1.

In assessing whether to accept a client for an audit engagement, an auditor should consider the

I. Client's business risk

II. Auditor's business risk

A. I only

B. II only

C. Both I and II

D. Neither I nor II

Answer: C

2. Which of the following conditions most likely would pose the greatest risk in accepting a new audit
engagement?

A. There will be a client-imposed scope limitation.

B. The client's financial reporting system has been in place for 10 years.

C. The firm will have to hire an expert in one audit area.

D. Staff will need to be rescheduled to cover this new client.

Answer: A

3. Which of the following is not correct regarding the communications between successor/incoming and
predecessor/previous auditors?

A. The burden of initiating the communication rests with the predecessor auditor.

B. The burden of initiating the communication rests with the successor auditor.

C. The predecessor auditor may choose to provide a limited response to a successor auditor.

D. The predecessor auditor must receive his/her former client's permission prior to disclosing client
information to the auditor.

Answer: A
4. The auditor may accept or continue an audit engagement only when the basis upon which it is to be
performed has been agreed, through

I. Establishing whether the preconditions for an audit are present.

II. Confirming that there is a common understanding between the auditor and management and, where
appropriate, those charged with governance of the terms of the audit engagement.

A. I only

B. II only

C. Both I and II

D. Neither I nor II

Answer: C

5. The auditor shall agree the terms of the audit engagement with management or those charged with
governance, as ap-propriate. The agreed terms shall be recorded in a/an

A. Engagement letter

B. Letter of audit inquiry

C. Management representation letter

D. Confirmation letter

Answer: A

6. Which of the following statements would least likely appear in an auditor's engagement letter?

A. Our audit will be made with the objective of our expressing an opinion on the financial statements.

B. We remind you that the responsibility for the preparation of financial statements including adequate
disclosure is that of the management of the entity.

C. After performing our preliminary analytical procedures, we will discuss with you the other procedures
we consider necessary to complete the engagement.

D. Our fees, which will be billed as work progresses, are based on the time required by the individuals
assigned. to the engagement plus out-of-pocket expenses.

Answer: C
7. If the auditor is unable to agree to a change of the engagement and is not permitted to continue the
original engagement, the auditor should

A. Insist on continuing the original engagement.

B. Express a qualified opinion.

C. Express an adverse opinion.

D. Withdraw from the engagement.

Answer: D

8. In the planning stage of an audit engagement, the auditor is required to perform audit procedures to
obtain an understanding of the entity and its environment, including its internal control. These
procedures are called

A. Risk assessment procedures

B. Substantive tests

C. Tests of controls

D. Dual-purpose tests

Answer: A

9. In connection with the planning phase of an audit engagement, which of the following statements is
always correct?

A. Final staffing decisions must be made prior to completion of the planning stage.

B. Observation of inventory count should be performed at year-end.

C. A portion of the audit of a continuing audit client can be performed at interim dates.

D. An engagement should not be accepted after the client's financial year-end.

Answer: C
10. It is an appraisal activity established within an entity. Its functions include, among other things,
examining, evaluating, and monitoring the adequacy and effectiveness of the accounting and internal
control systems.

A. External auditing

B. Internal auditing

C. Governmental auditing

D. Internal control

Answer: B

11. Which is not a similarity between external and internal auditors?

A. Both consider materiality and risk in their work.

B. Both use similar methodologies in performing their work.

C. Both must be competent.

D. Both must be independent of the company.

Answer: D

12. The auditor's risk assessment procedures should always include the following, except

A. Inquiries of management and of others within the entity.

B. Analytical procedures.

C. Observation and inspection.

D. Substantive test procedures and tests of controls.

Answer: D

13. Which of the following statements concerning analytical procedures is true?

A. Analytical procedures are more efficient, but not more effective, than tests of details of transactions.

B. Analytical procedures used as risk assessment procedures use data aggregated at a high level.
C. Analytical procedures can replace tests of controls in gathering audit evidence to support the assessed
level of control risk.

D. Analytical procedures usually involve comparisons of ratios developed from recorded amounts with
ratios developed by management.

Answer: B

14. Analytical procedures used in planning an audit should focus on

A. Enhancing the auditor's understanding of the client's business.

B. Evaluating the adequacy of evidence gathered concerning unusual balances.

C. Identifying significant deficiencies in internal control.

D. Testing individual account balances that depend on accounting estimates.

Answer: A

15. Analytical procedures performed in the

A. Planning stage of the audit should assist in assessing the validity of the conclusions reached.

B. Planning stage of the audit should address the risk of material misstatement of revenue due to
fraudulent financial reporting.

