of the following may be considered an appropriate means for further testing
controls over vendor payments?
a. Confirm year-end balances with vendors.
b. Search for unrecorded invoices at year-end.
c. Develop a set of hypothetical transactions designed to test existing controls
over vendor payments
d. Construct an internal control flowchart covering the payment processing
function.

21. Which of the following statements concerning the independent auditor's required
communication of material weaknesses in internal control is correct?
a. Weaknesses reported at interim dates must be repeated in the final communication.
b. If the auditor does not become aware of any material weaknesses during the
examination, that fact must be communicated.
c. Weaknesses that had been reported in prior years' communications and have not
been corrected need not be repeated in the current year's communication.
d. Although written communication is preferable, the auditor may communicate the
findings orally.

22. Which of the following would be the best procedure to determine whether purchases
were properly authorized?
a. Discuss authorization procedures with personnel in the controller's and
purchasing functions.
b. Review and evaluate a flowchart of purchasing procedures.
c. Determine whether a sample of entries in the purchase journal is supported by
properly executed purchase orders.
d. Vouch payments for selected purchases to supporting receiving reports.

23. After studying and evaluating a client's existing internal control, an auditor has
concluded that the policies and procedures are well designed and functioning as
intended. Under these circumstances, the auditor would most likely
a. Perform further control tests to the extent outlined in the audit program.
 b. Determine the control policies and procedures that should prevent or detect
errors and fraud.
c. Set detection risk at a higher level than would be set under conditions of weak
internal control.
d. Set detection risk at a lower level than would be set under conditions of weak
internal control.

24. An auditor is required to obtain a basic understanding of the client's internal

control to plan the audit. The auditor may then decide to perform tests of controls
on all internal control procedures
a. That would aid in preventing fraud.
b. Documented in the flowchart.
c. Considered to be weaknesses that might allow errors to enter the accounting
system.
d. Considered to be strengths for which the auditor desires further reduction in
the assessed level of control risk.

25. The auditor's understanding of the client's internal control is documented in order
to substantiate
a. Conformity of the accounting records with generally accepted accounting
principles.
b. Compliance with generally accepted auditing standards.
c. Adherence to requirements of management.
d. The fairness of the financial statement presentation.

26. When evaluating a client's system of internal control to determine whether the
necessary procedures are prescribed and have been implemented satisfactorily, an
auditor must
a. Develop questionnaires and checklists.
b. Obtain an understanding of internal control.
c. Perform tests of internal control procedures.
d. Evaluate administrative policies.

27. Of the following internal control policies or procedures, which would most likely
allow for a reduction in the scope of the auditor's tests of depreciation expense?
a. Review and approval of the periodic equipment depreciation entry by a supervisor
who does not actively participate in its preparation.
b. Comparison of equipment account balances for the current year with the current-
year budget and prior-year actual balances.
c. Review of the miscellaneous income account for salvage credits and scrap sales
of partially depreciated equipment.
d. Authorization of payment of vendors' invoices by a designated employee who is
independent of the equipment receiving function.

28. 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.

29. In assessing control risk, the auditor must, as a minimum

a. Perform tests of all significant controls.
b. Obtain an understanding of the design and implementation of the client's internal
control.
 c. Obtain an understanding of the design of the client's internal control.
d. Obtain an understanding of the design, implementation, and operating
effectiveness of the client's internal control.

30. An independent auditor has concluded that the client's records, procedures and
representations can be relied upon based on tests made during the year when internal
control was found to be effective. The auditor should test the records, procedures,
and representations again at year-end if
a. Inquiries and observations lead the auditor to believe that conditions have
changed significantly.
b. Comparisons of year-end balances with like balances at prior dates revealed
significant fluctuations.
c. Unusual transactions occurred subsequent to the completion of the interim audit
work.
d. Client records are in a condition that facilitate effective and efficient
testing.

31. An auditor is least likely to further test control procedures by examining documents
with respect to controls relating to
a. Segregation of the functions of recording disbursements and reconciling the bank
account.
b. Comparison of receiving reports and vendors' invoices with purchase orders.
c. Approval of the purchase and sale of marketable securities.
d. Classification of revenue and expense transactions by product line.

32. An auditor usually examines receiving reports to support entries in the

a. Voucher register and sales returns journal.
b. Sales journal and sales returns journal.
c. Voucher register and sales journal.
d. Check register and sales journal.

33. Regardless of whether the auditor decides to test controls for operating
effectiveness, he/she must fully document his or her understanding of the internal
control policies and procedures obtained through whatever means. Which of the
following does not describe an appropriate means for documenting such understanding?
a. Internal control flowchart. c. Internal control memorandum.
b. Internal control implementation. d. Internal control questionnaire.

