Chapter 1

Which one of the following organizations is recognized for

providing guidance on a framework for internal control?
a. AICPA
b. PCAOB
c. IAASB
d. COSO
d. COSO
Which phase of the audit opinion formulation process is most
commonly thought of as auditing by the general public?
a. Performing risk assessment.
b. Obtaining evidence about internal controls.
c. Obtaining substantive evidence about accounts.
d. Making reporting decisions.
c. Obtaining substantive evidence about accounts.
Which one of the following is not a management expectation for
independent auditors?
a. An outside source of expertise on accounting matters.
b. Individuals who perform tests and draw conclusions on
assertions.
c. A participant in management decision making.
d. A provider of a written communication.
c. A participant in management decision making.
Why is auditing important in a free market society?
a. The public requires auditors to function as divisions of
regulatory bodies.
b. Auditors detect all errors and fraud perpetrated by company
employees.
c. It provides reliable information upon which to judge economic
performance.
d. The auditor is an amiable insurance policy for investors.
e. All of the above are true.
c. It provides reliable information upon which to judge economic
performance.
Which governing board performs quality reviews on registered
audit firms that audit public companies?
a. PCAOB.
b. GAO.
c. AICPA.
d. FASB.
a. PCAOB.
What is the primary objective of the independent auditor's report
on financial statements?
a. To report on all instances of fraud.
b. To assist the board in evaluating management's effectiveness.
c. To attest to the credit-worthiness of the client.
d. To give credibility to management's prepared financial
statements.

d. To give credibility to management's prepared financial

statements.
What is the first phase in an audit?
a. Client acceptance or client continuance.
b. Understanding the client.
c. Understanding internal controls.
d. Testing of account balances.
a. Client acceptance or client continuance.
What is the management of a company responsible for?
a. Hiring the auditor.
b. Preparing the financial statements.
c. The audit workpapers.
d. Ensuring auditor independence.
b. Preparing the financial statements.
The Center for Audit Quality is dedicated to enhancing investor
confidence in what?
a. The financial markets.
b. Management.
c. Auditors.
d. Both B and C.
e. All of the above.
a. The financial markets.
Which of the following is a driver of audit quality?
a. Audit firm culture.
b. Engagement team skills and attributes.
c. Factors outside control of auditors.
d. Investor requirements.
e. A, B, and C only.
e. A, B, and C only.
An Integrated Audit Report provides opinion(s) on which of the
following?
a. The financial statements.
b. Internal controls.
c. Both financial statements and internal controls.
d. Neither financial statements or internal controls.
c. Both financial statements and internal controls.
Which organization issued the Internal Control, Integrated
Framework which serves as the primary criterion for evaluating
the quality of a company's internal audit?
a. PCAOB
b. COSO
c. AICPA
d. GAO
b. COSO

How is the audit report referred to when the auditor has no

reservations about management's financial statements?
a. An unqualified report
b. A qualified report
c. An adverse report
d. An integrated report
a. An unqualified report

What must audit firms do to perform financial statement audits for

public companies?
a. Register with the American Institute of Certified Public
Accountants.
b. Register with the Institute of Internal Auditors.
c. Register with the U.S. General Accounting Office.
d. Register with the Public Company Accounting Oversight Board.
d. Register with the Public Company Accounting Oversight Board.

In the United States, what is the most common criteria against

which the auditor measures the fairness of financial statement
presentation?
a. Auditing standards
b. Generally accepted accounting principles
c. Generally accepted accounting standards
d. Governmental accounting standards
b. Generally accepted accounting principles

Who is responsible for internal controls within an organization?

a. The internal auditor
b. The external auditor
c. Management
d. PCAOB
c. Management

Which of the following groups is not typically considered to be a

user of the audited financial statements?
a. Management
b. Vendors
c. Retired employees
d. Competitors
d. Competitors

Congress authorized which of the following organizations to

establish generally accepted accounting principles?
a. SEC
b. APB
c. AICPA
d. FASB

a. SEC

Who licenses CPAs?

a. The PCAOB
b. The AICPA
c. The State Boards of Accountancy
d. The SEC
c. The State Boards of Accountancy

As it relates to an audit, which of the following statement about

professional skepticism is true?
a. Professional skepticism is not taken into consideration.
b. Professional skepticism relates only to the nature of
procedures performed.
c. Professional skepticism is an attitude.
d. Professional skepticism is determined based upon the
importance to a user of the financial statements.
c. Professional skepticism is an attitude.
Chapter 2

One of the primary goals of the PCAOB is to restore confidence in

which group?
a. SEC
b. Board of Directors
c. Internal Auditors
d. Independent Auditors
d. Independent Auditors

Which of the following is a specific corporate governance

responsibility of Executive Management?
a. Approving major changes, such as mergers
b. Approving non-audit work performed by the audit firm
c. Reviewing the budget of the internal audit function
d. Implementing an effective ethical environment
d. Implementing an effective ethical environment

The fraud triangle says three conditions are generally present in

the client's organization when fraud occurs. Which one the
following is not one of those conditions?
a. Incentives
b. Professional skepticism
c. Opportunity
d. Ability to rationalize fraud
b. Professional skepticism

Which of the following is an example of fraud?

a. A mistake in processing accounting data
b. An innocent accounting estimate arising from misinterpretation
of facts
c. Misappropriation of an asset
d. A mistake in the application of accounting principles
c. Misappropriation of an asset

Protection Transparency, Inc. is being audited by Messer and

Bromely, LLP. During the assessment of fraud, Messer and
Bromely discover that the controller has been creating sales and
posting them to the general ledger. Who should the auditors make
award of this issue?
a. Protection Transparency's legal counsel
b. The police
c. The chairman of Protection Transparency's audit committee
d. The predecessor auditor of Protection Transparency
c. The chairman of Protection Transparency's audit committee

How did the Sarbanes-Oxley Act strengthen auditor

independence?
a. By requiring auditors to provide reports in accordance with the
Foreign Corrupt Practices Act
b. By requiring auditors to report the nature of any auditor-client
disagreements to the SEC
c. By requiring the lead partner to rotate off the audit engagement
at least every five years
d. By requiring a different audit firm from the one that performs
the audit to prepare the client's tax return
c. By requiring the lead partner to rotate off the audit engagement at
least every five years

The PCAOB has how many board members?

a. Three
b. Five
c. Seven
d. Nine
b. Five

Under the Sarbanes-Oxley Act, which of the following services

performed by registered accounting firms for their audit clients
would not impair their independence?
a. Systems design
b. Tax services
c. Appraisal services
d. Internal audit services
b. Tax services

Which of the following is a NYSE mandated guideline for

corporate governance?
a. Boards need to consist entirely of independent auditors
b. Boards must have an audit committee with a minimum of three
independent directors
c. Boards must have a compensation committee with a minimum
of three independent directors
d. CFOs must provide annual certification of compliance with
corporate governance standards
b. Boards must have an audit committee with a minimum of three
independent directors
Incorrect:
a. Boards need to consist of a majority of independent auditors
d. CEOs must provide annual certification of compliance with
corporate governance standards

Which of the following is not one of management's

responsibilities?
a. Ensuring accounting principles are being followed in preparing
financial statements
b. Engaging a qualified auditor
c. Implementing effective internal controls
d. Ensuring financial statements and disclosures are accurate
b. Engaging a qualified auditor
How must an auditor address fraud in the planning stage?
a. The auditor must test for fraud in the planning stage.
b. The auditor must consider the likelihood of fraud existing in the
company in the planning stage.
c. The auditor must realize that most people are honest and not
automatically assume that fraud exists when planning the audit.
d. The auditor must not be aggressive in its initial approach to
fraud as trust may be lost by the client
b. The auditor must consider the likelihood of fraud existing in the
company in the planning stage.

