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Definitions |
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23. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?A. The results of the initial assessment of control riskB. The anticipated sample size for planned substantive testsC. The enti
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C. The entity's financial statements of the prior year
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93. Which of the following types of evidence would an auditor most likely examine to determine whether internal control policies and procedures are operating as designed?A. Gross margin information regarding the client's industryB. Confirmations of receiv
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C. Client records documenting the use of computer programs
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16. The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether theA. Auditor's system of quality control has been maintained at a high level.B. Results are consistent with the con
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B. Results are consistent with the conclusions to be presented in the auditor's report.
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75. An auditor most likely would modify an unqualified opinion if the entity's notes to the financial statements include a not on related party transactionsA. Disclosing loans to related parties at interest rates significantly below prevailing market rate
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C. Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction
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49. An auditor may achieve audit objectives related to particular assertions byA. Performing analytical proceduresB. Adhering to a system of quality controlC. Preparing auditor working papersD. Increasing the level of detection risk
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A. Performing analytical procedures
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106. In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?A. VariablesB. StratifiedC. RatioD. Attributes
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D. Attributes
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76. Proper segregation of duties reduces the opportunities to allow persons to be in positions to bothA. Journalize entries and prepare financial statementsB. Record cash receipts and cash disbursementsC. Establish internal controls and authorize transact
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D. Perpetuate and conceal errors and fraud
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128. To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and theA. Expected deviation rateB. Upper precision limitC. Risk of incorrect acceptan
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A. Expected deviation rate
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41. Which of the following is an auditor not required to communicate to an entity's audit committee?A. Significant adjustments arising from the audit that were recorded by managementB. The basis for the auditor's conclusions about the reasonableness of ma
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D. The degree of reliance the auditor placed on the management representation letter
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35. As the acceptable level of detection risk increases, the auditor may:A. Increase the assessed level of control riskB. Change the assurance provided by tests of controls by using a larger sample size than plannedC. Change the timing of substantive test
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C. Change the timing of substantive tests from year-end to an interim date
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62. For which of the following matters should an auditor obtain written management representations?A. Management's cost-benefit justifications for not correcting internal control weaknessesB. Management's knowledge of future plans that may affect the pric
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C. Management's compliance with contractual agreements that may affect the financial statements
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48. An entity's income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this misstatement by:A. Tracin
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D. Performing analytical procedures designed to disclose differences from expectations
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125. An auditor may use a systematic sampling technique with a start at any randomly selected item when performing a test of controls with respect to control over cash receipts. The biggest disadvantage of this type of sampling is that the items in the po
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B. May occur in a systematic pattern, thus destroying the sample randomness
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30. Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements?A. The entity's industry is experiencing declining customer demand.B. Employees who han
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A. The entity's industry is experiencing declining customer demand.
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99. After testing a client's internal control activities, an auditor discovers a material weakness in the operation of a client's internal controls. Under these circumstances the auditor most likely wouldA. Issue a disclaimer of opinion about the internal
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B. Increase the assessment of control risk and increase the extent of substantive tests
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135. Which of the following statements is correct concerning the auditor's use of statistical sampling?A. An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling.B. The selection of ze
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A. An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling.
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42. Which of the following types of audit evidence is the most persuasive?A. Prenumbered client purchase order formsB. Client work sheets supporting cost allocationsC. Bank statements obtained from the clientD. Management representation letter
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C. Bank statements obtained from the client
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105. The expected population deviation rate of client billing misstatements is 2%. The auditor has established a tolerable rate of 3%. In the review of client invoices the auditor should useA. Stratified samplingB. Discovery samplingC. Variable samplingD.
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D. Attribute sampling
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124. Given random selection, the same sample size, and the same precision requirement for the testing of two unequal populations, the risk of assessing control risk too low on the smaller population isA. Higher than assessing control risk too low for the
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C. Lower than assessing control risk too low for the larger population
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19. In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the
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A. $10,000
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132. In planning a statistical sample for a test of controls, an auditor increased the expected population deviation rate from the prior year's rate because of the results of the prior year's tests of controls and the overall control environment. The audi
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D. Sample size
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116. As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred becauseA. Control risk based on the auditor's sample is less than the true operating effectiveness of the client's control act
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D. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.
