Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) If it is probable that the judgment of a reasonable person would have been changed or influenced 1)
by the omission or misstatement of information, then that information is, by definition of FASB
Statement No. 2:
A) relevant. B) material. C) significant. D) insignificant.

2) The preliminary judgment about materiality is the ________ amount by which the auditor believes 2)
the statements could be misstated and still not affect the decisions of reasonable users.
A) mean average B) minimum
C) median average D) maximum

3) Auditors are responsible for determining whether financial statements are materially misstated, so 3)
upon discovering a material misstatement they must bring it to the attention of:
A) the audit firm's managing partner. B) the client's management.
C) no one in particular. D) regulators.

4) The FASB definition of materiality emphasizes what class of financial statement users? 4)
A) Regulators. B) Informed investors.
C) Potential investors. D) Reasonable persons.

5) When auditors allocate the preliminary judgment about materiality to account balances, the 5)
materiality allocated to any given account balance is referred to as:
A) the error range. B) tolerable misstatement.
C) the materiality range. D) tolerable materiality.

6) Why do auditors establish a preliminary judgment about materiality? 6)

A) To determine the appropriate level of audit experience required for the work.
B) To plan the appropriate audit evidence to accumulate and develop an overall audit strategy.
C) So that the client can know what records to make available to the auditor.
D) None of the above.

7) Auditors are ________ to decide on the combined amount of misstatements in the financial 7)
statements that they would consider material early in the audit.
A) permitted B) strongly encouraged
C) not allowed D) required

8) Which of the following is not a correct statement regarding the allocation of the preliminary 8)
judgment about materiality to balance sheet accounts?
A) Auditors expect to identify overstatements as well as understatements in the accounts.
B) Auditors expect certain accounts to have more misstatements than others.
C) The allocation has virtually no effect on audit costs because the auditor must collect sufficient
appropriate audit evidence.
D) Relative audit costs affect the allocation.

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 9) The phrase "in our opinion" in the auditor's report is intended to inform users that auditors: 9)
A) act as insurers of the accuracy of the statements.
B) guarantee fair presentation of the financial statements.
C) certify the material presented in the statements by management.
D) base their conclusions about the statements on professional judgment.

10) An overstatement of an asset account has ________ effect on the income statement than an 10)
understatement of a liability account.
A) the same B) less of an
C) a greater D) none of the above

11) Which of the following statements is not correct? 11)

A) Qualitative factors as well as quantitative factors affect materiality.
B) The most important base used as the criterion for deciding materiality is total assets.
C) Materiality is a relative rather than an absolute concept.
D) Given equal dollar amounts, frauds are usually considered more important than errors.

12) Allocating the preliminary judgment about materiality to financial statements segments is 12)
necessary because:
A) it is required by the AICPA's Code of Professional Conduct.
B) evidence is accumulated by segments rather than for the financial statements as a whole.
C) it is required by the SEC.
D) evidence is accumulated for the financial statements as a whole so materiality does not apply
to them.

13) Regardless of how the preliminary judgment about materiality is allocated, the auditor must be 13)
confident that total combined misstatements in all accounts are:
A) more than the preliminary judgment.
B) less than the preliminary judgment.
C) equal to the preliminary judgment.
D) less than or equal to the preliminary judgment.

14) ________ misstatements are those where the auditor can determine the amount of the misstatement 14)
in the account.
A) Projected B) Likely C) Known D) Potential

15) When a different extent of evidence is needed for the various cycles, the difference is caused by: 15)
A) errors in the client's accounting system.
B) an auditor's expectations of errors and assessment of internal control.
C) an auditor's need to follow auditing standards.
D) a client's need to achieve an unqualified opinion.

16) If planned detection risk is reduced, the amount of evidence the auditor accumulates will: 16)
A) be indeterminate. B) remain unchanged.
C) decrease. D) increase.

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17) To what extent do auditors typically rely on internal controls of their private company clients? 17)
A) Only as the controls are expected to be effective.
B) Only as the client asks an auditor to test controls.
C) Only as needed to complete the audit.
D) None of the above.

