1. According to PSA 400, which of the following is correct regarding internal
control system?
a. Internal control system refers to all the policies and procedures
adopted by the auditor to assist in achieving management’s
objective.
b. A strong environment, by itself, ensure the effectiveness of the
internal control system.
c. In the audit of financial statements, the auditor is only concerned
with those policies and procedures within the accounting and
internal control systems that are relevant to the financial
statements.
d. The internal control system is confined to those matters which
relate directly to the functions of the accounting system.
2. Which of the following is correct about internal control?
a. Accounting and internal control systems provide management
with conclusive evidence that objectives are reached.
b. One of the inherent limitations of accounting and internal control
systems is the possibility that the procedures may become
inadequate due to changes in conditions, and compliance with
procedures may deteriorate.
c. Most internal controls tend to be directed at non-routine
transactions.
d. Management does not consider costs of the accounting and
internal control systems.
3. Corporate directors, management, external auditors, and internal
auditors all play important roles in creating a proper control environment.
Top management is primarily responsible for
a. Establishing a proper environment and specifying overall internal
control.
b. Reviewing the reliability and integrity of financial information and
the means used to collect and report such information.
c. Ensuring that external and internal auditors adequately monitor
the control environment.
d. Implementing and monitoring controls designed by the board of
directors.
4. Which of the following best describe the interrelated components of
internal control?
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a. Organizational structure, management philosophy, and planning.
b. Control environment, risk assessment, control activities,
information and communication systems, and monitoring.
c. Risk assessment, backup facilities, responsibility accounting and
natural laws.
d. Legal environment of the firm, management philosophy, and
organizational structure.
5. In an audit of financial statements, an auditor’s primary consideration
regarding a control is whether it
a. Reflects management’s philosophy and operating style.
b. Affects management’s financial statement assertions.
c. Provides adequate safeguards over access to assets.
d. Enhances management’s decision-making processes.
6. Effective internal control
a. Eliminates risk and potential loss to the organization.
b. Cannot be circumvented by management.
c. Is unaffected by changing circumstances and conditions
encountered by the organization.
d. Reduces the need for management to review exception reports
on a day-to-day basis.
7. Which of the following statements about internal control is correct?
a. Properly maintained internal controls reasonably assure that
collusion among employees cannot occur.
b. Establishing and maintaining internal control is the internal
auditor’s responsibility.
c. Exceptionally strong control allows the auditor to eliminate
substantive tests.
d. The cost-benefit relationship should be considered in designing
internal control.
8. The ultimate purpose of assessing control risk is to contribute to the
auditor’s evaluation of the risk that
a. Tests of controls may fail to identify controls relevant to
assertions.
b. Material misstatements may exist in the financial statements.
c. Specified controls requiring segregation of duties may be
circumvented by collusion.
d. Entity policies may be overridden by senior management.
9. A proper understanding of the client’s internal control is an integral part
of the audit planning process. The results of the understanding
a. Must be reported to the shareholders and the SEC.
b. Bear no relationship to the extent of substantive testing to be
performed.
c. Are not reported to client management.
d. May be used as the basis for withdrawing from an audit
engagement.
10. An entity should consider the cost of a control in relationship to the risk.
Which of the following controls best reflects this philosophy for a large
peso investment in heavy machine tools?
a. Conducting a weekly physical inventory.
b. Placing security guards at every entrance 24 hours a day.
c. Imprinting a controlled identification number on each tool.
d. Having all dispositions approved by the vice president of sales.
11. Audit evidence concerning segregation of duties ordinarily is best
obtained by
a. Performing tests of transactions that corroborate management’s
financial statement assertions
b. Observing the employees as they apply specific controls.
c. Obtaining a flowchart of activities performed by available
personnel.
d. Developing audit objectives that reduce control risk.
12. Which of the following statements about preliminary assessment of
control risks is correct?
a. After obtaining an understanding of the accounting and internal
control systems, the auditor should make a preliminary
assessment of control risks, at the assertion level, for all accounts
or transaction classes.
b. The preliminary assessment of control risk can be done only after
completing tests of controls.
c. The preliminary assessment of control risk for a financial assertion
is normally low, unless the auditor is able to identify weaknesses
that may indicate ineffectiveness of accounting and internal
control system.
