1.

The development of a general strategy and a detailed approach for the expected nature, timing, and
extent of audit refers to :
a. Supervision b. Audit procedures c. Directing d. Planning

2. The auditor should consider the nature, extent, and timing of the work to be performed and should
prepare a written audit program for every audit. Which audit standard is most closely related to this
requirement?
a. The audit is to be performed by a person or persons having adequate technical training and
proficiency as an auditor.
b. In all matters relating to the assignment, an independent mental attitude is to be maintained by the
auditor(s).
c. Due professional care is to be exercised in the planning and performance of the audit and
preparation of the report.
d. The work is to be adequately planned and assistants, if any, are to be properly supervised.

3. Which of the following would a successor auditor normally perform after acceptance of an audit client?
a. Inquiry of predecessor auditor regarding the client.
b. Review the SEC filings of the client.
c. Inquiry of bankers regarding the client.
d. Review of predecessor auditor working papers.

4. To obtain an understanding of a continuing clients business in planning an audit, 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 specialized industry journals.
d. Reevaluate clients internal control environment.

5. Which of the following is required documentation in an audit in accordance with generally accepted
auditing standards?
a. A flowchart or narrative of the information system describing the recording and classification of
transactions for financial reporting.
b. An audit program setting forth in detail the procedures necessary to accomplish the
engagements objectives.
c. A planning memorandum establishing the timing of the audit procedures and coordinating
the assistance of entity personnel.
d. An internal control questionnaire identifying policies and procedures that assure specific
objectives will be achieved.

6. Which of the following procedures would an auditor most likely perform in planning a financial statement
audit?
a. Inquiring of the clients legal counsel concerning pending litigation.
b. Comparing the financial statements to anticipated results.
c. Examining computer generated exception reports to verify the effectiveness of internal controls.
d. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities

7. Analytical procedures used in planning 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 auditors understanding of the clients business.
d. Assessing the adequacy of the available evidential matter.

8. Analytical procedures, which means the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationships that are inconsistent with other relevant information or
which deviate from predicted amounts, are not required to be applied
a. At the planning stage of the audit c. As substantive procedures
b. Overall review stage of the audit d. None of the above

9. Which of the following statements is correct concerning analytical procedures?

a. Analytical procedures usually involve comparisons of ratios developed from recorded amounts
to assertions developed by management.
b. Analytical procedures used in planning an audit generally use data aggregated at a high level.
 c. Analytical procedures can replace tests of controls in gathering evidence to support the
assessed level of control risk.
d. Analytical procedures are more efficient, but not more effective, than tests of details and
transactions.

10. Which of the following is an effective audit planning and control procedures that helps prevent
misunderstandings and inefficient use of audit personnel?
a. Make copies, for inclusion in the working papers, of those client supporting documents
examined by the auditor.
b. Provide the client with copies of the audit programs to be used during the audit.
c. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other
information.
d. Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries
prior to final closing.

11. Which of the following is an aspect of scheduling and controlling the audit engagement?
a. Including in the audit program a column for estimated and actual time.
b. Performing audit work only after the clients books of account have been closed for the period
under examination.
c. Writing a conclusion in individual working papers indicating how the results of the audit will affect the
auditors report.
d. Including in the engagement letter an estimate of the minimum and maximum audit fee.

12. Which of the following is an engagement attribute for an audit of an entity that processes most of its
financial data in electronic form without any paper documentation?
a. Discrete phases of planning, interim, and year-end field work.
b. Increased effort to search for evidence of management fraud.
c. Performance of audit tests on a continuous basis.
d. Increased emphasis on the completeness assertion.

13. 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.
c. Materiality judgments are made in light of surrounding circumstances and necessarily involve
both quantitative and qualitative judgments.
d. An auditors consideration of materiality is influenced by the auditors perception of the needs of
a reasonable person who will rely on the financial statements.

14. 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 b. Inherent risk c. Control risk d. Detection risk

15. Incremental risk is the increased risk that errors may not be detected at the balance sheet date because:
a. Audit procedures were performed at an interim date
b. Inherent risk was assessed too low.
c. Analytical procedures were not performed.
d. Detection risk was set too high a level.

