I. Multiple Choice
1. Which of the following is the essential purpose of the audit function?
A. Detection of fraud
B. Examination of individual transactions to certify as to their validity
C. Determination of whether the client's financial statement assertions are fairly stated
D. Assurance of the consistent application of correct accounting procedures

2. The engineering department at Omni Company built a piece of equipment in the company's own shop for use in the company's operations. When looking at the ending balance for the fixed asset account the auditor examined all work orders, purchased materials, labor cost reports, and applied overhead that were capitalized as part of the equipment costs. Which of the following is the ASB balance assertion most closely related to the auditor's testing?
A. Existence
B. Completeness
C. Rights and obligations
D. Valuation

3. In performing an attestation engagement, a CPA typically
A. Supplies litigation support services
B. Assesses control risk at a low level
C. Expresses a conclusion on subject matter or an assertion about the subject matter
D. Provides management consulting advice

4. The Sarbanes-Oxley Act of 2002 requires that the key company officials certify the financial statements. Certification means that the company CEO and CFO must sign a statement indicating:
A. They have read the financial statements
B. They are not aware of any false or misleading statements (or any key omitted disclosures)
C. They believe that the financial statements present an accurate picture of the company's financial condition.
D. All of the above

5. Control risk is
A. The probability that a material misstatement could not be prevented or detected by the entity's internal control policies and procedures
B. The probability that a material misstatement could occur and not be detected by auditors' procedures
C. The risk that auditors will not be able to complete the audit on a timely basis
D. The risk that auditors will not properly control the staff on the audit engagement

6. An audit of the financial statements of Camden Corporation is being conducted by external auditors. The external auditors are expected to:
A. Certify the correctness of Camden's financial statements
B. Make a 100% examination of Camden's records
C. Give an opinion on the fair presentation of Camden's financial statements in conformity with generally accepted accounting principles
D. Give an opinion on the attractiveness of Camden for investment purposes and critique the wisdom and legality of its business decisions

7. Which of the following procedures would provide the most reliable audit evidence?
A. Inquiries of the client's internal audit staff held in private
B. Inspection of prenumbered client purchase orders filed in the vouchers payable department
C. Analytical procedures performed by auditors on the client's trial balance
D. Inspection of bank statements obtained directly from the client's financial institution

8. Which of the following would most likely be a violation of the independence standard under generally accepted auditing standards?
A. An auditor on the engagement has a distant relative who is employed by a vendor that does a significant amount of business with clients
B. The client's Chief Executive Officer graduated from the same university as the partner in charge of the accounting firm
C. An auditor on the engagement owns a small financial interest in the stock of the client
D. The client provides financial support to a number of charitable causes that also receive support from the accounting firm

9. The standard auditors' report refers to GAAS and GAAP in which paragraph?
A. GAAS: Scope only; GAAP: Opinion only
B. GAAS: Introductory only; GAAP: Scope and opinion
C. GAAS: Introductory and scope; GAAP: Opinion only
D. GAAS: Introductory only; GAAP: All paragraphs

10. Which of the following statements is not true with respect to the evidence that would be gathered when assessments of control risk are high?
A. Auditors would be required to rely on external (rather than internal) forms of evidence
B. Auditors would be required to perform procedures at interim periods, rather than at year end
C. Auditors would be required to confirm a larger number of customer accounts receivable balances
D. Auditors would be required to obtain more evidence through direct personal observation

11. Which reporting options do auditors have if the client's financial statements are not presented according to GAAP?
A. Unqualified or disclaimer of opinion
B. Qualified or disclaimer of opinion
C. Unqualified or adverse
D. Qualified or adverse

12. Certain conditions and circumstances are often present with management fraud. Which of the following is not such a condition or circumstance?
A. Unfavorable industry conditions
B. Lack of working capital
C. High liquidity
D. Slow customer collections

13. Which of the following statements best describes auditors' responsibility to detect errors and frauds?
A. Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements
B. Auditors are responsible to detect material errors, but have no responsibility to detect material frauds that are concealed through employee collusion or management override of the internal control structure
C. Auditors have no responsibility to detect errors and frauds unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated
D. Auditors have no responsibility to detect errors and frauds because an auditor is not an insurer and an audit does not constitute a guarantee

14. The probability that an audit team will give an inappropriate opinion on financial statements best describes
A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk

15. If control risk increases, and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct?
A. Detection risk will decrease
B. Inherent risk will increase
C. Audit risk will decrease
D. Detection risk will increase

16. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. Financial statements to the potentially unrecorded items
B. Potentially unrecorded items to the financial statement
C. Accounting records to the supporting evidence
D. Supporting evidence to the accounting records

17. In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design audit procedures that would be expected to detect misstatements that aggregate
A. $10,000
B. $15,000
C. $20,000
D. $30,000

18. Which of the following pieces of information discovered by an auditor when performing substantive tests of account balances would most likely raise red flags about the possible existence of material fraudulent financial reporting?
A. Paper copies of paid invoices and cancelled checks are microfiched and then destroyed
B. The controller requires that you schedule any audit inquiries for after lunch each day, not in the morning
C. The petty cash fund custodian never takes a vacation
D. The client's estimate of the allowance for doubtful accounts is lower than the auditor's independent evaluation of the allowance

19. Factors that should be considered when evaluating audit risk in a functional area include:
Volume of transactions.
Degree of system integration.
Years since last audit.
Significant management turnover.
(Dollar) value of assets at risk.
Average value per transaction.
Results of last audit.
Factors that best define the materiality of audit risk are
A. 1 through 7
B. 2, 4, and 7
C. 1, 5, and 6
D. 3, 4, and 6

20. When an auditor increases the planned assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the
A. Extent of substantive tests of details
B. Level of inherent risk
C. Extent of tests of controls
D. Level of detection risk

21. To exercise due care, an accountant should
A. Take continuing professional education classes.
B. Report whether the financial statements are in accordance with GAAP.
C. Gather enough audit evidence to have complete assurance that there is enough support for the accountant’s opinion on the financial statements.
D. Conduct the engagement in accordance with GAAS and ensure that the engagement is completed on a timely basis.