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d. The auditor ordinarily assesses control risk at high level for some
or all assertions when it is not cost efficient to do tests of
controls.
13. Which of the following statements concerning control risk is correct?
a. When control risk is at the maximum level, an auditor is required
to document the basis for that assessment.
b. Control risk may be assessed sufficiently low to eliminate
substantive testing for significant transaction classes.
c. When assessing control risk, an auditor should not consider
evidence obtained in prior audits about the operation of controls.
d. Assessing control risk and obtaining an understanding of an
entity’s internal control may be performed concurrently.
14. Based on a consideration of internal control completed at an interim date,
the auditor assessed control risk at a low level and performed interim
substantive tests. The records and procedures would most likely be tested
again at year-end if
a. Tests of controls were not performed by the internal auditor
during the remaining period.
b. Internal control provides a basis for limiting the extent of
substantive testing.
c. The auditor used nonstatistical sampling during the interim
period testing of controls.
d. Inquiries and observations lead the auditor to believe that
conditions have changed.
15. Although substantive tests may support the accuracy of underlying
records, these tests frequently provide no affirmative evidence of
segregation of duties because
a. Substantive tests rarely guarantee the accuracy of the records if
only a person who performs incompatible functions.
b. The records may be accurate even though they are maintained by
a person who performs incompatible functions.
c. Substantive tests relate to the entire period under audit, but tests
of controls ordinarily are confined to the period during which the
auditor is on the client’s premises.
d. Many computerized procedures leave no audit trail of who
performed them, so substantive tests may necessarily be limited
to inquiries and observation of office personnel.
16. After obtaining an understanding of internal control and assessing control
risk, an auditor decided not to perform additional tests of controls. The
auditor most likely concluded that the
a. Additional evidence to support a further reduction in control risk
was not cost-beneficial to obtain.
b. Assessed level of inherent risk exceeded the assessed level of
control risk.
c. Internal control was properly designed and justifiably may be
relied on.
d. Evidence obtainable through tests of controls would not support
an increased assessment of control risk.
17. The objective of tests of details of transactions performed as tests of
controls is to
a. Monitor the design and use of entity documents such as
prenumbered shipping form
b. Determine whether controls have been placed in operation.
c. Detect material misstatements in the account balances of the
financial statements.
d. Evaluate whether controls operated effectively.
18. An auditor wishes to perform tests of controls on a client’s cash
disbursements procedures. If the controls leave no audit trail of
documentary evidence, the auditor most likely will test the procedures by
a. Confirmation and observation.
b. Observation and inquiry.
c. Analytical procedures and confirmation.
d. Inquiry and analytical procedures
19. Which of the following would not be a method used to conduct tests of
controls?
a. Inquiry c. Confirmation
b. Walkthrough d. Observation
20. The auditor is examining copies of sales invoices only for the initials of the
person responsible for checking the extensions. This is an example of a
a. Test of controls c. Dual purpose test
b. Substantive test d. Test of balances
21. The element of the audit planning process most likely to be agreed upon
with the client before implementation of the audit strategy is the
determination of the
a. Timing of inventory observation procedures to be performed.
b. Evidence to be gathered to provide a sufficient basis for the
auditor's opinion.
c. Procedures to be undertaken to discover litigation, claims, and
assessments.
d. Pending legal matters to be included in the inquiry of the client's
attorney.
22. When a CPA is approached to perform an audit for the first time, the CPA
should make inquiries of the predecessor auditor. This is a necessary
procedure because the predecessor may be able to provide the successor
with information that will assist the successor in determining
a. Whether the predecessor's work should be utilized.
b. Whether the company follows the policy of rotating its auditors.
c. Whether, in the predecessor's opinion, internal control of the
company has been satisfactory.
d. Whether the engagement should be accepted.
23. Having evaluated inherent risk and control risk, the auditor determines
detection risk
a. As the complement of overall audit risk.
b. By performing substantive audit tests.
c. As a product of further study of the business and industry and
application of analytical procedures.
d. At a level that equates the joint probability of inherent risk,
control risk, and detection risk with overall audit risk.