Which of the following best represents actions that may indicate

fraud is pervasive throughout the company under audit?
a. The company's management negotiates deals with vendors in
such a manner as to pay lower prices.
b. The company's management drives luxury vehicles and takes
vacations to exotic places.
c. The company's management takes an overly aggressive
approach to revenue recognition.
d. The company's management estimates bad debts using an

aged accounts receivable ledger rather than as a percent of

sales.
c. The company's management takes an overly aggressive
approach to revenue recognition.

What should an audit team do when it discovers that fraud risk

factors are present on an audit engagement?
a. Retract from the client and inform regulatory bodies.
b. Modify procedures to actively search for the existence of fraud.
c. Reduce the amount of evidence required and resort to
management inquiry.
d. Turn the audit over to forensic accountants.
b. Modify procedures to actively search for the existence of fraud.

Which of the following best describes professional skepticism?

a. An intent to deceive
b. An attitude of intrusion and obstinacy
c. A character that does not waver
d. A questioning mind
d. A questioning mind

Management of Premium Discovery Company is compensated

through large salaries, stock options, and bonuses tied to the
company's working capital growth. The CEO is constantly holding
meetings to ensure that management is on target for increased
operating income each month. Based on the above information
only, what type of probable motivation is there to commit fraud at
Premium Discovery Company?
a. Incentive
b. Opportunity
c. Rationalization
d. Expectation
a. Incentive

Which of the following creates an opportunity for fraud to be

committed in an organization?
a. Management demands financial success
b. Poor internal controls
c. Commitments tied to debt covenants
d. Management is aggressive in its application of accounting rules
b. Poor internal controls

Which of the following statements about fraud or fraud detection

is true?
a. Management may physically alter evidence to perpetrate and
conceal the fraud.
b. Fraudulent financial reporting is generally not material enough

to consider.
c. Journal entries will supply evidence necessary to detect fraud.
d. The advent of new technology prevents fraud, thereby leading
to less fraud over time.
a. Management may physically alter evidence to perpetrate and
conceal the fraud.

Which of the following factors should an auditor consider in

evaluating the effect of fraud upon the planned audit procedures?
a. The type of fraud that may occur.
b. The potential materiality of fraud.
c. The likelihood of fraud occurring.
d. All of the above.
d. All of the above.

How often does the PCAOB inspect registered accounting firms

that audit fewer than 100 issuers?
a. Annually
b. Every two years
c. Every three years
d. Every five years
c. Every three years

Which of the following items are registered audit firms not required to report to
the audit committee?
a. Critical accounting policies and practices.
b. Alternative treatments of financial information within generally accepted
accounting principles that have been considered by management, as well as the
preferred treatment of the audit firm.
c. A list of all audit procedures performed.
d. Significant written communications between the audit firm and management.
c. A list of all audit procedures performed.
Chapter 3
The quality of an organization's internal controls affect which of
the following?
a. The reliability of financial data.
b. The ability of management to make good decisions.
c. The ability to remain in business.
d. All of the above.
d. All of the above.

With whom does the tone of internal control typically originate?

a. Auditors.
b. Employees.
c. Management.
d. Stockholders.

c. Management.

Which one of the following COSO components of internal controls

influences the tone for the organization?
a. Control risk assessment.
b. Control environment.
c. Information and communication.
d. Monitoring.
b. Control environment.

Which of the following services does the PCAOB require auditors

of public companies to perform?
a. A financial statement audit and an attest audit.
b. A financial statement audit and an assurance audit.
c. A financial statement audit and agreed upon procedures.
d. A financial statement audit and an examination of the
effectiveness of internal controls.
d. A financial statement audit and an examination of the
effectiveness of internal controls.

Which one of the following represents a control deficiency?

a. A missing control that is required for achievement objectives.
b. A control that operates as designed.
c. A control that ensures the reliability of financial reporting.
d. A control that does not prevent immaterial errors.
a. A missing control that is required for achievement objectives.

The COSO principle that an organization should identify and

assess changes that significantly impact the system of internal
control is related to which COSO component?
a. Control Environment
b. Risk Assessment
c. Control Activities
d. Monitoring
b. Risk Assessment

Requiring the mail clerk to prepare a listing of all checks received,

with copies of the list going to the cashier and to accounting, is an
example of which type of control?
a. Preventive.
b. Corrective.
c. Detective.
d. Directive.
a. Preventive.

Which of the following is another name for transaction controls?

a. Entity-wide controls.
b. Application controls.
c. Supporting controls.
d. Detail controls.
b. Application controls.

Internal control is a process affected by the organization's board

of directors, management, and other personnel to provide
reasonable assurance of achieving certain objectives. Which of
the following does not fit into one of these categories of
objectives?
a. Reliability of financial reporting.
b. Compliance with laws and regulations.
c. Continuing existence.
d. Effectiveness and efficiency of operations.
c. Continuing existence.

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

a. External auditors.
b. PCAOB.
c. CFO.
d. Internal auditors.
d. Internal auditors.
Internal control is a process designed to achieve objectives in
which one of the following categories?
a. Reliability of financial reporting.
b. Compliance with applicable laws.
c. Operational effectiveness.
d. All of the above.
d. All of the above.

Which of the following is not included as a component of an

organization's internal control structure in the COSO Framework?
a. Control risk
b. Control enviroment
c. Risk assessment
d. Control activities
a. Control risk

The information and communication component of internal control

includes which of the following?
a. The organization deploys control activities through policies that
establish what is expected an in procedures that put policies into
action.
b. The organization obtains or generates and uses relevant,
quality information to support the functioning of other components

of internal control.
c. The organization identifies and assesses changes that could
significantly impact the system of internal control.
d. All of the above.
b. The organization obtains or generates and uses relevant, quality
information to support the functioning of other components of
internal control.

In an Integrated Audit, what is the independent external auditor

primarily concerned with?
a. Detecting all errors.
b. Controls over management override.
c. Determining whether the internal controls are effective.
d. Determining whether the controls promote efficiency.
c. Determining whether the internal controls are effective.