22. The primary purpose for obtaining an understanding of the entity’s environment (including its internal control) in a financial statement audit is
A. To determine the nature, timing, and extent of further audit procedures to be performed.
B. To make consulting suggestions to the management.
C. To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements.
D. To determine whether the entity has changed any accounting principles.

23. The most persuasive evidence regarding the existence of newly acquired computer equipment is
A. Inquiry of management.
B. Documentation prepared externally.
C. Observation of auditee’s procedures.
D. Physical observation.

24. Which of the following concepts is least related to the standard of due care?
A. Independence in fact.
B. Professional skepticism.
C. Prudent auditor.
D. Reasonable assurance.

25. Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients?
A. Acceptance and continuance of clients.
B. Engagement performance.
C. Monitoring.
D. Relevant ethical requirements.

26. The risk that the auditors’ own procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is
A. Audit risk.
B. Inherent risk.
C. Control risk.
D. Detection risk.

27. An audit plan contains
A. Specifications of audit standards relevant to the financial statements being audited.
B. Specifications of procedures the auditors believe appropriate for the financial statements under audit.
C. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached.
D. Reconciliation of the account balance in the financial statements with the account balances in the client’s general ledger.

28. Which of the following is a specific procedural response to a particular fraud risk in an account balance or class of transactions?
A. Exercising more professional skepticism.
B. Carefully avoiding conducting interviews with people in the fraud-rich areas.
C. Performing procedures such as inventory observation and cash counts on a surprise or unannounced basis.
D. Studying management’s selection and application of accounting principles more carefully.

29. One of the typical characteristics of management fraud is
A. Falsification of documents in order to misappropriate funds from an employer.
B. Victimization of investors through the use of materially misleading financial statements.
C. Illegal acts committed by management to evade laws and regulations.
D. Conversion of stolen inventory to cash deposited in a falsified bank account.

30. When the audit team becomes aware of an illegal act committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to
A. Recommend remedial actions to the audit committee.
B. Evaluate the effect of the illegal act on the financial statements.
C. Determine whether to contact law enforcement officials.
D. Determine whether other similar acts could have occurred.

II. Matching Problem
1. Auditors are auditing the warehouse of Huge Lots Corporation. The auditors performed the audit procedures listed 1 – 5. For each audit procedure select the ASB balance assertion that is most likely being tested.
A. Existence
B. Rights and obligations
C. Completeness
D. Accuracy
E. Valuation
______ 1. The auditors walked through the warehouse looking for obsolete inventory
______ 2. The auditors compared invoices received from suppliers with the cost of inventory listed in the inventory accounts.
______ 3. The auditors reviewed purchase orders to determine if any inventory was on consignment.
______ 4. The auditors reviewed vendor invoices to determine if freight costs, taxes, tariffs or other costs had been included in inventory costs
______ 5. The auditors selected items from the inventory and reviewed inventory records to ensure these items were included in those records.

2. For each of the matters below, indicate through the appropriate letter the group of generally accepted auditing standards to which the matter is most closely related.
A. General standards
B. Standards of field work
C. Standards of reporting
(1) The mental attitude and impartiality of auditors.
(2) Auditors' overall conclusion of the fairness of the client's financial statements.
(3) The use of an audit program to identify audit procedures to be performed during the engagement.
(4) Auditors' assessment of control risk after performing tests of controls.
(5) Accounting firm policies with respect to the level of expected continuing professional education.
(6) Client's disclosure of all pending litigation against the client at year end.
(7) The hierarchical review process used to evaluate the appropriateness of audit documentation prepared by assistants.
(8) Auditors' requests to obtain bank statements directly from institutions with whom the client does business.
(9) The client's use of accounting principles that are consistent with those used in prior years.
(10) Actions taken by auditors to communicate their level of involvement with and responsibility assumed for the client's financial statements.

3. For each of the following statements or phrases, indicate by letter the professional standard to which it relates.
A. SAS 99: "Consideration of Fraud in a Financial Statement Audit"
B. SAS 54: "Illegal Acts by Clients"
C. SAS 57: "Auditing Accounting Estimates"
D. SAS 114 "The Auditor's Communication with Those Charged with Governance"
___1. Disagreements with management on significant accounting and auditing matters.
___2. Investigate large and unusual transactions, particularly those that occur at or near year-end.
___3. Make inquiries about management's policies and procedures for compliance with laws and regulations.
___4. Evaluate the net realizable value of inventory.

4. Distinguish between attestation standards and generally accepted auditing standards by identifying and describing major differences between the two sets of standards.

5. List 4 key differences between pre-SOX and post-SOX regarding SEC’s internal control requirement and audit regulation.

I. Multiple Choice 1. Which of the following is the essential pur...