24. Which of the following is not a factor that affects the auditor's judgment,
during audit planning, as to the quantity, type, and content of working
papers?
a. The auditor's preliminary assessment of control risk.
b. The auditor's preliminary evaluation of inherent risk based on
discussions with the client.
c. The nature of the client’s business.
d. The type of report to be issued by the auditor.
25. How can the audit program best be described at the beginning of the
audit process?
a. Tentative. c. Comprehensive.
b. Conclusive. d. Optional.
26. The auditor's analytical procedures will be facilitated if the client

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 a. Uses a standard cost system that produces variance reports.
b. Segregates obsolete inventory before the physical inventory
count.
c. Corrects material weaknesses in internal control before the
beginning of the audit.
d. Reduces inventory balances to the lower of cost or net realizable
value.
27. Experience has shown that certain conditions in an organization are
symptoms of possible management fraud. Which of the following
conditions would not be considered an indicator of possible fraud?
a. Managers regularly assuming subordinates' duties.
b. Managers dealing in matters outside their profit center's scope.
c. Managers not complying with corporate directives and
procedures.
d. Managers subject to formal performance reviews on a regular
basis.
28. Which of the following underlies the application of generally accepted
auditing standards, particularly the standards of field work and reporting?
a. The elements of materiality and relative risk.
b. The element of internal control.
c. The element of corroborating evidence.
d. The element of reasonable assurance.
29. Which of the following is not a purpose served by the application of
analytical procedures?
a. As part of audit planning to assist in locating significant changes in
revenues and expenses.
b. To provide a basis for lowering materiality thresholds where
significant earnings inflation is indicated.
c. To determine the economic substance of related party
transactions.
d. As part of audit review to determine that all significant
abnormalities have been resolved to the auditor's satisfaction.
30. The probability of an auditor's procedures leading to the conclusion that a
material error does not exist in an account balance when, in fact, such
error does exist is referred to as
a. Prevention risk. c. Control risk.
b. Inherent risk. d. Detection risk.
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31. Which of the following concepts is most useful in assessing the scope of
an auditor's program relating to various accounts?
a. Attribute sampling.
b. Materiality.
c. The reliability of information.
d. Management fraud.
32. The existence of a related party transaction may be indicated when
another entity
a. Sells real estate to the corporation at a price that is comparable
to its appraised value.
b. Absorbs expenses of the corporation.
c. Borrows from the corporation at a rate of interest which equals
the current market rate.
d. Lends to the corporation at a rate of interest, which equals the
current market rate.
33. Which of the following is an indicator of possible fraudulent financial
reporting for the purpose of inflating earnings?
a. A trend analysis discloses: (1) sales increases of 50 percent and (2)
cost of goods sold increases of 25 percent.
b. A ratio analysis discloses: (1) sales of $50 million and (2) cost of
goods sold of $25 million.
c. A cross-sectional analysis of common size statements discloses:
(1) the firm's ratio of cost of goods sold to sales is .4 and (2) the
industry average ratio of cost of goods sold to sales is .5.
d. A cross-sectional analysis of common size statements discloses:
(1) the firm's ratio of cost of goods sold to sales is .5 and (2) the
industry average ratio of cost of goods sold to sales is .4.
34. An auditor judged an item to be immaterial when planning an audit.
However, the auditor may still include the item if it is subsequently
determined that:
a. Sufficient staff is available.
b. Adverse effects related to the item are likely to occur.
c. Related evidence is reliable.
d. Miscellaneous income is affected.
35. Given that an audit in accordance with generally accepted auditing
standards is influenced by the possibility of material errors and fraud, the
auditor should conduct the audit with an attitude of
 a. Professional responsiveness. c. Professional skepticism.
b. Conservative advocacy. d. Objective judgment.
36. Adequate planning of the audit work helps the auditor of accomplishing
the following objectives, except:
a. Gathering of all corroborating audit evidence.
b. Ensuring that appropriate attention is devoted to important areas
of the audit.
c. Identifying the areas that need a service of an expert.
d. The audit work is completed efficiently.
37. The extent of planning will vary according to any of the following, except:
a. Size of the audit client.
b. Auditor’s experience with the entity and knowledge of the
business.
c. The nature and complexity of the audit engagement
d. The assessed level of control risk.