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

a. Segregation of duties.
b. Controls over management override.
c. Determining whether internal controls are effective.
d. Determining whether the controls promote efficiency.
b. Controls over management override.

Which one of the following is an example of an internal risk for an

organization?
a. Changes in internal information technology.
b. Increases in substitute services or products.
c. Changes in reliability of source goods.
d. Changes in regulation that make the business model
unsustainable.
a. Changes in internal information technology.

Which one of the following is not a control activity implemented in

most accounting systems?
a. Segregation of duties.
b. Competent, trustworthy employees.
c. Authorization procedures.
d. All of these activities are normally implemented.
d. All of these activities are normally implemented.

Which of the following is not a way management obtains evidence

regarding the effectiveness of internal control over the accounting
system?
a. Performing a walkthrough of the accounting system.
b. Making inquiries of banks and attorneys.
c. Reviewing system flowcharts.
d. Taking plan and operational tours.

b. Making inquiries of banks and attorneys.

Which of the following is an example of a control environment

deficiency?
a. A low level of control consciousness withing the organization.
b. An audit committee that does not have independent members.
c. An audit committee that is not viewed as the client of the
external auditor.
d. All of the above.
d. All of the above.

Which statement is true concerning the documentation of internal

control?
a. Documentation should be sufficient to support the design and
operating effectiveness of internal controls.
b. Documentation requirements are standardized by the PCOAB.
c. Documentation of disbursements require paper and electronic
documentation.
d. Documentation of all transaction controls should be tested on
an annual basis.
a. Documentation should be sufficient to support the design and
operating effectiveness of internal controls.
Chapter 4

Under common law, which standard may a client sue an auditor

for failure to demonstrate due care?
a. Negligence
b. Gross negligence
c. Fraud
d. All of the above.
d. All of the above.

Which of the following may an auditor use as a defense under the

Securities Act of 1933?
a. Contributory Negligence
b. Scienter
c. Due Care
d. Immaterial loss
c. Due Care

Which of the following is not one of the reasons for increased

litigation related to audits?
a. Class action lawsuit.
b. Increased complexity of accounting standards.

c. Contingent-fee-based compensation for law firms.

d. Joint and several liability doctrines.
b. Increased complexity of accounting standards.

Liability based on federal securities law is known as which type of

law?
a. Common Law
b. Contract Law
c. Commercial Law
d. Statutory Law
d. Statutory Law

Which of the following is a principle of the Code of Ethics of the

International Ethics Standards Board for Accountants but not a
principle found in the AICPA Professional Code of Conduct?
a. Integrity
b. Professional Behavior
c. Confidentiality
d. Objectivity
b. Professional Behavior

What is information about a client that cannot be subpoenaed by

a court of law called?
a. Confidential information.
b. Privileged communication.
c. Contingent information.
d. Audit communication.
b. Privileged communication.

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?
a. An ethical dilemma.
b. An ethical problem.
c. An ethical theory.
d. None of the above.
a. An ethical dilemma.

In which of the following situations would a CPA be considered

independent?
a. A CPA has obtained an interest-free loan from a banking client.
b. A CPA has obtained a 90-day signature loan from a client.
c. A CPA has obtained a loan for investment purposes from a
client.
d. A CPA has obtained an auto loan from a banking client.
d. A CPA has obtained an auto loan from a banking client.

The concept of the Third-Party Beneficiary Test was established

by which court case?
a. Credit Alliance Corp. v. Touche
b. Ultramares Corp. v. Touche
c. Citizens State Bank v. Timm, Schmidt, & Co.
d. Rosenblum v. Adler
b. Ultramares Corp. v. Touche

For which of the following engagements are members of the

AICPA required to act with integrity and objectivity?
a. Tax preparation.
b. Financial statement review services.
c. Financial statement audits.
d. All engagements.
d. All engagements.

Which of the following concepts represents the most expansive

aspect of liability for auditors?
a. Foreseeable Party.
b. Identified User.
c. Foreseen Party.
d. Third-Party Beneficiary.
a. Foreseeable Party.

Which of the following is not an action required by Utilitarian

Theory?
a. Identify the potential problem.
b. Identify the potential impact of actions on each affected party.
c. Identify the rights of the affected parties.
d. Identify the desirability of each action.
c. Identify the rights of the affected parties.

Mark Pulley is an auditor at Pulley and Hurst, LLC. If Pulley's fiveyear-old daughter owns shares of stock in McBurgers
Corporation, then what is Pulley considered to have?
a. An immaterial indirect interest in McBurgers Corporation.
b. A material indirect interest in McBurgers Corporation.
c. A loophole for claiming independence from McBurgers
Corporation.
d. A direct financial interest in McBurgers Corporation.
d. A direct financial interest in McBurgers Corporation.

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?
a. To discuss information relating to inadequate disclosure in an
audit report.
b. To comply with a validly issued and enforceable subpoena or
summons.
c. To accommodate the review of client audit work papers under
AICPA, PCAOB, or State Board of Accountancy authority.
d. To explain the members of the press whether a client is likely to
miss payroll in the forthcoming periods.
d. To explain the members of the press whether a client is likely to
miss payroll in the forthcoming periods.

Julie Webb, CPA takes out an automobile loan with First National
Bank of Wellville (FNBW) while attending the University of
Wellville. Julie graduates one year later and is hired as an auditor
by Best and Driftwood, LLP. Her first assigned audit is with First
National Bank of Wellville, a client of Best and Driftwood. As a
new audit assistant, Julie continues to pay her automobile loan
payments each month. Which of the following best describes
Julie's independence status?
a. Impaired because Julie has a direct financial interest in FNBW.
b. Impaired because Julie has a material indirect financial interest
in FNBW.
c. Not impaired because Julie has a immaterial indirect financial
interest in FNBW.
d. Not impaired because Julie is permitted to take normal loans
from FNBW.
d. Not impaired because Julie is permitted to take normal loans
from FNBW.

Which of the following represents a situation in which an auditor is

independent of its client?
a. The audit fee paid by the client represents 10% of the auditor's
annual gross revenue.
b. The auditor takes a personal loan from the president of the
company.
c. The auditor's dependent son holds 25 shares of the client's
common stock.
d. The auditor has not received payment for the previous audit
services.
a. The audit fee paid by the client represents 10% of the auditor's
annual gross revenue.

From whom should a CPA not accept a commission for

recommending a product or service?
a. A tax client.
b. An audit client.
c. A financial-planning client.
d. A management-service client.
e. any of the above.
b. An audit client.

What is the purpose of an ethical framework?

a. To provide a defined methodology to solve the ethical problem.
b. To provide a defined methodology to aid the user in making
complex ethical decisions.
c. To provide a defined program to solve ethical dilemmas.
d. To provide all of the above.
b. To provide a defined methodology to aid the user in making
complex ethical decisions.
Chapter 5

The first general standard of the PCAOB requires that an audit be

performed by which type of person?
a. Au auditor with seasoned judgment in varying degrees of
supervision and review.
b. An auditor with appropriate technical training and proficiency.
c. An auditor with adequate knowledge of the standards of
fieldwork and reporting.
d. An auditor satisfying the independence standards.
b. An auditor with appropriate technical training and proficiency.

