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Chapter 4

20. Enterprise risk management is the responsibility of?

A. Company Management
B. The external auditors
C. The Company's insurance providers
D. All of the Above

21. Failure to meet company objectives is a result of?

A. Information risk
B. Audit Risk
C. Business risk
D. Inherent Risk

22. Auditing standards do not require auditors of financial statements to?

A. Understand the nature of errors and frauds
B. Assess the risk of occurrence of errors and frauds
C. Design audits to provide reasonable assurance of detecting errors and frauds
D. Report all errors and frauds found to police authorities

23. If sales were overstated by recording a false credit sale at year end, where could you find the false
"dangling debt"?
A. Inventory
B. Cost of Goods Sold
C. Bad Debt Expense
D. Accounts Receivable

24. 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 omitted by management to evade laws and regulations
D. Conversion of stolen inventory to cash deposited in a falsified bank account

25. Which of the following circumstances would cause auditors to perform extended procedures?
A. supporting documents are produced when requested
B. the company made several large adjustment at or near YE
C. the company has recently hired a new chief financial officer after the previous one retired
D. the company maintains several different petty cash fund

26. The likelihood that material misstatements may have entered the accounting system and not been
detected and corrected by the client's internal control is referred to as?
A. Inherent risk
B. Control risk
C. Detection risk
D. Risk of Material misstatement

27. The risk of material misstatements is composed of which audit risk components?
A. Inherent risk & control risk
B. Control risk & detection risk
C. Inherent risk & detection risk
D. Inherent risk, control risk, & detection risk
28. 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 misstatement do exist if?
A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk

29. Auditors assessed risk of material misstatement is 0.50 and they want to achieve a 0.05 risk of failing to
express a correct opinion. What detection risk do the auditors plan to use for planning the remainder of
the audit work?
A. 0.20
B. 0.10
C. 0.75
D. 0.00

30. If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from
0.4 to 1.0 and the audit risk (0.05) and inherent risk remain constant, the acceptable level of detection
risk is most likely to
A. Change from 0.1 to 0.04
B. Change from 0.2 to 0.3
C. Change from 0.25 to 0.1
D. Be Unchanged

31. What is a specific procedural response to a particular fraud risk in an account balance or class of
A. Exercising more professional skepticism
B. Carefully avoiding conducting interviews with people in areas that are most susceptible to fraud
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

32. Analytical procedures are generally used to produce evidence from

A. Confirmations mailed directly to the auditors by client customers
B. Physical observation of inventories
C. Relationships among current financial balances and prior balances, forecasts, and non financial
D. Detailed examination of external, external-internal, and internal documents

33. Which of the following relationships between types of analytical procedures and sources of information
are most logical?

Type of Analytical Procedure Source of Information

A. Comparison of current account balance with Physical production statistics
prior periods
B. Comparison of current account balances Company’s budgets and forecasts
with expected balances
C. Evaluation of current account balances with Published industry ratios
relation to predictable historical patterns
D. Evaluation of current account balances in Company’s own comparative financial
relation to nonfinancial information statements
34. Analytical procedures can be used in which of the following ways?
A. As a means of overall review at the end of an audit
B. As "attention-directing" methods when planning an audit at the beginning
C. As substantive audit procedures to obtain evidence during the audit
D. All of the Above

35. Analytical procedures used when planning an audit should concentrate on

A. Weaknesses in the company's internal control activities
B. Predictability of account balances based on individual significant transactions
C. Management assertions in financial statements
D. Accounts and relationships that can represent specific potential problems and risks in the
financial statements

36. When a company that sells its products for a (gross) profit increases its sales by 15% and its cost of
goods sold by 7%, the cost of goods ratio will
A. Increase
B. Decrease
C. Remain unchanged
D. Not be able to be determined with the information provided

37. Auditors are not responsible for accounting estimates with respect to
A. making the estimates
B. determining the reasonableness of estimates
C. determining that estimates are presented in conformity with GAAP
D. Determining that estimates are adequately disclosed in the financial statements