38. Which of the following is least likely considered by the auditor in
developing the overall audit plan?
a. Understanding of the accounting and internal control systems.
b. Relevant risk and materiality.
c. The involvement of other auditors in the audit of major
component of financial statements
d. The general level of competence of audit assistants.
39. Which of the following is not considered by the CPA when he makes an
overall audit plan?
a. Identification of complex accounting areas including those
involving accounting estimates.
b. The information technology used by the client.
c. The content of the representation letters.
d. The nature and timing of reports or other communication with
the entity that are expected under the engagement.
40. Which of the following statements is not correct about materiality?
a. The concept of materiality recognizes that some matters are
important for fair presentation of financial statements in
conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of
the largest aggregate level of misstatements that could be
material to any one of the financial statements.
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c. Materiality judgments are made in light of surrounding
circumstances and necessarily involve both quantitative and
qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the
auditor’s perception of the needs of a reasonable person who will
rely on the financial statements.
41. The risk that the assertion contains material misstatements that, when
aggregated with misstatements in other assertions, could make the entire
financial statements materially misstated is:
a. Individual audit risk c. Control risk
b. Inherent risk d. Detection risk
42. Which of the following will most likely help the auditor to identify and
understand the events, transactions and practices of his audit client?
a. Obtaining a sufficient knowledge of the business of his client.
b. Understanding of accounting and internal control.
c. Testing control policies and procedures.
d. Obtaining a representation letter from the client management.
43. The auditor should have or obtain a knowledge of the client’s business
sufficient to:
a. Evaluate whether the financial statements are materially
misstated.
b. Document material weaknesses in accounting and internal control
systems.
c. Identify and understand events, transactions and practices that
may have effect on financial statements.
d. Have an overall evaluation of whether financial assertions are
fairly presented in the financial statements.
44. The auditor is not expected to have
a. A particular knowledge of the economy and the industry within
which the entity operates.
b. A particular knowledge of how the entity operates.
c. A level of knowledge of business ordinarily less than that
possessed by management.
d. A knowledge of business which is used in assessing inherent and
control risk.
45. Understanding the business and using this information appropriately
assists the auditor in, except
 a. Deciding whether to do tests of controls.
b. Evaluating audit evidence.
c. Assessing risks and identifying potential problems.
d. Planning and performing the audit effectively and efficiently.
46. The basic concept of internal control which recognizes that the cost of
internal control should not exceed the benefits expected to be derived is
known as
a. Management by exception.
b. Management responsibility.
c. Limited liability.
d. Reasonable assurance.
47. Of the following control environment characteristics, identify the one that
contributes most to effective internal control
a. The audit committee consists of the president, two vice-
presidents, and the corporate controller.
b. The company does not have a centralized human resources
function.
c. The company has an effective internal audit staff that monitors
controls on a continuous basis.
d. The company routinely transacts business with related parties.
48. It would be appropriate for the payroll accounting department to be
responsible for which of the following functions?
a. Approval of employee time records.
b. Maintenance of records of employment, discharges, and pay
increases.
c. Preparation of periodic governmental reports as to employees'
earnings and withholding taxes.
d. Temporary retention of unclaimed employee paychecks.
49. The most effective control to prevent unbilled and unrecorded shipments
of finished goods is to
a. Require all outgoing shipments to be accompanied by a
prenumbered shipping order and bill of lading (signed by the
carrier). Forward a copy of these documents to accounting, to be
placed in an open file awaiting receipt of the customer invoice
copy.
b. Forward a copy of the shipping order and bill of lading to billing.
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c. Implement a policy that prevents sales invoices from being mailed
to customers in the absence of a properly approved shipping
order and bill of lading signed by the carrier.
d. Forward a copy a the signed bill of lading to the stores manager.
50. Apex Manufacturing Corporation mass produces eight different products.
The controller, who is interested in strengthening internal controls over
the accounting for materials used in production, would be most likely to
implement
a. An economic order quantity (EOQ) system.
b. A job order cost accounting system.
c. A perpetual inventory system.
d. A separation of duties among production personnel.