To satisfy the fieldwork standards, what must an auditor do?

a. Act with due care.
b. Gather sufficient appropriate evidence.
c. Be independent in mental attitude.
d. Have adequate knowledge about the client's industry.
e. All of the above.
b. Gather sufficient appropriate evidence.
a. Act with due care.--General Standard
c. Be independent in mental attitude.--General Standard
d. Have adequate knowledge about the client's industry.--Not a
standard

Which one of the following has the most affect on the reliability of
financial statements?
a. The size of the client.
b. The industry of the client.
c. The client's internal control structure.
d. The client's trend of earnings.
c. The client's internal control structure.

The standards of competence, independence, and due

professional care are covered by which of the generally accepted
auditing standards?
a. General standards.
b. Standards of fieldwork.
c. Reporting standards.
d. None of the above.
a. General standards.

Which of the following is the primary assertion related to testing

inventory on hand to see if it includes consignment goods?
a. Existence.
b. Completeness.
c. Valuation.
d. Rights and Obligations.
d. Rights and Obligations.

Which of the following groups are committed to the convergence

of the auditing standards?
a. IAASB.
b. PCAOB.
c. AICPA.
d. Both A and C.
e. All of the above.
d. Both A (IAASB) and C (AICPA).

Which of the following is a procedure that requests a direct written

response to the auditor from a third party?
a. Inquiry.
b. Confirmation.
c. Inspection.
d. Observation.
b. Confirmation.

What does the quality of the evidence an auditor collects depend

upon?
a. The nature of the procedures.
b. The extent of the procedures.
c. The timing of the procedures.
d. Both A and C.
e. All of the above.
e. All of the above.

Which one of the following is a requirement of the reporting

standards included in the generally accepted auditing standards?
a. The auditor will state explicitly whether the financial statements
are fairly presented in accordance with the applicable financial
reporting framework.
b. The auditor will identify in the auditor's report, those
circumstances in which auditing principles have not been
consistently observed in the current period in comparison to the
preceding period.
c. The auditor will review adjusting journal entries for accuracy,
and if the auditor concludes those entries are not reasonably
accurate, the auditor must so state in the auditor's report.
d. The auditor will express an unqualified opinion on the financial
statements, or will conduct additional audit procedures until such
an opinion can be expressed.
a. The auditor will state explicitly whether the financial statements
are fairly presented in accordance with the applicable financial
reporting framework.

Which type of audit documentation is required by PCAOB

standards?
a. Flowcharts.
b. Narratives.
c. Questionnaires.
d. A specific form of documentation is not required.
d. A specific form of documentation is not required.
Which of the following is a reason that the auditor uses an
accounting approach when performing an audit?
a. The accounting cycle approach allows the auditor to focus
exclusively on either the balance sheet or the income statement.
b. COSO internal control components are based on the
accounting cycles.
c. The accounting cycles provide a convenient way to break the

audit up into manageable pieces.

d. The auditor needs to be able to provide an opinion related to
each accounting cycle.
c. The accounting cycles provide a convenient way to break the
audit up into manageable pieces.

The AICPA Princples Governing an Audit include which of the

following categories that guide the conduct of an audit?
a. Purpose of an audit and premise upon which an audit is
conducted.
b. Responsibilities.
c. Performance.
d. All of the above.
d. All of the above.

What are the PCAOB standards that present guidance in testing

assertions and planning for the audit known as?
a. General standards.
b. Fieldwork standards.
c. Reporting standards.
d. None of the above.
b. Fieldwork standards.

Which assertion is most closely related to the determination of the

adequacy of the allowance for doubtful accounts?
a. Existence.
b. Valuation.
c. Rights and Obligations.
d. Presentation and Disclosure.
b. Valuation.

Which of the following is a procedure which analyzes plausible

relationships among financial and nonfinancial data?
a. Analytical procedures.
b. Scanning
c. Reviewing.
d. Observation.
a. Analytical procedures.

Which of the following statements about the auditing standards

issued by the AICPA is true?
a. The auditing standards issued by the AICPA are no longer

recognized by the PCAOB.

b. The auditing standards issued by the AICPA are no longer
recognized by the profession because the AICPA voted itself out
of existence.
c. The auditing standards issued by the AICPA continue to be
issued by that organization for audits of public companies.
d. The auditing standards issued by the AICPA were used by the
PCAOB as a starting point.
d. The auditing standards issued by the AICPA were used by the
PCAOB as a starting point.

Which of the following is not a typical accounting cycle?

a. Revenue.
b. Inventory.
c. Cash.
d. Internal Controls.
d. Internal Controls.

Which statement is true concerning materiality?

a. Misstatements are material if they could reasonably be
expected to influence the decisions of users of the financial
statements.
b. Materiality guidelines are specifically prescribed by the
PCAOB.
c. Materiality is not a useful concept in assessing internal control
effectiveness.
d. Materiality is a concept applied to financial statement
presentation but not to disclosures.
a. Misstatements are material if they could reasonably be expected
to influence the decisions of users of the financial statements.

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

a. Extensively test internal controls.
b. Limit the testing of internal controls.
c. Not access the control risk.
d. Issue an adverse opinion on the financial statements.
b. Limit the testing of internal controls.

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

a. Perform a substantive procedure concurrently with a test of
control.
b. Perform a substantive procedure concurrently with a risk
assessment test.

c. Perform a risk assessment test concurrently with a test of

control.
d. None of the above.
a. Perform a substantive procedure concurrently with a test of
control.
Chapter 6

Two determinants of the persuasiveness of evidence include

which of the following?
a. Competence and Sufficiency.
b. Relevance and Reliability.
c. Appropriate and Sufficiency.
d. Independence and Effectiveness
c. Appropriate and Sufficiency.
Appropriateness of evidence refers to relevance and reliability.

Directional testing involves testing transactions or balances

primarily for which type of error?
a. Overstatement.
b. Understatement.
c. Either overstatement or understatement.
d. Neither overstatement nor understatement.
c. Either overstatement or understatement.

Which one of the following would be considered the most reliable

type of audit evidence?
a. Purchase orders from vendors.
b. Customer accounts receivable files.
c. Computerized general ledger.
d. Confirmations from banks.
d. Confirmations from banks.

Which of the following is an example of inspection of

documentation?
a. Review shipping documents.
b. Estimate the expected amount of interest income.
c. Observe controls.
d. Recalculate the total amount included on a sales invoice.
a. Review shipping documents.

An audit program provides an effective means for which of the

following?
a. Reviewing the completeness and persuasiveness of
procedures performed.
b. Recording the audit work performed and those responsible for
performing the work.
c. Organizing and distributing the work.
d. All the above.
d. All the above.