34. Which of the following best describes the primary reason for the auditor's use of
flowcharts during an audit engagement?
a. To comply with the requirements of generally accepted auditing standards.
b. To classify the client's documents and transactions by major operating functions,
e.g., cash receipts, cash disbursements, etc.
c. To record the auditor's understanding of the client's internal control policies
and procedures.
d. To interpret the operational effectiveness of the client's existing
organizational structure.

35. An auditor generally tests physical security controls over inventory by

a. Test counts and cutoff procedures.
b. Examination and reconciliation.
c. Inspection and recomputation.
d. Inquiry and observation
36. Which of the following is not an auditing procedure that is commonly used in
performing control tests?
a. Inquiring. c. Confirming.
b. Observing. d. Inspecting.

37. If the independent auditor decides that the work performed by internal auditors may
have a bearing on the independent auditor's own procedures, the independent auditor
should consider the objectivity of the internal auditors. One method of judging
objectivity is to
a. Review the recommendations made in the reports of the internal auditor.
b. Examine, on a test basis, documentary evidence of the work performed by internal
auditors.
c. Inquire of management about the qualifications of the internal audit staff.
d. Consider the client's practices for hiring, training, and supervising the
internal audit staff.

38. Tracing bills of lading to sales invoices will provide evidence that
a. Recorded sales were shipped.
b. Invoiced sales were shipped.
c. Shipments to customers were invoiced.
d. Shipments to customers were recorded as
e. sales.

39. The element of the audit planning process most likely to be agreed upon with the
client before implementation of the audit strategy is the determination of the
a. Timing of inventory observation procedures to be performed.
b. Evidence to be gathered to provide a sufficient basis for the auditor's
opinion.
c. Procedures to be undertaken to discover litigation, claims, and assessments.
d. Pending legal matters to be included in the inquiry of the client's attorney.

40. The development of constructive suggestions to clients for improvements in internal

accounting control is
a. A requirement of the auditor's study and evaluation of internal accounting
control.
b. A desirable by-product of an audit engagement.
c. Addressed by the auditor only during a special engagement.
d. As important as establishing a basis for reliance upon the internal accounting
control system.

41. Which of the following statements with respect to the independent auditor's
evaluation of internal control is correct?
a. The auditor should decrease control testing when weaknesses in cash receipts
are mitigated by strong controls in cash disbursement procedures.
b. The auditor should increase control testing when weaknesses in billing procedures
are mitigated by strong controls in collection procedures.
c. The auditor generally should not evaluate the overall effectiveness of internal
control, but should separately evaluate each of the transaction cycles.
d. The auditor should evaluate all internal control weaknesses before determining
the control procedures that should prevent or detect errors or irregularities.

42. Which of the following statements best describes the auditor's responsibility
regarding the detection of material fraud?
a. Because of the inherent limitations of an audit, the auditor is not responsible
for the failure to detect material fraud.
 b. The auditor is responsible for the failure to detect material fraud when such
failure results from nonperformance of audit procedures specifically described
in the engagement letter.
c. The auditor should design audit programs that will provide reasonable assurance
that material errors and fraud will be detected in the ordinary course of the
examination.
d. The auditor is responsible for the failure to detect material fraud when the
auditor's evaluation of internal control procedures indicates that they are
ineffective.

43. Which of the following procedures most likely would be included as part of an
auditor's tests of control procedures?
a. Inspection. c. Confirmation.
b. Reconciliation. d. Analytical procedures.

44. If, after obtaining an initial understanding of a client's internal control, the
auditor wishes to further reduce the assessed level of control risk relating to
plant asset transactions, the auditor should next
a. Make extensive substantive tests of plant asset balances.
b. Establish the physical existence of current year additions.
c. Complete the plant asset section of the internal accounting control
questionnaire.
d. Further test those internal control procedures relating to processing and
recording plant asset transactions.

45. The auditor is most likely to presume that a high risk of defalcation exists if
a. The client is a multinational company that does business in numerous foreign
countries.
b. The client does business with several related parties.
c. Inadequate segregation of duties places an employee in a position to perpetrate
and conceal thefts.
d. Inadequate employee training results in lengthy CBIS exception reports each
month.

46. After obtaining an understanding of the client’s internal control, the auditor
should consider whether
a. The projected degree of effectiveness of internal control is justified.
b. The evidential matter obtained from the study of the internal control system
can provide a reasonable basis for an opinion.
c. Further testing of internal control procedures is likely to permit further
reduction of assessed control risk.
d. Sufficient knowledge has been obtained about the entity's entire system of
internal control.