51. Which of the following activities represents both an appropriate human
resources function and a deterrent to payroll fraud?
a. Distribution of paychecks.
b. Authorization of overtime.
c. Authorization of additions to and deletions from the payroll.
d. Collection and retention of unclaimed paychecks.
52. Alpha Company uses its sales invoices for posting perpetual inventory
records. Inadequate internal control procedures over the invoicing
function allow goods to be shipped that are not invoiced. The inadequate
controls could cause an
a. Understatement of revenues, receivables, and inventory.
b. Overstatement of revenues and receivables, and an
understatement of inventory.
c. Understatement of revenues and receivables, and an
overstatement of inventory.
d. Overstatement of revenues, receivables, and inventory.
53. The human resources department receives an edit listing of payroll
changes processed at every payroll cycle. If they do not verify the
changes processed, this could result in:
a. Undetected errors in payroll rates for new employees.
b. Inaccurate social security deductions.
c. Labor hours charged to the wrong account in the cost reporting
system.
d. Employees not being asked if they want to contribute to the
company pension plan.
54. Property acquisitions that are misclassified as maintenance expense
would most likely be detected by internal control procedures that provide
for
a. Investigation of variances within a formal budgeting system.
b. Review and approval of the monthly depreciation entry by the
plant supervisor.
c. Segregation of duties of employees in the accounts payable
department.
d. Examination by the internal auditor of vendor invoices and
canceled checks for property acquisitions.
55. During the review of a small business client's internal control system, the
auditor discovered that the accounts receivable clerk approves credit
memos and has access to cash. Which of the following controls would be
most effective in offsetting this weakness?
a. The owner reviews errors in billings to customers and postings to
the subsidiary ledger.
b. The controller receives the monthly bank statement directly and
reconciles the checking accounts.
c. The owner reviews credit memos after they are recorded.
d. The controller reconciles the total of the detail accounts
receivable accounts to the amount shown in the ledger.
56. Which of the following, if material, would be considered fraud?
a. Mistakes in the application of accounting principles.
b. Clerical mistakes in the accounting data underlying the financial
statements.
c. Misappropriation of an asset or groups of assets.
d. Misinterpretations of facts that existed when the financial
statements were prepared.
57. Competence of personnel is necessary to proper recording of transactions
and supports financial statements that are fairly presented. In reviewing
the organization for necessary competence, which of the following job
types would be of least interest to the auditor?
a. Corporate controller.
b. Vice-president for marketing.
c. Manager of electronic data processing.
d. Chief accountant.
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58. An auditor would consider internal control procedures relating to a
client's payroll procedures to be ineffective if the payroll department
supervisor is responsible for
a. Hiring subordinate payroll department employees.
b. Having custody over unclaimed paychecks.
c. Updating employee earnings records.
d. Applying pay rates to time tickets.
59. Which of the following is the most effective control procedure to detect
vouchers that were prepared for the payment of goods that were not
received?
a. Count goods upon receipt in storeroom.
b. Match purchase order, receiving report, and vendor's invoice for
each voucher in accounts payable department.
c. Compare goods received with goods requisitioned in receiving
department.
d. Verify vouchers for accuracy and approval in internal audit
department.
60. For effective internal control purposes, which of the following individuals
should be responsible for mailing signed checks?
a. Receptionist. c. Accounts payable clerk.
b. Treasurer. d. Payroll clerk.
61. Which of the following is ordinarily considered a test of internal control
procedures?
a. Send confirmation letters to banks.
b. Count and list cash on hand.
c. Examine signatures on checks.
d. Obtain or prepare reconciliations of bank accounts as of the
balance sheet date.
62. When obtaining an understanding of an entity's control environment, an
auditor should concentrate on the substance of management's policies
and procedures rather than their form because
a. The auditor may believe that the policies and procedures are
inappropriate for that particular entity.
b. The board of directors may not be aware of management's
attitude toward the control environment.
c. Management may establish appropriate policies and procedures
but not act on them.
 d. The policies and procedures may be so weak that no reliance is
contemplated by the auditor.
63. After the study and evaluation of a client's internal control policies and
procedures has been completed, an auditor might decide to
a. Increase the extent of substantive testing in areas where the
internal control policies and procedures are strong.
b. Reduce the extent of control testing in areas where the internal
control policies and procedures are strong.
c. Reduce the extent of both substantive and control testing in areas
where the internal control policies and procedures are strong.
d. Increase the extent of substantive testing in areas where the
internal controls are weak.