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44. Which of the following procedures would be most effective in reducing attestation risk?A. Discussion with responsible individualsB. Examination of evidenceC. Inquiries of senior managementD. Analytical procedures
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B. Examination of evidence
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40. Which of the following matters would an auditor most likely communicate to an entity's audit committee?A. A list of negative trends that may lead to working capital deficiencies and adverse financial ratiosB. The level of responsibility assumed by man
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D. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance
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87. In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is obligated toA. Determine whether control procedures have been placed in operationB. Perform procedures to understand the design of internal con
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A. Determine whether control procedures have been placed in operationB. Perform procedures to understand the design of internal control policiesC. Document the understanding of the entity's internal control
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126. In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups ifA. Probability proportional to size (PPS) sampling is used.B. The population has highly variable recorded amounts
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B. The population has highly variable recorded amounts.
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123. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to A. Eliminate the risk of nonsampling errorsB. Reduce the level of audit risk and materiality to a relatively low amountC. Measure the s
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C. Measure the sufficiency of the audit evidence obtained
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102. Employers bond employees who handle cash receipts because fidelity bonds reduce the possibility of employing dishonest individuals andA. Protect employees who make unintentional errors from possible monetary damages resulting from their errorsB. Dete
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B. Deter dishonestly by making employees aware that insurance companies may investigate and prosecute dishonest acts
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107. Which of the following sampling methods would be used to estimate a numerical estimate of a population, such as a dollar value?A. Attributes samplingB. Stop-or-go samplingC. Variable samplingD. Random-number sampling
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C. Variable sampling
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110. An auditor examining inventory most likely would use variables sampling rather than attributes sampling toA. Identify whether inventory items are properly pricedB. Estimate whether the dollar amount of inventory is reasonableC. Discover whether misst
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B. Estimate whether the dollar amount of inventory is reasonable
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12. Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?A. Obtaining a written representation letter from the client's managementB. Examining documents to detect illegal acts having
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D. Determining the extent of involvement of the client's internal auditors
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13. Audit programs should be designed so thatA. Most of the required procedures can be performed as interim work.B. Inherent risk is assessed at a sufficiently low level.C. The auditor can make constructive suggestions to management.D. The audit evidence
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D. The audit evidence gathered supports the auditor's conclusions.
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108. For which of the following audit tests would an auditor most likely use attribute sampling?A. Selecting accounts receivable for confirmation of account balancesB. Inspecting employee time cards for proper approval by supervisorsC. Making an independe
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B. Inspecting employee time cards for proper approval by supervisors
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51. Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?A. Management places little emphasis on meeting earnings projections.B. The board of directors
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D. Transactions selected for testing are not supported by proper documentation.
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Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:
a. opinion of any subsequent events occuring since the predecessor's audit report was issued
b. understandin
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Understanding as to the reasons for the change of auditors
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97. Which of the following statements is correct concerning deficiencies in internal control identified in an audit of financial statements?A. An auditor is required to search for control deficiencies during an audit.B. All significant deficiencies are al
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C. An auditor may communicate some deficiencies during an audit in addition to after the audit's completion.
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100. A previously communicated significant deficiency ordinarily should be communicated again ifA. The deficiency has a material effect on the auditor's assessment of control risk.B. The entity accepts that degree of risk because of cost-benefit considera
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C. The significant deficiency has not been corrected.
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63. To which of the following matters would materiality limits not apply in obtaining written management representations?A. The availability of minutes of stockholders' and directors' meetingsB. Losses from purchase commitments at prices in excess of mark
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A. The availability of minutes of stockholders' and directors' meetings
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119. When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration shouldA. Be related to the auditor's business riskB. Not be adjusted for qualitative factorsC. Be related t
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C. Be related to preliminary judgments about materiality levels
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92. The objective of tests of details of transactions performed as tests of controls is toA. Monitor the design and use of entity documents such as prenumbered shipping forms.B. Determine whether internal control policies and procedures have been placed i
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D. Evaluate whether internal control procedures operated effectively.