47. Which of the following is the correct order of performing the auditing procedures
A through C below?
A. Tests of internal control procedures.
B. Preparation of a flowchart depicting the client's internal control system.
C. Substantive tests.

a. ABC. c. BAC.
b. ACB. d. BCA.

48. Auditors frequently use flowcharts in connection with which of the following
a. Preparation of generalized computer audit programs.
 b. Review of the client's internal control procedures.
c. Use of statistical sampling in performing an audit.
d. Performance of analytical review procedures of account balances.

49. Which of the following conditions suggest a lowering of the aggregate materiality
threshold?

a. Internal controls in the area of payroll processing are found to be much stronger
than the auditor's initial assessment.
b. The application of analytical procedures reveals a favorable sales budget
variance that is material and that remains unexplained.
c. Study of the business and industry reveals a material decline in both industry
and client revenue during the current year.
d. Tests of internal controls in nearly all transaction cycle subsets have produced
numerous and widespread errors.

50. If, during the course of an annual audit of a publicly held manufacturing company,
an independent auditor becomes aware of a material weakness in the company's
internal control, the auditor is required to communicate the weakness to
a. The audit committee of the board of directors, or to a similar body having
financial oversight responsibility.
b. The senior management of the company.
c. The board of directors of the company.
d. The treasurer and controller of the client entity.

51. Under which of the following conditions would you consider lowering individual item
materiality thresholds.
a. Study of the business and industry, together with the application of analytical
procedures, reveals that the client has enjoyed a surge in sales and gross profit
during an industry downturn.
b. Application of analytical procedures shows that the client's gross profit rate
is significantly below last year and also is materially lower than the industry
average.
c. Study of internal controls within the revenue cycle reveal material weaknesses.
d. Study of internal controls within the payroll cycle confirm the auditor's belief
that few errors have occurred.

52. Which of the following is not a medium that can normally be used by an auditor to
record information concerning a client's internal control policies and procedures?
a. Narrative memorandum. c. Flowchart.
b. Procedures manual. d. Questionnaire.

53. With respect to the client's system of internal control, the auditor is concerned
that the existing policies and procedures provide reasonable assurance that
a. Operational efficiency has been achieved in accordance with management plans.
b. Errors and fraud have been prevented or detected.
c. Controls have not been circumvented by collusion.
d. Management cannot override the internal controls.

54. The auditor observes client employees during the review of the client's system of
internal control in order to
a. Prepare a flowchart.
b. Update information contained in the organization and procedure manuals.
c. Assist in obtaining an understanding of the client's internal control policies
and procedures.
 d. Determine the extent of compliance with quality control standards.

55. An auditor's flowchart of a client's accounting system is a diagrammatic

representation that depicts the auditor's
a. Program for tests of controls.
b. Understanding of the system.
c. Understanding of the types of fraud that are probable, given the present system.
d. Documentation of the study and evaluation of the system.

56. An independent auditor might consider the procedures performed by the internal
auditors because
a. They are employees whose work must be reviewed during substantive testing.
b. They are employees whose work might be relied upon.
c. Their work impacts upon the cost/benefit tradeoff in evaluating inherent
limitations.
d. Their degree of independence may be inferred by the nature of their work.

57. A procedure that would most likely be used by an auditor in performing tests of
control procedures that involve segregation of functions and that leave no
transaction trail is
a. Inspection. c. Reprocessing.
b. Observation. d. Reconciliation.
58. It is important for the CPA to consider the competence of the audit client's
employees because their competence bears directly and importantly upon the
a. Cost/benefit relationship of the internal control system.
b. Achievement of the objectives of the internal control system.
c. Comparison of recorded accountability with assets.
d. Timing of the tests to be performed.

59. In studying internal control and assessing control risk, the auditor applies the
following steps:
A. Determine the internal control policies and procedures necessary to prevent or
detect errors or fraud that could occur in the absence of controls.
B. Identify control weaknesses.
C. Determine whether the necessary policies and procedures have been designed and
whether they have been placed in operation.
D. Design substantive audit programs.
E. Consider the types of errors or fraud that could occur in the absence of necessary
controls.

The proper sequence in applying these steps is:

a. CDEAB c. EACBD
b. BCAED d. AECBD

60. The primary purpose of performing further control tests is to provide

a. A basis for reducing the assessed level of control risk below the maximum level.
b. A basis for understanding the flow of transactions through the accounting system.
c. Assurance that transactions are properly recorded.
d. All accounting control procedures leave visible evidence.