64. A conceptually logical approach to the auditor's evaluation of internal
accounting control consists of the following four steps:
I. Determine whether the necessary procedures are prescribed and are
being followed satisfactorily.
II. Consider the types of errors and fraud that could occur.
III. Determine the internal control policies and procedures that should
prevent or detect errors and fraud.
IV. Evaluate any weakness to determine its effect on the nature, timing,
or extent of auditing procedures to be applied and suggestions to be
made to the client.
What should be the order in which these four steps are performed?
a. III, IV, I, II c. II, III, I, IV
b. III, I, II, IV d. II, I, III, IV
65. An auditor evaluates the existing internal control in order to
a. Determine the extent of substantive tests which must be
performed.
b. Determine the extent of control tests which must be performed.
c. Ascertain whether irregularities are probable.
d. Ascertain whether any employees have incompatible functions.
66. The auditor is studying internal control policies and procedures within the
sales, shipping, and billing subset of the revenue cycle. Which of the
following conditions suggests a need for additional testing of controls?
a. Internal control is found to be weak with regard to shipping and
billing.
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b. Internal control over sales, billing, and shipping appears strong,
but 80% of sales revenue is attributable to three major
customers.
c. Internal control over billing and shipping is thought to be strong
and the auditor considers additional testing of selected controls
will result in a major reduction in substantive testing.
d. Internal control over the recording of sales is found to be weak
and the sales are evenly divided among a large number of
customers.
67. A secondary objective of the auditor's study and evaluation of internal
control is that the study and evaluation provide
a. A basis for constructive suggestions concerning improvements in
internal control.
b. A basis for reducing the auditor's assessed level of control risk
below the maximum level.
c. An assurance that the records and documents have been
maintained in accordance with existing company policies and
procedures.
d. A basis for determination of the resultant extent of the tests to
which auditing procedures are to be restricted.
68. In studying the design and implementation of a client's internal controls,
the auditor needs to identify necessary control points. Controls existing at
these points may be classified as "accuracy" controls and "safeguard"
controls. Which of the following controls may be regarded as a safeguard
control?
a. In processing sales orders, the computer is programmed to
compare the customer's credit limit minus the prior balance with
the current sales order amount.
b. Sales prices are stored in computer memory and are
automatically applied as stock numbers are entered from
customer orders.
c. Although the payroll is prepared manually, a second employee
recalculates gross pay, withholdings, and net pay.
d. Negotiable securities are kept in a locked vault and are accessible
only by the treasurer accompanied by one of her assistants.
69. The auditor's review of the client's internal control is documented in
order to substantiate
 a. Conformity of the accounting records with generally accepted
accounting principles.
b. Representation as to adherence to requirements of management.
c. Representation as to compliance with generally accepted auditing
standards.
d. The fairness of the financial statement presentation.
70. An internal control questionnaire indicates that an approved receiving
report is required to accompany every check request for payment of
merchandise. Which of the following procedures provides the greatest
assurance that this control is operating effectively?
a. Select and examine canceled checks and ascertain that the
related receiving reports are dated no earlier than the checks.
b. Select and examine canceled checks and ascertain that the
related receiving reports are dated no later than the checks.
c. Select and examine receiving reports and ascertain that the
related canceled checks are dated no earlier than the receiving
reports.
d. Select and examine receiving reports and ascertain that the
related canceled checks are dated no later than the receiving
reports.
71. When considering internal control, an auditor must be aware of the
concept of reasonable assurance which recognizes that
a. The employment of competent personnel provides assurance that
the objectives of internal control will be achieved.
b. The establishment and maintenance of a system of internal
control is an important responsibility of the management and not
of the auditor.
c. The cost of internal control should not exceed the benefits
expected to be derived from internal control.
d. The segregation of incompatible functions is necessary to obtain
assurance that the internal control is effective.
72. The permanent file section of the working papers that is kept for each
audit client most likely contains
a. Review notes pertaining to questions and comments regarding
the audit work performed.
b. A schedule of time spent on the engagement by each individual
auditor.