External documentation may lack reliability. Which of the following

is the most probable reason for that?
a. The external party may be competent in performing duties.
b. The documentation may be properly understood by the client in
the response.
c. The auditor may decide not to use the documentation and
replace it with other documents.
d. The documentation may have been altered if the process is not
controlled from inception.
d. The documentation may have been altered if the process is not
controlled from inception.

When the auditor uses the audit procedure vouching she is

primarily concerned with which of the following assertions?
a. Completeness.
b. Existence.
c. Authorization.
d. Classification.
b. Existence.

Which one of the following is the primary reason for documenting

audit work?
a. To prevent litigation by other parties that question the audit
performance.
b. To provide a stand-alone medium that gives audit conclusions
and supports the opinion.
c. To give the client a full reporting of all work performed on their
behalf.
d. To supply a point of reference for all auditors performing the
work subsequently.
b. To provide a stand-alone medium that gives audit conclusions
and supports the opinion.

The processes used by management in developing estimates

include which of the following?
a. Controls over the process.
b. The reliability of underlying data in developing the estimate.
c. Use of outside experts by management (for example, how they
were used and their expertise).
d. All of the above.
d. All of the above.

In evaluating cost of evidence, which of the following evidence

qualities of the audit usually has the lowest cost?
a. High quality.
b. Medium quality.
c. Low quality.
d. All cost the same.
c. Low quality.
Which of the following audit judgements would an auditor be least
likely to use an audit specialist?
a. Existence of cash.
b. Valuation of works of art.
c. Valuation of oil and gas reserves.
d. Interpretation of laws and regulations.
a. Existence of cash.

Recalculations of the client's computations would not include

which of the following types of evidence?
a. Cutoff.
b. Footing.
c. Extension.
d. Cross-footing.
a. Cutoff.

Vouching of transactions deals with which of the following?

a. Testing forward.
b. Testing backward.
c. Testing at a point in time.
d. Directional testing either forward or backward.
b. Testing backward.

A date at which audit evidence is collected earlier than the

balance sheet date is referred to as what?

a. Subsequent date.
b. Cutoff period.
c. Significant date.
d. Interim date.
d. Interim date.

An auditor selects a sample of items recorded and traces them

back (vouches) to the supporting documentation. This is an
example of which of the following?
a. Directional testing for existence.
b. Directional testing for completeness.
c. Direct test for valuation.
d. Direct testing for rights.
a. Directional testing for existence.

Which of the following assertions is the primary assertion that is

satisfied by physically observing the client's count of inventory?
a. Rights.
b. Valuation.
c. Completeness.
d. Existence.
d. Existence.

An audit program is created to specify which of the following?

a. The type of audit opinion to be rendered based upon
procedures formed.
b. The audit procedures that will be performed every year for the
client.
c. How an auditor should think while performing audit procedures.
d. Audit objectives and procedures to be followed during the audit
process.
d. Audit objectives and procedures to be followed during the audit
process.

To be reliable evidence, confirmations must be controlled by

which of the following individuals?
a. A client employee responsible for accounts receivable.
b. An external auditor.
c. A client's internal audit department.
d. A client's controller or CFO.
b. An external auditor.

Which of the following is not a type of internal documentation?

a. Legal documents.
b. Business documents.
c. Third-party documents.
d. Accounting documents.
c. Third-party documents.

Which of the following types of audit evidence is the most

reliable?
a. Evidence from the client's organization.
b. Evidence from a poorly controlled system.
c. Directly observable evidence.
d. Facsimiles of documents.
c. Directly observable evidence.
Chapter 7

Which of the following best describes the amount of misstatement an auditor is willing to
accept and still judge that an account balance is not materially misstated?
a. Tolerable misstatement.
b. Performance materiality.
c. A clearly trivial amount.
d. Significant risk.
a. Tolerable misstatement.

Which of the following factors would lead an auditor to assess inherent risk at a higher
level?
a. The account balance is easily determined without estimation.
b. The account balance is composed of a high volume of nonroutine transactions.
c. The account balance is composed of simple transactions.
d. All of the above would lead the auditor to assess a higher level of inherent risk.
b. The account balance is composed of a high volume of nonroutine transactions.

Which of the following factors will result in control risk being assessed at a higher level?
a. Controls are well designed.
b. There is a lack of supervision of accounting personnel.
c. Accounting staff are well trained and educated.
d. The control environment is operating effectively.
b. There is a lack of supervision of accounting personnel.

Which of the following ratios provide information about liquidity?

a. Net profit margin.
b. Current ratio.
c. Inventory turnover.
d. Sales to assets.
b. Current ratio.

What is the typical range for the setting of audit risk?

a. 1% - 10%
b. 1% - 5%
c. 0% - 5%
d. 0% - 10%
b. 1% - 5%

Which of the following statements best describes what is meant by setting control risk at
100%?
a. Controls are effective.
b. Controls are relevant.
c. Controls are ineffective.
d. Cannot be determined from the information given.
c. Controls are ineffective.

When an auditor chooses not to rely on a client's internal controls because the control
design is ineffective, which of the following tests are eliminated?
a. Substantive testing.
b. Tests of controls.
c. Tests of details of balances.
d. Substantive analytical procedures.
b. Tests of controls.

What is the auditor trying to accomplish by varying the timing of audit procedures from
the prior year?
a. Introduce unpredictability.
b. Confuse the client.
c. Gather information during different times of the year.
d. Finish the audit sooner.
a. Introduce unpredictability.

An increase in the risk of material misstatement would lead to which of the following
responses?

a. Increase in the extent of auditing procedures.

b. Decrease in the extent of auditing procedures.
c. No change in the extent of audit procedures.
a. Increase in the extent of auditing procedures.

As the risk of material misstatement increases, what happens with detection risk?
a. Medium increase.
b. Stay the same.
c. Decrease.
d. Severely increase.
c. Decrease.
Which of the following statements is true regarding analytical techniques?
a. Ratio analysis takes advantage of economic relationships between two or more
accounts.
b. Ratio and trend analysis are generally carried out through a comparison of client data
with expectations based on industry data, prior-period data, and expectations developed
from industry trends, client budgets, and so on.
c. Developing expectations is the first step in performing analytical procedures.
d. All of the above.
d. All of the above.

What type of relationship exists between audit risk and detection risk?
a. Direct.
b. Inverse.
c. Indirect.
d. No relationship.
a. Direct.

As inherent risk increases, and other factors remain constant, what happens to the
extent of audit work?
a. Increases.
b. Decreases.
c. Stays the same.
d. Becomes less reliable.
a. Increases.

Which of the following terms best describes the numerical depiction of the relationship
between control risk, inherent risk, detection risk, and audit risk?
a. Materiality equation.
b. Significant model.
c. Audit risk model.
d. Risk of misstatement model.

c. Audit risk model.