16. 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.

17. The extent of planning will vary according to any of the following, except:
a. Size of the audit client.
b. Auditors 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.
18. 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.

19. 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.

20. Audit plan should

A B C D
A. Precede action Yes No Yes No
B. Be fixed Yes No No Yes
C. Be cost beneficial Yes Yes Yes Yes

21. Which of the following least likely affect the form and content of the overall audit plan?
a. Complexity of the audit engagement.
b. Methodology and technology used by the auditor.
c. The entitys form of business organization.
d. The size of the entity.

22. The audit program should contain the following, except:

a. Audit objective
b. Time budget for the various audit areas
c. Set of planned audit procedures
d. The combined assessed level of inherent and control risk

23. 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.

24. The auditor should have or obtain a knowledge of the clients 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.

25. 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.

26. The auditor obtains knowledge of clients business

A B C D
Prior to acceptance of engagement No No Yes Yes
Planning stage of the audit Yes Yes Yes No
Testing of transactions stage No Yes Yes Yes

27. 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.
 28. Which of the following is the ultimate concern of the knowledge about the business?
a. Consideration of how it affects the financial statements taken as a whole.
b. Assists the auditor in enforcing quality control procedures.
c. To assure that sufficient audit evidence is obtained.
d. It assists in determining the type of audit report to be issued.

29. A knowledge of the business is a frame of reference within which the auditor exercises
professional judgment. This assists the auditor in carrying out the following objectives, except:
a. Assessing risks and identifying problems.
b. Evaluating audit evidence.
c. Determining the audit opinion to be expressed.
d. Planning and performing the audit effectively and efficiently.

30. Throughout the course of the audit, the auditors make judgment about many matters where
knowledge of the business is important. These procedures do not include:
a. Evaluating accounting estimates and management representations.
b. Identifying related parties and related party transactions.
c. Assessing inherent and control risks.
d. Assessing the appropriateness of using statistical sampling instead of judgmental sampling.

31. Which of the following is most likely to be presumed to represent a fraud risk on an audit?
a. Capitalization of repairs and maintenance expense into the property, plant and equipment asset
account
b. Improper revenue recognition
c. Improper interest expense accrual
d. Introduction of significant new products

32. Which of the following is least likely to be included in an auditor's inquiry of management while obtaining
information to identify the risks of material misstatement due to fraud?
a. Does it have knowledge of fraud or suspect fraud?
b. Are financial reporting operations controlled by and limited to one location?
c. Has it reported to the audit committee the nature of the company's internal control?
d. Does it have programs to mitigate fraud risks?

33. Which of the following conditions justifies an auditor's decision of raising the materiality level?
a. Application of analytical procedures reveals a significant increase in sales revenue in December, the
last month of the fiscal year.
b. Internal control over shipping, billing, and-recording of sales revenue is weak.
c. Internal control over revenue and receipts cycle is excellent.
d. Study of the business reveals that the client recently acquired a new company in an unrelated industry.

34. Which of the following is not required by PSA No. 315, "Consideration of Fraud in a Financial Statement
Audit"?
a. Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the
audit.
b. Conduct a discussion by the audit team of the risks of material misstatement due to fraud.
c. Conduct inquiries of the audit committee as to their views about the risks of fraud and their knowledge
of any fraud or suspected fraud.
d. Conduct the audit with professional skepticism, which includes an attitude that assumes balances are
incorrect until verified by the auditor.

35. Inherent risk is defined as the susceptibility of an account balance or class of transactions to error that
could be material assuming that there were no related internal controls. Of the following conditions, which
one does not increase inherent risk?
a. The board of directors approved a substantial bonus for the president and chief executive officer, and
also approved an attractive stock option plan for themselves.
b. The client has entered into numerous related party transactions during the year under audit.
c. Internal control over shipping, billing, and recording of sales revenue is weak.
 d. The client has lost a major customer accounting for approximately 30% of annual revenue.

36. Which of the following is true?

a. Auditors are responsible for detecting all fraudulent financial reporting.
b. Auditors must specifically consider fraud risk from overstating liabilities.
c. Auditors must specifically consider fraud risk from management override of controls.
d. All of the above are true

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

a. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an
expense account, thus overstating expenses.
b. Company management changes inventory count tags and overstates ending inventory, while
understating cost of goods sold.
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.