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c. Correspondence with the client's legal counsel concerning
pending litigation.
d. Narrative descriptions of the client's internal control policies and
procedures
73. Of the following procedures, which is not considered part of “obtaining an
understanding of the client’s environment?”
a. Examining trade publications to gain a better understanding of
the client's industry.
b. Confirming customer accounts receivable for existence and
valuation.
c. Touring the client's manufacturing and warehousing facilities to
gain a clearer understanding of operations.
d. Studying the internal controls over cash receipts and
disbursements.
74. If working papers are to have the characteristics that will ensure that they
achieve their primary purposes, which of the following is the most
important?
a. Working papers must be of standard format and standard
content.
b. Working papers must be properly indexed and cross-referenced
to the draft audit report.
c. Working papers must provide sufficient, competent, and useful
information to support the audit report.
d. Working papers must be arranged in logical order following the
audit program sequence.
75. Which of the following is not an example of analytical evidence?
a. Compared inventory turnover by major class with the prior year
on a monthly and quarterly basis.
b. Compared gross profit percentages by major product classes with
the prior year.
c. Examined invoices for plant asset additions to determine whether
the client had erroneously recorded ordinary repairs as plant
assets.
d. Examined monthly performance reports and investigated
significant variations from budgeted amounts.
76. Choose the best illustration of objective audit evidence from the following
 a. The paid invoice file containing invoices matched with receiving
reports and purchase orders.
b. Management's assertion that payment procedures require
matching of invoice with receiving report and purchase order.
c. Clerical staff assurances that management policy regarding
payment of invoices--matching of invoice with receiving report
and purchase order--is always followed.
d. The treasurer's statement of not remembering any exceptions in
which an invoice was submitted for payment that was not
accompanied by a matching receiving report and purchase order.
77. An initial (first-time) audit requires more audit time to complete than a
recurring audit. One of the reasons for this is that
a. New auditors are usually assigned to an initial audit.
b. Predecessor auditors need to be consulted.
c. The client's business, industry, and internal control are unfamiliar
to the auditor and need to be carefully studied.
d. A larger proportion of customer accounts receivable need to be
confirmed on an initial audit.
78. Which of the following is a basic tool used by the auditor to control the
audit work and review the progress of the audit?
a. Time and expense summary.
b. Engagement letter.
c. Progress flowchart.
d. Audit program.
79. An auditor wants to develop an audit test to evaluate the reasonableness
of the quantity of scrap material resulting from a certain production
process compared to industry standards. Which would be the most
competent type of evidence available to satisfy this objective?
a. Documentary. c. Physical.
b. Hearsay. d. Analytical.
80. As part of audit planning, CPAs should design audit programs for each
individual audit and should include audit steps and procedures to
a. Detect and eliminate fraud.
b. Increase the amount of management information available.
c. Provide assurances that the objectives of the audit are met.
d. Ensure that only material items are audited.
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81. Of the following audit procedures, which best supports the valuation
objective?
a. Performing a lower of cost or market test of the client's
inventories.
b. Reviewing a contingent liability footnote for proper wording.
c. Searching for unrecorded liabilities.
d. Observing the client's year-end physical inventory taking.
82. An assumption underlying analytical procedures is that
a. These procedures cannot replace tests of balances and
transactions.
b. Statistical tests of financial information may lead to the discovery
of material errors in the financial statements.
c. The study of financial ratios is an acceptable alternative to the
investigation of unusual fluctuations.
d. Relationships among data may reasonably be expected to exist
and continue in the absence of known conditions to the contrary.
83. An auditor is examining accounts receivable. What is the most competent
type of evidence in this situation?
a. Interviewing the personnel who record accounts receivable.
b. Verifying that postings to the receivable account from journals
have been made.
c. Receipt by the auditor of a positive confirmation.
d. No response received for a request for a negative confirmation.
84. With respect to the auditor's planning of a year-end examination, which
of the following statements is always true?
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of the specific
audit procedures that will be performed.
d. It is an acceptable practice to carry out substantial parts of the
examination at interim dates.
85. A letter to the auditor in response to an inquiry is an example of
a. Physical evidence.
b. Confirmation evidence.
c. Documentary evidence.
d. Analytical evidence.