18) Likely misstatements can result from: 18)

A) projections of misstatements based on an auditor's tests of a sample from a population.
B) differences between management's and an auditor's judgment about account balances.
C) both A and B.
D) neither A nor B.

19) The risk of material misstatement refers to: 19)

A) inherent risk.
B) the combination of inherent risk and control risk.
C) control risk and acceptable audit risk.
D) none of the above.

20) Which of the following is not a primary consideration when assessing inherent risk? 20)
A) Frequency and intensity of management's review of accounting transactions and records.
B) Nature of client's business.
C) Susceptibility to defalcation.
D) Existence of related parties.

21) The Sarbanes-Oxley Act requires: 21)

A) all public companies to issue an internal control report.
B) the auditor of public companies to design effective ICFR.
C) all public companies to define adequate internal controls.
D) provides for all three of the above.

22) When considering internal control, an auditor should be aware of the concept of reasonable 22)
assurance, which recognizes that the:
A) establishment and maintenance of internal control is an important responsibility of the
management and not of the auditor.
B) employment of competent personnel provides assurance that the objectives of internal control
will be achieved.
C) costs of internal control should not exceed the benefits expected to be derived from internal
control.
D) segregation of incompatible functions is necessary to ascertain that internal control is
effective.

23) The financial statements are not likely to correctly reflect GAAP if the: 23)
A) company's control do not promote compliance with applicable rules and regulations.
B) company's controls do not promote efficiency.
C) controls affecting the reliability of financial reporting are inadequate.
D) company's controls do not promote effectiveness.

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24) The primary emphasis by auditors is on controls over: 24)
A) account balances.
B) classes of transactions.
C) both A and B, because they are equally important.
D) both A and B, because they vary from client to client.

25) When planning an audit, the auditor's assessed level of control risk is: 25)
A) calculated by using the audit risk model.
B) determined by using actuarial tables.
C) calculated by using the formulas provided in the AICPA's auditing standards.
D) an economic issue, trading off the costs of testing controls against the cost of testing balances.

26) When a compensating control exists, the absence of a key control: 26)
A) could cause a material loss, so it must be tested using substantive procedures.
B) is a slight concern to the auditor.
C) is no longer a concern because there is no longer a significant deficiency or material
weakness.
D) is magnified and must be removed from the sampling process and examined in its entirety.

27) Proper segregation of functional responsibilities calls for separation of: 27)
A) authorization, payment, and recording. B) custody, execution, and reporting.
C) authorization, execution, and payment. D) authorization, recording, and custody.

28) How must significant deficiencies and material weaknesses be communicated to those charged 28)
with governance?
A) Either oral or written communication is acceptable.
B) Written communication is required.
C) Oral communication is required.
D) None of the above.

29) Which of the following is not one of the subcomponents of the control environment? 29)
A) Organizational structure.
B) Management's philosophy and operating style.
C) Adequate separation of duties.
D) Commitment to competence.

30) Which of the following is not a likely procedure to support the operating effectiveness of internal 30)
controls?
A) Reperformance of client procedures. B) Each of the above is a likely procedure.
C) Observation of control-related activities. D) Inquiry of client personnel.

31) Management is responsible for: 31)

A) identifying and measuring fraud risks. B) taking steps to mitigate identified risks.
C) both A and B. D) neither A nor B.

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32) With whom should the auditor communicate whenever he or she determines that fraud may be 32)
present, even if the matter might be considered inconsequential?
A) Audit committee.
B) Senior management.
C) An appropriate level of management that is at least one level above those involved.
D) All of the above.

33) When the auditor suspects that fraud may be present, SAS No. 99 requires the auditor to: 33)
A) issue an adverse opinion or a disclaimer of opinion.
B) terminate the engagement with sufficient notice given to the client.
C) obtain additional evidence to determine whether material fraud has occurred.
D) all of the above.

34) This type of inquiry often elicits "yes" or "no" responses to the auditor's questions. 34)
A) Interrogative. B) Declarative. C) Informational. D) Assessment.