38. The type of transactions that ordinarily have a high inherent risk because they involve management
judgments or assumptions are referred to as
a. Estimation transactions.
b. Nonroutine transactions.
c. Related-party transactions.
d. Routine transactions.

39. If results from the auditor's tests of controls induce the auditor to change the assessed level of control risk
for inventory from 0.2 to 0.4 and audit risk and inherent risk remain constant, what is the effect on the
acceptable level of detection risk?
a. A change in detection risk cannot be calculated because audit risk and inherent risk values are not
given.
b. Detection risk would decrease from 0.4 to 0.2.
c. Detection risk would increase from 0.3 to 0.6.
d. Detection risk would not change since audit risk and inherent risk do not change.

40. Professional skepticism

a. Assumes that management is either dishonest or assumes unquestioned honesty.
b. Either assumes that management is honest or dishonest.
c. Neither assumes that management is dishonest nor assumes unquestioned honesty.
d. None of the above is a correct statement

41. Which of the following conditions identified during fieldwork of an audit is most likely to affect the auditors
assessment of the risk of misstatement due to fraud?
a. Year-end adjusting journal entries.
b. Checks for significant amounts outstanding at year-end.
c. Missing documents.
d. Computer generated documents.

42. Which of the following best describes what is meant by the term fraud risk factor?
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presence requires modification of planned audit procedures.
c. Factors whose presence often have been observed in circumstances where frauds have occurred.
d. Reportable conditions identified during an audit.

43. Auditors would perform the following steps in which order?

a. Determine audit risk; assess control risk; determine detection risk; set materiality.
b. Determine audit risk; set materiality; assess control risk; determine detection risk.
c. Set materiality; determine audit risk; assess control risk; determine detection risk.
d. Set materiality; assess control risk; determine detection risk; determine audit risk.
44. Which of the following may cause management to intentionally understate profits?
a. Management wants to create "cookie jar" reserves for a rainy day.
b. The company is under scrutiny by tax authorities.
c. The company is suffering a large loss and wants to take a "big bath."
d. All of the above

45. Which of the following characteristics most likely would heighten an auditors concern about the risk of
intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low.
b. Insiders recently purchased additional shares of the entitys stock.
c. Management places substantial emphasis on meeting earnings projections.
d. The rate of change in the entitys industry is slow.

46. Which of the following statements reflects an auditors responsibility for detecting misstatements due to
errors and fraud?
a. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud
involving employee collusion or management override.
b. An auditor should design the audit to provide reasonable assurance of detecting misstatements due to
errors and fraud that are material to the financial statements.
c. An auditor should plan the audit to detect misstatements due to errors and fraud that are caused by
departures from GAAP.
d. An auditor is not responsible for detecting misstatements due to errors and fraud unless the application
of GAAS would result in such detection.

47. An auditor is required to obtain a basic understanding of the client's internal control to plan the audit. The
auditor may then decide to perform tests of controls on all internal control procedures
a. That would aid in preventing fraud.
b. Documented in the flowchart.
c. Considered to be weaknesses that might allow errors to enter the accounting system.
d. Considered to be strengths for which the auditor desires further reduction in the assessed level of
control risk.

48. When considering fraud risk factors relating to managements characteristics, which of the following is least
likely to indicate a risk of possible misstatement due to fraud?
a. Failure to correct known reportable conditions on a timely basis.
b. Use of unusually conservative accounting practices.
c. Nonfinancial managements preoccupation with the selection of accounting principles.
d. Significant portion of managements compensation represented by bonuses based upon achieving
unduly aggressive operating results.

49. 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.
b. Conservative advocacy.
c. Professional skepticism.
d. Objective judgment.

50. The primary difference between financial statement errors and fraud is that
a. Errors are intentional misstatements by management, while fraud involves unintentional mistakes or
omissions.
b. Errors are more likely to provide an indication that an illegal act has occurred.
c. Errors are unintentional mistakes or omissions, while fraud involves intentional misstatements.