Which of the following approaches can be used to introduce unpredictability into the
audit?
a. Assessing high risk accounts.
b. Performing procedures on an unannounced basis.
c. Performing the audit in the same location each year.
d. Selecting items that would normally be tested.
b. Performing procedures on an unannounced basis.

The risk of material misstatement refers to which of the following?

a. Inherent risk.
b. Control risk and acceptable audit risk.
c. The combination of inherent risk and control risk.
d. Inherent risk and audit risk.
c. The combination of inherent risk and control risk.

Which of the following statements is false?

a. Inherent risk is inversely related to the level of control risk.
b. Inherent risk is directly related to the amount of evidence required in account testing.
c. Inherent risk is the susceptibility of the financial statements to material misstatement,
assuming no internal controls.
d. Inherent risk and control risk are assessed by the auditor and controlled by the client.
a. Inherent risk is inversely related to the level of control risk.

To learn more about a company and its inherent risks, auditors can use which of the
following resources?
a. Management inquiries.
b. Economic statistics.
c. Online searches.
d. Any of the above could be used.
d. Any of the above could be used.

Detection risk is affected by which aspects of substantive audit procedures?

a. Nature.
b. Timing.
c. Extent.
d. All of the above.
d. All of the above.

Which of the following are two frequently used preliminary analytical procedures?
a. Reasonableness tests and economic analyses.
b. Trend analysis and reasonableness tests.
c. Ratio analysis and economic analyses.
d. Ratio analysis and trend analysis.
d. Ratio analysis and trend analysis.

Chapter 10

Which of the following is a cash management arrangement with a bank whereby the
organization's customers send payments directly to the client's bank, which deposits the
remittance to the client's account?
a. Lockbox.
b. Bank transfer.
c. Imprest bank account.
d. Imprest account.
a. Lockbox.

Which of the following situations would normally be discovered as part of the test of the
bank reconciliation?
a. Failure to bill a customer.
b. Failure to include a deposit in transit on the bank reconciliation.
c. Duplicate payment of a vendor's invoice.
d. Payment to an employee for more hours than she worked.
b. Failure to include a deposit in transit on the bank reconciliation.

A company must do which of the following, if a company maintains a material

compensating balance of cash?
a. Disclose the compensating account arrangement in financial statements.
b. Close out the balance prior to year-end.
c. Tie balances to debt covenants.
d. Provide a lockbox for appropriate line-of-credit draws.
a. Disclose the compensating account arrangement in financial statements.

During the testing of a year-end bank reconciliation, an auditor noticed that the majority
of checks listed as outstanding at year-end had not cleared the bank. Which of the
following is a likely explanation?
a. A high probability of kiting.
b. A high probability of lapping.

c. The year-end cash disbursements records had been closed prior to year-end.
d. T he year-end cash disbursements records had been held open past year-end.
d. The year-end cash disbursements records had been held open past year-end.

What form of evidence is used by the auditor to verify bank reconciliation items?
a. Cash counting observation.
b. General ledger.
c. Bank confirmation.
d. Cutoff statement.
d. Cutoff statement.

Which of the following best describes kiting?

a. Theft of cash for personal use and cover-up using the bank statement.
b. A fraudulent cash scheme to overstate cash assets at year-end by manipulating yearend transfers between cash accounts.
c. Manipulation of financial reporting by increasing both cash and debt by the same
amount.
d. Colluding to steal cash by wiring money to a fictional vendor and concealing it with
customer payments.
b. A fraudulent cash scheme to overstate cash assets at year-end by manipulating yearend transfers between cash accounts.

The auditor will send a standard bank confirmation to which of the following?
a. Financial institutions of customers using the lockbox.
b. Financial institutions for which the client has a balance greater than $0 at the end of
the year.
c. Financial institutions with which the client has transacted during the year.
d. Financial institutions used by significant shareholders.
c. Financial institutions with which the client has transacted during the year.

The emphasis in verifying petty cash is normally on which of the following?

a. Year-end balance.
b. Controls over petty cash.
c. Transactions for the period.
d. Balance sheet classification.
b. Controls over petty cash.

Investments in securities are classified as which of the following?

a. Held-to-maturity.
b. Trading securities.

c. Available-for-sale securities.
d. All of the above.
d. All of the above.

Which assertion related to investments is tested when the auditor examines the
documents for any restrictions?
a. Existence.
b. Rights.
c. Completeness.
d. Valuation.
b. Rights.
Clark Company has two bank accounts. In the table below, which of the transfers listed
would indicate possible kiting between Bank and Bank B?
Bank A Bank A Bank B Bank B
Deposits Deposits Transfers Transfers
Per Books Per Bank Per Books Per Bank
a. 12/29/01 01/01/02 01/02/02 01/03/02
b. 12/30/01 01/03/02 12/31/01 01/02/02
c. 01/04/02 01/02/02 01/02/02 01/04/02
d. 12/31/01 12/31/01 12/30/01 01/03/02
a. 12/29/01 01/01/02 01/02/02 01/03/02

As cash processing become more automated and integrated, the general concept of
segregation of duties _____.
a. becomes less important.
b. becomes more important.
c. does not change.
d. becomes completely computerized without human interaction.
c. does not change.

A common accounts receivable fraud is lapping. More sophisticated accounts receivable

frauds involve ____.
a. using journal entries to write off accounts against the allowance for doubtful accounts.
b. applying cash from one customer's receivable to that of another to cover the earlier
deficit.
c. recording large discounts for the clients.
d. both a. and c.
d. both a. and c.

The cut-off bank statement is used by the auditor to address which of the following
concerns?
a. Lapping.
b. Kiting.

c. Omitting outstanding checks on reconciliations.

d. All of the above.
c. Omitting outstanding checks on reconciliations.

The cash account is significant to the auditor for which of the following reasons?
a. The cash account is the culmination of a large volume of transactions.
b. The cash account is not as susceptible to fraud as most other accounts.
c. Cash is the only account that provides opportunity for fraud.
d. Automated systems do not possess the capability to maintain strong internal controls
over cash.
a. The cash account is the culmination of a large volume of transactions.

Which one of the following is not a fundamental internal control the auditor would expect
to find in place for a cash processing system?
a. Segregation of duties.
b. Electronic payments.
c. Authorization of transactions.
d. Periodic internal audits.
b. Electronic payments.

Which of the following describes documents that accompany customer payments to

help the clerk identify the payments?
a. Receipts such as register tapes.
b. Accommodation certificates such as authenticated customer tokens.
c. Turnaround documents such as remittance advices.
d. Checks stamped with restrictive endorsements such as customer signatures.
c. Turnaround documents such as remittance advices.

How will the auditor most likely utilize the bank reconciliation as evidence in the audit of
cash?
a. The auditor sends the reconciliation to the bank for independent verification.
b. The auditor performs the reconciliation for the client to record the proper cash
balance.
c. The auditor traces the book balance of the reconciliation to the cut-off bank
statement.
d. The auditor tests deposits-in-transit and outstanding items to other corroborating
evidence.
d. The auditor tests deposits-in-transit and outstanding items to other corroborating
evidence.