C. Final review stage of the audit should achieve audit objectives related to specific assertions in the
financial statements.

D. Final review stage of the audit should focus on identifying specific risks.

Answer: B

16. When an entity's internal control is functioning effectively, management can expect various benefits.
The benefit least likely to occur is

A. Some assurance of compliance with laws and regulations.

B. Availability of reliable data for decision-making purposes.

C. Reduced cost of an external audit.

Answer: D

17. Internal controls should be designed to provide reasonable assurance that

A. Management's planning, organizing, and directing processes are properly evaluated.

B. Management's plans have not been circumvented by employee collusion.

C. Material errors or fraud will be prevented, or detected and corrected, within a timely period by
employees in the course of performing their assigned duties.

D. The internal auditing department's guidance and oversight of management's performance is

Answer: C

18. Proper segregation of duties reduces the opportunities for persons to be in positions to both

A. Establish internal control and authorize transactions.

B. Perpetrate and conceal errors or fraud.

C. Record cash receipts and cash disbursements.

D. Record transactions and prepare financial statements.

Answer: B

19. Control activities include those that relate to physical controls over access to and use of assets and
records. A departure from the purpose of physical controls is that

A. The mail room clerk compiles a list of the checks received in the incoming mail.

B. Access to safe-deposit box requires two officers.

C. Only warehouse personnel and production supervisors have access to raw materials storeroom.

D. Only sales personnel use sales department vehicles.

Answer: A
20. In evaluating the effectiveness of the design of an entity's internal control system in order to make a
preliminary assessment of control risk for an assertion the auditor has to

I. Identify potential misstatements that could occur in the entity's assertion.

II. Identify the necessary controls that would be likely to prevent or detect the material misstatements.

III. Evaluate the evidence and makes the assessment.

A. I and II only

C. Il and III only

B. I and III only

D. I, II and III

Answer: D

21. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk
that

A. Material misstatements may exist in the financial statements.

B. Specified controls requiring segregation of duties may be circumvented by collusion.

C. Entity's control may be overridden by management.

D. Tests of controls may fail to identify procedures relevant to assertions.

Answer: A

22. Effective internal controls over inventories are designed and implemented for the following reasons,
except

A. Inventories typically represent a large component of an entity's current assets.

B. Inventories are the most liquid asset.

C. Inventories directly affect the financial performance of an entity.

D. Inventories typically represent a large portion of an entity's total assets.

Answer: B
23. Audit documentation may be recorded on paper or on electronic or other media. The following are
examples of audit documentation, except

A. Audit programs

B. Letters of confirmation and representation

C. Correspondence (including e-mail) concerning significant matters

D. The entity's accounting records

Answer: D

24. Audit evidence is information used to draw reasonable conclusions on which to base the auditor's
opinion. Audit evidence is obtained by performing

I. Risk assessment procedures

II. Further audit procedures

A. I only

B. II only

C. Either I or II

D. Both I and II

Answer: D

25. Which of the following forms of documentary evidence would be considered the most reliable by an
auditor?

A. Internally generated

B. Prenumbered

C. Easily duplicated

D. Authorized by a responsible official

Answer: D
26. The auditor shall assemble the audit documentation in a/an

A. Working paper

B. Workpaper

C. Audit file

D. Audit memorandum

Answer: C

27. The auditor should apply analytical procedures

I. As risk assessment procedures.

II. As substantive procedures.

III. In the overall review at the end of the audit.

A. I and II only

B. II and III only

C. I and III only

D. I, II, and III

Answer: C

28. All of the following are examples of substantive procedures to verify the valuation of net accounts
receivable, except

A. Comparison of the allowance for bad debts with past records.

B. Re-computation of the allowance for bad debts.

C. Inspection of the aging schedule and credit records of past due accounts.

D. Inspection of accounts for current versus noncurrent status in the statement of financial position.

Answer: D
29. Which of the following elements ultimately determines the specific auditing procedures that are
necessary in the circumstances to afford a reasonable basis for an opinion?

A. Materiality

B. Audit risk

C. Auditor judgment

D. Reasonable assurance

Answer: C

30. Substantive procedures for payroll transactions and balances primarily focus on analytical procedures
to identify unexpected fluctuations in recurring payroll entries. Which of the following is an appropriate
analytical procedure for payroll?

A. Reconcile the payroll bank account.

B. Compare the relationship of hours worked and payroll with that of the preceding year.

C. Inspect authorization on time cards.

D. Compare authorized wage rates with payroll records.

Answer: B