AUDITING
I.
MULTIPLE CHOICE: Choose the CORRECT answer for the following questions.
Write only the letter of the correct answer.
1. In planning and performing an audit, auditors are concerned about risk factors for
two distinct types of fraud: fraudulent financial reporting and misappropriation of
assets. Which of the following is a risk factor for misappropriation of assets?
a. Generous performance-based compensation systems.
b. Management preoccupation with increased financial performance.
c. An unreliable accounting system.
d. Strained relationships between management and the auditors.
2. The audit committee of a company must be made up of:
a. Representatives from the client's management, investors, suppliers, and
customers.
b. The audit partner, the chief financial officer, the legal counsel, and at least
one outsider.
c. Representatives of the major equity interests, such as preferred and
common stockholders.
d. Members of the board of directors who are not officers or employees.
3. Which of the following should not normally be included in the engagement letter
for an audit?
a. A description of the responsibilities of client personnel to provide
assistance.
b. An indication of the amount of the audit fee.
c. A description of the limitations of an audit.
d. A listing of the client's branch offices selected for testing.
4. Which portion of an audit is least likely to be completed before the balance sheet
date?
a. Tests of controls.
b. Issuance of an engagement letter.
c. Substantive procedures.
d. Assessment of control risk.
5. Which of the following should the auditors obtain from the predecessor auditors
before accepting an audit engagement?
a. Analysis of balance sheet accounts.
b. Analysis of income statement accounts.
c. All matters of continuing accounting significance.
d. Facts that might bear on the integrity of management.
6. As one step in testing sales transactions, a CPA traces a random sample of sales
journal entries to debits in the accounts receivable subsidiary ledger. This test
provides evidence as to whether:
a. Each recorded sale represents a bona fide transaction.
b. All sales have been recorded in the sales journal.
c. All debit entries in the accounts receivable subsidiary ledger are properly
supported by sales journal entries.
d. Recorded sales have been properly posted to customer accounts.
7. The primary objective of tests of details of transactions performed as substantive
procedures is to:
a. Comply with generally accepted auditing standards.
b. Attain assurance about the reliability of the accounting system.
c. Detect material misstatements in the financial statements.
d. Evaluate whether management's policies and procedures are operating
effectively.
8. The risk that the auditors will conclude, based on substantive procedures, that a
material misstatement does not exist in an account balance when, in fact, such
misstatement does exist is referred to as
a. Business risk.
b. Engagement risk.
c. Control risk.
d. Detection risk.
9. Which of the following elements underlies the application of generally accepted
auditing standards, particularly the standards of fieldwork and reporting?
a. Adequate disclosure.
b. Quality control.
c. Materiality and audit risk.
d. Client acceptance.
10. Which of the following best describes what is meant by the term "fraud risk
factor"?
a. Factors that, when present, indicate that risk exists.
b. Factors often observed in circumstances where frauds have occurred.
c. Factors that, when present, require modification of planned audit
procedures.
d. Weaknesses in internal control identified during an audit.
11. Three conditions generally are present when fraud occurs. Select the one below
that is not one of those conditions.
a. Incentive or pressure.
b. Opportunity.
c. Supervisory position.
d. Attitude.
12. Which of the following is most likely to be an overall response to fraud risks
identified in an audit?
a. Supervise members of the audit team less closely and rely more upon
judgment.
b. Use less predictable audit procedures.
c. Use only certified public accountants on the engagement.
d. Place increased emphasis on the audit of objective transactions rather
than subjective transactions.
13. Which of the following statements best describes assurance services?
a. Independent professional services that are intended to enhance credibility of
information to meet the needs of an intended user.
b. Services designed to express an opinion on the fairness of historical financial
statements based on the results of an audit.
c. The preparation of financial statements or the collection, classification, and
summarization of other financial information.
d. Services designed for the improvement of operations, resulting in better
outcomes.
14. Which of the following is not an assurance service?
a. Examination of prospective financial information
b. Audit of historical financial statements
c. Review of financial statements
d. Compilation of financial information
15. What level of assurance is provided by the auditor in an audit engagement?
a. Absolute
b. High, but not absolute
c. Moderate
d. No assurance
16. In an engagement to perform agreed-upon procedures, an auditor is engaged to
a. Carry out those procedures of an audit to which the auditor and the entity and
any appropriate third parties have agreed and to report on factual findings.
b. Use accounting expertise as opposed to auditing expertise to collect, classify
and summarize financial information.
c. Provide a moderate level of assurance that the information is free of material
misstatement.
d. Provide a high, but not absolute, level of assurance that the information is free
of material misstatement.
17. The purpose of an audit of financial statements is to
a. Relieve management or those charged with governance of the responsibility
for the preparation and presentation of the financial statements.
b. Obtain an absolute level of assurance that the financial statements as a whole
are free from material misstatement.
c. Enhance the degree of confidence of intended users in the financial
statements.
d. Assure the future viability of the entity by expressing an opinion on the entity’s
financial statements.
18. The primary reason for a financial statement audit by an independent CPA is to
a. Provide increased assurance to users as to the fairness of the financial
statements.
b. Guarantee that there are no misstatements in the financial statements and
ensure that any fraud will be discovered.
c. Satisfy governmental regulatory requirements.
d. Relieve management of responsibility for the financial statements.
19. A pervasive characteristic of a CPA’s role in a consulting services engagement is
that of being a (an)
a. Independent practitioner
b. Computer expert
c. Confidential reviewer
d. Objective adviser
20. Before an effectiveness audit can be performed, there must be
a. Specific criteria developed to define effectiveness
b. A compliance audit performed by a government auditor
c. A review performed by either an independent or internal auditor
d. A financial statement audit by an independent auditor
II. COMPUTATION: Solve the following 8 problems and write your solutions clearly,
showing all work necessary for your solution.