The ease with which cash can be stolen is most related to which of the following risks?

a. Control risk.
b. Inherent risk.
c. Detection risk.
d. Liquidity risk.
b. Inherent risk.

Which of the following is the most relevant assertion with regards to the audit of cash?
a. Existence.
b. Rights and obligations.
c. Valuation and allocation.
d. Presentation and disclosure.
a. Existence.
Chapter 14

In evaluating the reasonableness of an estimate, the auditor would not normally

concentrate on which of the following factors and assumptions?
a. Subjective judgments that introduce bias.
b. Deviations from historical patterns.
c. Amounts that are inconsistent with current economic trends.
d. All of these are a focus of the auditor regarding reasonable estimates.
d. All of these are a focus of the auditor regarding reasonable estimates.

Which of the following is a tool that is best used by the audit team to determine if the
client has included all disclosures?
a. Management representation letter.
b. GAAS.
c. Inquiry of the CFO.
d. Checklists.
d. Checklists.

What should an auditor do when becoming aware of violations of the FCPA (Foreign
Corrupt Practices Act of 1977)?
a. Contact foreign officials in the country where the client has business operations.
b. Notify the audit committee about the violations, their circumstances, and the effects
on the financial statements.
c. Contact the U. S. marshals.
d. Design internal controls to deter improper payments.
b. Notify the audit committee about the violations, their circumstances, and the effects
on the financial statements.

On what information does the auditor base a going concern evaluation?

a. On separate procedures.
b. On the management discussion and analysis (MD&A).
c. On information obtained from normal audit procedures performed to test
management's assertions.
d. On the statement of cash flows for the current period.
c. On information obtained from normal audit procedures performed to test
management's assertions.

The auditor is responsible for evaluating the likelihood of a client not being a going
concern for the next 12 months. What basis will the auditor use to assess this issue?
a. Management integrity.
b. Control environment.
c. Absolute assurance.
d. Substantial doubt.
d. Substantial doubt.

During which of the following phases of the audit are analytical review procedures
required by the auditing standards?
a. The planning phase of the audit.
b. The final review phase of the audit.
c. Both the planning and final review phases of the audit.
d. Performance of tests of controls.
c. Both the planning and final review phases of the audit.

Which of the following individuals should sign the management representation letter?
a. The members of the audit committee and board of directors.
b. The chief executive officer and the chief financial officer.
c. The chief financial officer and the treasurer.
d. The controller and the auditor.
b. The chief executive officer and the chief financial officer.

Which of the following items does the auditor ask the client to send to its legal counsel
requesting information about asserted claims?
a. A letter of audit inquiry.
b. A management representation letter.
c. A management letter.
d. A loss reserve confirmation.
a. A letter of audit inquiry.

An audit firm culture that emphasizes "doing the right thing" does not incorporate which
of the following to enhance audit quality?
a. Encouraging auditors to seek consultation with other member of the audit firm.
b. Yielding to management's demands in order to promote additional service
engagements.
c. Taking sufficient time to deal with difficult client issues.
d. Emphasizing long-term reputation over the immediate satisfaction of client
preferences.
b. Yielding to management's demands in order to promote additional service
engagements.

During the course of an audit, misstatements that are individually immaterial may be
detected. What should the auditor do with these?
a. Permanently pass on these immaterial misstatements as they do not individually
impact the financial statements.
b. Request that management footnote the immaterial misstatements in the financial
statements for fair presentation.
c. Accumulate all of the known and projected misstatements to determine if the impact
is material in the aggregate.
d. Roll them forward for three years when they will become material enough to adjust.
c. Accumulate all of the known and projected misstatements to determine if the impact
is material in the aggregate.
When responding to the auditor as a result of the audit client's letter of inquiry, how
might the attorney limit the response?
a. Limit the response to litigations in process.
b. Limit the response to asserted claims.
c. Limit the response to matters to which the attorney has given substantive attention in
the form of legal consultation or representation.
d. Limit the response to items which the attorney believes will result in loss to the client.
c. Limit the response to matters to which the attorney has given substantive attention in
the form of legal consultation or representation.

Which of the following is not true regarding accounting estimates?

a. Accounting estimates are based on management's knowledge and experience of past
and current events.
b. Accounting estimates are based on management's assumptions about conditions that
are expected to exist and courses of action the company expects to take.
c. Accounting estimates are based on both subjective and objective factors
d. Because accounting estimates are based, in part, on management's knowledge and
experience, they are not biased.
d. Because accounting estimates are based, in part, on management's knowledge and
experience, they are not biased.


Which one of the following is false regarding the adequacy of disclosures in a financial
statement audit?
a. The auditor should consider matters for disclosure while gathering evidence during
the course of the audit, not just at the end of the audit.
b. One of the key disclosures is a summary of significant accounting policies used by
the company.
c. Disclosures should be limited to only checklist items.
d. The auditor's report does not specifically cover the statements made by management
in the "Management Discussion and Analysis" (MD&A) section of the annual report.
c. Disclosures should be limited to only checklist items.

If the auditor concludes that there may be a going-concern problem with the client,
which of the following is the best course of action for the auditor to follow?
a. Issue a qualified opinion.
b. Identify and assess management's plan to overcome the situation.
c. Chart the negative trends as an addendum to the audit report.
d. Increase fees to cover the probable exposure.
b. Identify and assess management's plan to overcome the situation.

Which of the following is not a typical analytical procedure for the completion of the
audit?
a. Ratio analysis.
b. Common-size analysis.
c. Changes from the prior year.
d. All of the above would typically be used.
d. All of the above would typically be used.

Which of the following statement is false regarding analytical procedures that help
auditors assess the overall final presentation of the financial statements?
a. By performing a final analytical review, the audit firm will identify any unusual,
unexpected, or unexplained relationships that should be resolved before the issuance of
the audit report.
b. A basic five step process for using analytical procedures applies.
c. Analytical procedures provide evidence on whether certain relationships make sense
in light of the knowledge obtained during the audit.
d. Auditing standards require the use of analytical procedures in the final review phase
of the audit to assist in identifying ending account relationships that are unusual. d.
Auditing standards require the use of analytical procedures in the final review phase of
the audit to assist in identifying ending account relationships that are unusual.
b. A basic five step process for using analytical procedures applies.

Management of AllTech, Inc. refuses to sign the management representation letter given
to them in the course of the audit on the grounds that it invades the company's privacy.
What does this refusal constitute?
a. A violation of full and fair disclosure.
b. A securities law violation.
c. A scope limitation.
d. A breakdown in internal controls.
c. A scope limitation.

The date of the audit opinion of Upton Industries, Inc. reads: March 7, 2014 except for
Note D, as to which the date is March 12, 2014. What is this an example of?
a. Improper reporting.
b. A GAAP violation.
c. Dual dating.
d. A contingent event.
c. Dual dating.

