Drill 1

1.
The risk that an auditor will conclude, based on substantive tests, that a material
misstatement does not exist in an account balance when, in fact, such misstatement does
exist is referred to as
a. Sampling risk
b. Detection risk
c. Non-sampling risk
d. Inherent risk
2. Which of the following is an example of fraudulent financial reporting?

a. Company management changes inventory count tag and overstates ending
inventory, while understating cost of goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions
by debiting an expense account, thus overstating expenses.
c. An employee steals inventory and the “shrinkage” is recorded in cost of goods sold.
d. An employee steals small tools from the company and neglects to return them; the cost
is reported as a miscellaneous operating expense.
3. An attitude that includes a questioning mind and a critical assessment of audit evidence
is referred to as
a. Due professional care.
b. Professional skepticism.
c. Reasonable assurance.
d. Supervision.
4. Individuals who commit fraud are ordinarily able to rationalize the act and also have an
Incentive Opportunity
a. Yes Yes
b. Yes No
c. No Yes
d. No No
5. Which of the following would be least likely to be considered an audit planning procedure?
a. Use an engagement letter.
b. Develop the overall audit strategy.
c. Perform risk assessment.
d. Develop the audit plan.
6. An engagement letter should ordinarily include information on the objectives of the

engagement and
CPA responsibilities Client responsibilities Limitation of engagement
a. Yes Yes Yes
b. Yes No Yes
c. Yes No No
d. No No No
7. The auditor should document the understanding established with a client through a(n)
a. Oral communication with the client.
b. Written communication with the client.
c. Written or oral communication with the client.
d. Completely detailed audit plan.
8. Audit plans should be designed so that
a. Most of the required procedures can be performed as interim work.
b. Inherent risk is assessed at a sufficiently low level.
c. The auditor can make constructive suggestions to management.
d. The audit evidence gathered supports the auditor’s conclusions.
9. In designing written audit plans, an auditor should establish specific audit objectives that
relate primarily to the
a. Timing of audit procedures.
b. Cost-benefit of gathering evidence.
c. Selected audit techniques.
d. Financial statement assertions.
10. To obtain an understanding of a continuing client’s business, an auditor most likely would
a. Perform tests of details of transactions and balances.
b. Review prior year working papers and the permanent file for the client.
c. Read current issues of specialized industry journals.
d. Reevaluate the client’s internal control environment.
11. An auditor obtains knowledge about a new client’s business and its industry to
a. Make constructive suggestions concerning improvements to the client’s internal control.
b. Develop an attitude of professional skepticism concerning management’s financial
statement assertions.
c. Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.
d. Understand the events and transactions that may have an effect on the client’s
financial statements.
12. A successor auditor should request the new client to authorize the predecessor auditor to
allow a review of the predecessor’s
Engagement letter Working papers
a. Yes Yes
b. Yes No
c. No Yes
d. No No
13. Analytical procedures used during risk assessment in an audit should focus on
a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditor’s understanding of the client’s business.
d. Assessing the adequacy of the available evidence.
14. A primary purpose of performing analytical procedures as risk assessment procedures is

to identify the existence of
a. Unusual transactions and events.
b. Illegal acts that went undetected because of internal control weaknesses.
c. Related-party transactions.
d. Recorded transactions that were not properly authorized.
15. Which of the following are considered further audit procedures that may be designed after
assessing the risks of material misstatement?
Substantive tests of details Risk assessment procedures
a. Yes Yes
b. Yes No
c. No Yes
d. No No
16. Which of the following is least likely to be considered a risk assessment procedure?
a. Analytical procedures.
b. Confirmation of ending accounts receivable.
c. Inspection of documents.
d. Observation of the performance of certain accounting procedures.
17. Which of the following statements is correct about the auditor’s use of the work of a
specialist?
a. The specialist should not have an understanding of the auditor’s corroborative use of
the specialist’s findings.
b. The auditor is required to perform substantive procedures to verify the specialist’s
assumptions and findings.
c. The client should not have an understanding of the nature of the work to be performed
by the specialist.
d. The auditor should obtain an understanding of the methods and assumptions
used by the specialist.
18. Proper segregation of functional responsibilities calls for separation of the functions of
a. Authorization, execution, and payment.
b. Authorization, recording, and custody.
c. Custody, execution, and reporting.
d. Authorization, payment, and recording.
19. Which of the following is not a component of an entity’s internal control?

a. Control risk.
b. Control activities.
c. Monitoring.
d. Control environment.
20. A primary objective of procedures performed to obtain an understanding of internal

control is to provide an auditor with
a. Knowledge necessary to assess the risks of material misstatements.
b. Evidence to use in assessing inherent risk.
c. A basis for modifying tests of controls.
d. An evaluation of the consistency of application of management’s policies.
21. In obtaining an understanding of an entity’s internal control, an auditor is required to
obtain knowledge about the
Operating effectiveness of controls Design of controls
a. Yes Yes
b. No Yes
c. Yes No
d. No No
22. An auditor assesses control risk because it
a. Is relevant to the auditor’s understanding of the control environment.
b. Provides assurance that the auditor’s materiality levels are appropriate.
c. Indicates to the auditor where inherent risk may be the greatest.
d. Affects the level of detection risk that the auditor may accept.

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1.

2. Which of the following is an example of fraudulent financial reporting?

6. An engagement letter should ordinarily include information on the objectives of the

14. A primary purpose of performing analytical procedures as risk assessment procedures is

19. Which of the following is not a component of an entity’s internal control?

20. A primary objective of procedures performed to obtain an understanding of internal

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