35) Which of the following most accurately defines professional skepticism as it is used in auditing 35)
standards?
A) It either assumes management is honest or slightly dishonest, but neither all the time.
B) It assumes that management is dishonest in only rare instances.
C) It assumes management is honest most of the time.
D) It neither assumes that management is dishonest nor assumes unquestioned honesty.

36) As part of the brainstorming sessions, auditors are directed to emphasize: 36)
A) areas where fraud may occur.
B) the audit team's response to potential fraud risks.
C) the need for professional skepticism.
D) all of the above.

37) In the fraud triangle, fraudulent financial reporting and misappropriation of assets: 37)
A) share little in common. B) share most of the same risk factors.
C) share most of the same conditions. D) share the same three conditions.

38) ________ is a form of earnings management in which revenues and expenses are shifted between 38)
periods to reduce fluctuations in earnings.
A) Income smoothing B) Fraudulent financial reporting
C) Expense smoothing D) Each of the above is correct

39) Which of the following is not a factor that relates to opportunities to commit fraudulent financial 39)
reporting?
A) High turnover of accounting, internal audit, and information technology staff.
B) Lack of controls related to the calculation and approval of accounting estimates.
C) Management's practice of making overly aggressive forecasts.
D) Ineffective oversight of financial reporting by the board of directors.

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40) Which of the following is a factor that relates to incentives or pressures to commit fraudulent 40)
financial reporting?
A) High turnover of accounting, internal audit, and information technology staff.
B) Management's practice of making overly aggressive forecasts.
C) Significant accounting estimates involving subjective judgments.
D) Excessive pressure for management to meet debt repayment requirements.

41) The audit procedure which is least useful in gathering evidence on significant computer processes 41)
is:
A) generalized audit software. B) test decks.
C) documentation. D) observation.

42) Which of the following is not a general control? 42)

A) Procedures for documenting, reviewing, and approving systems and programs.
B) Hardware controls.
C) Processing controls.
D) The plan of organization and operation of IT activity.

43) An auditor who is testing IT controls in a payroll system would most likely use test data that 43)
contain conditions such as:
A) payroll checks with unauthorized signatures.
B) overtime not approved by supervisors.
C) deductions not authorized by employees.
D) time tickets with invalid job numbers.

44) Many clients have outsourced the IT functions. The difficulty the independent auditor faces when a 44)
computer service center is used is to:
A) try to abide by the Code of Professional Conduct to maintain the security and confidentiality of
client's data.
B) gain the permission of the service center to review their work.
C) determine the adequacy of the service center's internal controls.
D) find compatible programs that will analyze the service center's programs.

45) Application controls vary across the IT system. To gain an understanding of internal control for a 45)
private company, the auditor must evaluate the application controls for every:
A) every audit area.
B) every material audit area.
C) every audit area where the auditor plans to reduce assessed control risk.
D) every audit area in which the client uses the computer.

46) Which of the following is not an application control? 46)

A) Preprocessing authorization of sales transactions.
B) Separation of duties between computer programmer and operators.
C) Reasonableness test for unit selling price of sale.
D) Post-processing review of sales transactions by the sales department.

47) What tools do companies use to limit access to sensitive company data? 47)
A) Digital signatures. B) Firewalls.
C) Encryption techniques. D) All of the above.

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 48) If a control total were to be computed on each of the following data items, which would best be 48)
identified as a hash total for a payroll IT application?
A) Total hours worked.
B) Total debit amounts and total credit amounts.
C) Gross wages earned.
D) Employee numbers.

49) Because general controls have a ________ effect on the operating effectiveness of application 49)
controls, auditors must consider general controls.
A) worsening B) mitigating C) pervasive D) nominal

50) Which of the following IT duties should be separated from the others? 50)
A) Operations. B) Data control.
C) Systems development. D) All of the above should be separated.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

51) Discuss each of the five steps in applying materiality in an audit, and identify the audit phase(s) in which each
step is performed. List these steps in the order in which they occur.

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52) Identify the six categories of general controls and give one example of each.

53) The text suggested a five-step approach to identify deficiencies, significant deficiencies, and material
weaknesses. Describe this approach.