Which of the following would be a Type II subsequent event?

a. Information becomes available that provides evidence about the valuation of an
estimate or reserve that had been accrued at year end.
b. A sale of inventory below carrying value provides evidence that the net realizable
value was less than cost at year end.
c. A stock dividend or split that takes place during the subsequent period should be
disclosed. In addition, earnings-per-share figures should be adjusted to show the
retroactive effect of the stock dividend or split.
d. A material change occurs in the value of investment securities after the balance sheet
date.
d. A material change occurs in the value of investment securities after the balance sheet
date.

Which of the following is not a typical communication between the auditor and the audit
committee?
a. The auditor should clearly communicate the auditor's responsibility under Generally
Accepted Auditing Standards (GAAS).
b. The auditor should clearly communicate the planned scope of the audit engagement
with the audit committee and discuss its adequacy.
c. The auditor and management should discuss issues related to the retention of both
client staff and audit firm staff during the period of audit.
d. All major accounting disagreements with management, even if eventually resolved,
should be discussed with the audit committee.
c. The auditor and management should discuss issues related to the retention of both
client staff and audit firm staff during the period of audit.

Chapter 15

Which of the following is a change not being debated by auditing standard setters and
investors?
a. Adding disclosure about which engagement partner at the firm supervised the audit
and who from outside the audit firm participated in the audit.
b. Adding commentary on areas of risk of material misstatement of the financial
statements identified by the auditor.
c. Adding commentary about the level of materiality applied by the auditor to perform the
audit.
d. All of the above are being debated.
d. All of the above are being debated.

According to the AICPA, the auditor needs to form an opinion on the financial
statements based on an evaluation of the audit evidence obtained. This is stated in
which AICPA principle governing an audit conducted in accordance with GAAS?
a. Principle 1
b. Principle 4
c. Principle 5
d. Principle 7
a. Principle 1

Which one of the following is an example of the contents of an opinion paragraph found
in an audit report?
a. "We have audited ..."
b. "Nothing came to our attention ..."
c. "The financial statements referred to above present fairly ..."
d. "An audit includes examining, on a test basis ..."
c. "The financial statements referred to above present fairly ..."

The division of responsibility between the reporting company's management and the
audit firm is described in which one of the following?
a. Scope paragraph.
b. Introductory paragraph.
c. Notes to the financial statements.
d. Opinion paragraph.
b. Introductory paragraph.

When financial statements contain a material, unjustified departure from GAAP, which of
the following is contained in the audit report?

a. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No

b. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes
c. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes
d. A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No
b. A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes

Which of the following would not result in an unqualified audit report with an explanatory
paragraph?
a. Going concern issue.
b. Scope limitation.
c. Emphasis of a matter.
d. Consistency of presentation.
b. Scope limitation.

The opinion paragraph of the audit report for Schnook Company states that the financial
statements "do not present fairly". Which type of audit report is this?
a. Improper.
b. Disclaimer
c. Adverse.
d. Qualified.
c. Adverse.

In which of the following instances would an auditor most likely issue a disclaimer of
opinion?
a. Management will not sign a management representation letter.
b. Management declines to provide a statement of cash flows.
c. The auditor is independent of the client.
d. The auditor is unable to confirm receivables but performs alternative procedures.
a. Management will not sign a management representation letter.

A justified departure from GAAP may result in which of the following?

a. A disclaimer of an audit opinion.
b. An adverse opinion.
c. An unqualified audit opinion with an explanation paragraph before the opinion
paragraph or a qualified opinion.
d. A standard unqualified opinion.
c. An unqualified audit opinion with an explanation paragraph before the opinion
paragraph or a qualified opinion.

A reference to another auditor under U.S. auditing standards may result in which of the
following?

a. A disclaimer of opinion.
b. A qualified audit opinion.
c. An adverse opinion.
d. An unqualified audit opinion with modified wording for all three paragraphs.
d. An unqualified audit opinion with modified wording for all three paragraphs.
According to the AICPA principles, which of the following is incorrect?
a. If the auditor has reservations about the fairness of financial statement presentation,
the reason(s) must be stated in the auditor's report.
b. If there is a material departure from GAAP in the financial statements, the auditor
should explicitly state the nature of the departure and the dollar effects where
determinable.
c. Auditors should state the reasons why an unqualified opinion cannot be issued.
d. Auditors should issue an unqualified opinion in all cases where companies have
provided an entire set of financial statements and footnotes that include all years
presented for comparative purposes.
d. Auditors should issue an unqualified opinion in all cases where companies have
provided an entire set of financial statements and footnotes that include all years
presented for comparative purposes.

The scope paragraph of an unqualified opinion primarily gives information relating to

which of the following?
a. The division of responsibilities.
b. The final assessment of a company's standings with the audit firm.
c. The statements and dates under audit.
d. Audit planning and procedure.
d. Audit planning and procedure.

When the financial statements contain a material departure from GAAP that the auditor
believes is justified, where should the justification appear?
a. In a footnote.
b. In a paragraph added before the scope paragraph.
c. In the opening paragraph.
d. In a paragraph added before the opinion paragraph.
d. In a paragraph added before the opinion paragraph.

How would the auditor categorize a situation when the financial statements do not
contain a footnote the auditor believes is necessary for fair presentation?
a. A scope limitation.
b. An uncertainty.
c. A departure from GAAP.
d. An act discreditable.
c. A departure from GAAP.


Qualified opinions can only be issued by auditors for which of the following?
a. Violations of GAAP.
b. Scope limitations.
c. Lack of independence.
d. Either a. or b.
d. Either a. or b.

Which of the following phrases should not be used when the auditor is qualifying the
audit opinion?
a. Except for.
b. Subject to.
c. With the exception of.
d. With the qualification of.
b. Subject to.

When an auditor is faced with a material departure from GAAP that is pervasive, which
of the following should the audit report contain?
a. An unqualified opinion.
b. A qualified opinion with an explanatory paragraph.
c. An adverse opinion.
d. A disclaimer of opinion.
c. An adverse opinion.

When the auditor is not independent with respect to a client, what must the auditor do?
a. Not accept an audit engagement.
b. Include a separate paragraph in the audit report stating the lack of independence.
c. Provide a review report.
d. Report the non-compliance to the AICPA.
a. Not accept an audit engagement.

When there is a restriction on the scope of the internal control over financial reporting
(ICFR) engagement, what should the auditor do?
a. The auditor will either withdraw from the engagement or disclaim an opinion.
b. The auditor will issue an adverse opinion.
c. The auditor will issue an opinion on the ICFR based on another audit firm's work.
d. The auditor will report this directly to the Treadway Commission.
a. The auditor will either withdraw from the engagement or disclaim an opinion.

When an auditor lacks independence with respect to a client, which of the following
should the auditor issue?

a. A disclaimer of opinion.
b. An adverse opinion.
c. A qualified opinion with explanatory paragraph.
d. An unqualified opinion.
a. A disclaimer of opinion.