38. An audit strategy memorandum contains

A. Specifications of auditing standards relevant to the financial statements being audited
B. Specifications of procedures the auditors believe appropriate or the financial statements under
C. Documentation of the assertions under audit, the evidence obtained, and the conclusions
D. Reconciliation of the account balances in the financial statements with the account balances in
the client's general ledger

39. It is acceptable under GAAS for an audit team to

A. Assess risk of material misstatement at high and achieve an acceptably low audit risk by
preforming extensive detection work
B. assess control risk at zero and perform a minimum of detection work
C. asses inherent risk at zero and perform a minimum of detection work
D. Decide that audit risk can be 40 percent

40. Under the Private Securities Litigation Reform Act, independent auditors are required to first
A. Report in writing all instances of noncompliance with the act to the client's board of directors
B. Report to the SEC all instances of noncompliance thy believe have a material effect on financial
statements if the board of directors does not first report to the SEC
C. Report clearly inconsequential noncompliance with the act to the audit committee of the client's
board of directors
D. Resign from the audit engagement and report the instances of noncompliance with the act to the
41. When evaluating whether accounting estimates made by management are reasonable, auditors would be
most interested in what?
A. Key factors that are consistent with prior periods
B. Assumptions that are similar to industry guidelines
C. Measurements that are objective and non-susceptible to bias
D. Evidence of a conservative systematic bias

42. An audit committee is

A. composed of internal auditors
B. composed of members of the audit team
C. composed of members of a company's board of directors who are not involved in the day-to-day
operations of the company
D. A committee composed of persons not associating in any way with the client or the board of

43. When auditors become aware of noncompliance with a law or regulation 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 noncompliance on the financial statements
C. Determine whether to contact law enforcement officials
D. Determine whether other similar acts have occurred

44. Which of the following statements best describes auditor's responsibility for detecting a clients
noncompliance with a law or regulation
A. The responsibility for detecting noncompliance exactly parallels the responsibilities for errors
and fraud
B. Auditors must design tests to detect all material noncompliance that indirectly affects the
financial statements
C. Auditors must design tests to obtain reasonable assurance that all noncompliance with direct
material financial statements effects is detected.
D. Auditors must design tests to detect all noncompliance that directly affects the financial

45. Auditors perform analytical procedures in the planning stage of an audit for the purpose of
A. Deciding the matters to cover in an engagement letter.
B. Identifying unusual conditions that deserve more auditing effort.
C. Determining which of the financial statement assertions are the most important for the client's
financial statements.
D. Determining the nature, timing, and extent of further audit procedures for auditing the inventory

46. A primary objective of analytical procedures used in the final review stage of an audit is to
A. Identify account balances that represent specific risks relevant to the audit.
B. Gather evidence from tests of details to corroborate financial statement assertions.
C. Detect fraud that may cause the financial statements to be misstated.
D. Assist the auditor in evaluating the overall financial statement presentation
47. An auditor’s analytical procedures indicate a lower than expected return on an equity method
investment. This situation most likely could have been caused by
A. An error in recording amortization of the excess of the investor’s cost over the investment’s
underlying book value
B. The investee’s decision to reduce cash dividends declared per share of its common stock
C. An error in recording the unrealized gain from an increase in the fair value of available for sale
securities in the income account for trading securities
D. A substantial fluctuation in the price of the investee’s common stock on a national stock

48. Which of the following risk types increase when an auditor performs substantive analytical audit
procedures for financial statement accounts at an interim date?
A. Inherent.
B. Control.
C. Detection.
D. Sampling

49. Which of the following matters relating to an entity's operations would an auditor most likely consider
as an inherent risk factor in planning an audit?
A. The entity's fiscal year ends on June 30.
B. The entity enters into significant derivative transactions as hedges.
C. The entity's financial statements are generated at an outside service center.
D. The entity's financial data is available only in computer-readable form

50. What is the primary objective of the fraud brainstorming session?

A. Determine audit risk and materiality.
B. Identify whether analytical procedures should be applied to the revenue accounts.
C. Assess the potential for material misstatement due to fraud.
D. Determine whether the planned procedures in the audit plan will satisfy the general audit