MIDTERM EXAM

SUBJECT CODE: ACCTG. 411 Date:

Description: (Assurance Principles, Prof.Ethics & Good Governance) PERMIT NO.__________ Time:
QUESTIONS: SCORE:
1. 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
3%
c) Limited liability d) Reasonable insurance
2. 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
3%
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
3. Which of the following activities represent both an appropriate human resources function and a deterrent to payroll
fraud?
a) Distribution of paychecks. b) Authorization of overtime 3%
c) Authorization of additions to and deletion from the payroll d) Collection and retention of unclaimed paychecks.
4. In general, material irregularities perpetrated by which of the following are most difficult to detect?
a) Internal Auditor b) Keypunch operator
c) Cashier d) Controller 3%
5. In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase
order, requisition, and receiving report are verified, the next step in the system is to
a) Cancel the supporting documents. b) Enter the check amount in the check register.
3%
c) Approve the voucher for payment. d) Post the voucher amount to the expense ledger.
6. An auditor evaluate the existing internal control order to
a) Determine the extent of substantive tests which must be performed
b) Determine the extent of control tests which must be performed.
3%
c) Ascertain whether irregularities are probable. d) Ascertain whether any employees have incompatible function.

7. An auditor uses the knowledge provided by the understanding of internal control and the final
assessed level of control risk primarily to determine the nature, timing, and extent of the
a) Attribute tests. b) Compliance tests.
3%
c) Tests of controls. d) Substantive tests.
8. Control testing is performed in order to determine whether or not?
a) The assessed level of control risk can be reduced b) Necessary controls are absent.
c) Incompatible functions exist d) Material dollar errors exist.
3%
9. An auditor usually examines receiving reports to support entries in the
a) Voucher register and sales returns journal. b) Sales journal and sales returns journal.
c) Voucher register and sales journal d) Check register and sales journal.
3%
10. A procedure that would most likely be used by an auditor in performing tests of control
procedures that involve segregation of functions and that leave no transaction trail is
a) Inspection b) Observation.
3%
c) Reprocessing. d) Reconciliation
11. Unauthorized alteration of on-line records can be prevented by employing:
a) Key verification. b) Computer sequence checks.
c) Computer matching. d) Data base access controls.
3%
12. The primarily reason for internal auditing’s involment in the development of new computer-based system is to:
a) Plan post-implementation reviews. b) Promote adequate controls.
c) Train auditors in CBIS techniques. d) Reduce overall audit effort. 3%
13. Checklists, system development methodology, and staff hiring are example of what type of controls?
a) Detective. b) Preventive.
c) Subjective. d) Corrective. 5%
14. Which of the following methods of testing application controls utilizes a generalized audit
software package prepared by the auditors?
a) Parallel simulation b) Integrated testing facility approach.
3%
c) Test data approach. d) Exception report tests.
15. Auditing by testing the input and output of a computer-based system instead of the computer
program itself will
a) Not detect program errors which do not show up in the output sampled.
3%
b) Detect all program errors, regardless of the nature of the output
c) Provide the auditor with the same type of evidence.
d) Not provide the auditor with confidence in the results of the auditing procedures.
 16. An auditor samples cash disbursement records for significant errors of $5 or more. Upon finding
one such error, these records are scheduled for a complete review. This conclusion is most likely
based on a
3%
a) Cluster sample. b) Discovery sample.
c) Systematic sample d) Stratified sample.
17. During an audit involving testing of accounts receivable balances, an auditor decides to specify a
precision interval of $100,000 instead of the $200,000 precision interval that was called for in the
sampling plan contained in the audit program. Which of the following would be a result of the
3%
auditor’s decision to narrow the precision interval?
a) An increase in the required sample size. b) A decrease in the required sample size.
c) An increase in the population standard deviation. d) A decrease in the population standard deviation .
18. In testing accounts receivable, an auditor sends out positive confirmation requests to 100
randomly selected customers. A costumer return the confirmation indicating that the balance is
correct when, in fact, the balance is overstated. This is an example of
3%
a) Tainting. b) Sampling error.
c) Standard error d) Non-sampling error.
19. Auditors who prefer statistical to non-statistical sampling believe that the principal advantage of
statistical sampling flows from its unique ability to
a) Define the precision required to provide adequate satisfaction b) Provide a mathematical measurement of risk .
3%
c) Establish conclusive audit evidence with decreased audit effort.d) Promote a more legally defensible procedural approach
20.The standard deviation of a sample will usually decrease with
a) A decrease in sample size b) the use of stratification
c) An increase in desired precision d) An increase in confidence level.
3%
21.Which of the following might be detected by an auditor’s review of the client’s sales cut-off?
a) Excessive goods returned for credit b) Unrecorded sales discounts 3%
c) Lapping of year end accounts receivable d) Inflated sales for the year
22.Which of the following forms of evidence represents the most competent evidence that a receivable actually exists?
a) A positive confirmation b) A sales invoice 3%
c) A receiving report d) A bill of lading
23.What form of analytical review might uncover the existence of obsolete merchandise?
a) Inventory turnover rate b) Decrease in the ratio of gross profit to sales 3%
c) Ratio of inventory to account payable d) Comparison of inventory values to purchase invoices
24.The auditor tests the quantity of materials charged to work in process by tracing these quantities to?
a) Cost ledger b) Perpetual inventory records 3%
c) Receiving reports d) Material requisitions
25.When reviewing working papers, an audit supervisor will be primarily concerned with determining whether the
a) Audit programs have been carried out without deviation 3%
b) Working papers adequately support the audit findings, conclusions, and reports
c) Working papers reflect adherence to budget constraints
d) Auditing department’s standard formats and tick marks have been used consistently
26.The existence of a related party transactions may be indicated when another entity
a) Sells real estate to the corporation at a price that is comparable to its appraised value 3%
b) Absorbs the expenses of the corporation
c) Borrows from the corporation at a rate of interest which equals the current market price
d) Lends to the corporation at a rate of interest which current market rate
27.When financial statements are presented that are not in conformity with generally accepted accounting principles, an
auditor may issue a (an) “Except for” Disclaimer 3%
Opinion of an opinion
a) Yes No
b) Yes Yes
c) No Yes
d) No No
28.The auditor’s report should be dated as of the date on which they?
a) Report is delivered to the client b) Field work is completed 3%
c) Fiscal period under audit ends d) Review of the working papers is complete
29. Comfort letters are ordinarily signed by the
a) Client b) Client’s lawyer 3%
c) Independent auditor d) Internal auditor
30. A major difference between operational auditing and financial auditing is
a) Operational auditing focuses on activities rather than financial statement assertions 3%
b) Operational auditing extends beyond the entity to analysis of industry and economic data
c) Unlike financial auditing, operational auditing does not generally culminate in a formal audit report
d) Operational auditing is narrower than financial auditing in its breadth of coverage 10%
PLUS TEN POINTS
TOTAL SCORE >>>>>>>>>>>>>>>>>>> 100 %