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121. When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known asA. PrecisionB. ReliabilityC. Projected errorD. Stand
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A. Precision
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21. The acceptable level of detection risk is inversely related to theA. Assurance provided by substantive testsB. Risk of misapplying auditing proceduresC. Preliminary judgment about materiality levelsD. Risk of failing to discover material misstatements
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A. Assurance provided by substantive tests
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10. In developing a preliminary audit strategy, an auditor should considerA. Whether the allowance for sampling risk exceeds the achieved upper precision limitB. Findings from substantive tests performed at interim datesC. Whether the inquiry of the clien
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D. Potential risks of material misstatement
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A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:
a. specialized accounting principles of the client's industry
b. the competency of the client's internal audit staff
c. the uncertainty inherent in appl
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Disagreements with management as to auditing procedures
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26. The primary objective of procedure performed to obtain an understanding of the entity and its environment, including its internal control, is to provide an auditor withA. Knowledge necessary to assess the risk of material misstatement and design furth
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A. Knowledge necessary to assess the risk of material misstatement and design further audit procedures
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77. In an audit of financial statements, an auditor's primary consideration regarding an internal control policy or procedure is whether the policy or procedureA. Reflects management's philosophy and operating styleB. Affects management's financial statem
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B. Affects management's financial statement assertions
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39. An auditor is obligated to communicate a proposed audit adjustment to an entity's audit committee only if the adjustment:A. Has not been recorded before the end of the auditor's field workB. Has a significant effect on the entity's financial reporting
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B. Has a significant effect on the entity's financial reporting process
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138. Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar-unit sampling?A. The sampling distribution should approximate the normal distribution.B. Overstated units have a lower proba
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C. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
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64. Which of the following expressions most likely would be included in a management representation letter?A. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.B. There are
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A. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.
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46. An auditor scans a client's investment records for the period just before and just after the year end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evi
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D. Classification, and Valuation & Allocation
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120. Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?A. Set the tolerable rate of deviation at a lower level than
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B. Stratify the cash disbursements population so that the unusually large disbursements are selected.
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24. In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methodsA. Influence the design of internal controlB. Affect the auditor's preliminary judgment about materialit
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A. Influence the design of internal control
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7. An auditor's engagement letter should include:A. Management's acknowledgment of its responsibility for maintaining effective internal controlB. The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent f
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A. Management's acknowledgment of its responsibility for maintaining effective internal control
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95. Which of the following statements is correct concerning the use of prior audit evidence regarding the operating effectiveness of controls?A. If the auditor plans to rely on controls that have changed since they were last tested, the auditor should tes
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B. If the auditor uses prior audit evidence for several controls, the auditor should test a sufficient portion of them in each audit so that each is tested every third audit.
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81. Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?A. The complexity of the accounting systemB. The existence of related party transactionsC. The adequacy of th
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C. The adequacy of the accounting records
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58. A purpose of a management representation letter is to reduceA. Audit risk to an aggregate level of misstatement that could be considered materialB. An auditor's responsibility to detect material misstatements only to the extent that the letter is reli
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C. The possibility of a misunderstanding concerning management's responsibility for the financial statements
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28. Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?A. Audit procedures that are effective for detecting an unintentional missta
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A. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.
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73. An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity becauseA. The business structure may be deliberately designed to obscure related party transactions.B. Intercompan
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A. The business structure may be deliberately designed to obscure related party transactions.
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104. Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor toA. Apply the planned substantive tests prior to the balance sheet d
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B. Perform the planned auditing procedures closer to the balance sheet date
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114. The likelihood of assessing control risk too high is the risk that the sample selected to test controlsA. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the internal control justifies su
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A. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the internal control justifies such an assessment
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22. Which of the following audit risk components may be assessed in nonquantitative terms? Control Risk Detection Risk Inherent RiskA. Yes Yes NoB. Yes No YesC. Yes Yes YesD. No Yes Yes
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C. Yes Yes Yes
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134. In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consid
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I. The likely rate of deviations
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78. The overall attitude and awareness of an entity's board of directors concerning the importance of internal control usually is reflected in itsA. Computer-based controlsB. System of segregation of dutiesC. Control environmentD. Safeguards over access t
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C. Control environment
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71. Which of the following events most likely would indicate the existence of related parties?A. Granting stock options to key executives at favorable pricesB. High turnover of senior management and members of the board of directorsC. Failure to correct i
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D. Selling real estate at a price significantly different from appraised value
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32. Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements?A. Obtain assurance from the entity's attorney that all material lit
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D. Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud
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55. In assessing the competence of the internal auditor, an independent CPA most likely would obtain information about the: A. Quality of the internal auditor's working paper documentationB. Organization's commitment to integrity and ethical valuesC. Infl
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A. Quality of the internal auditor's working paper documentation
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137. Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected amount of misstatement Measure of tolerable misstatementA. Yes YesB. Yes NoC. No YesD. No
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A. Yes Yes
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86. Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls?A. The amount of time budgeted to complete the engagementB. The size and complexity of the clientC. The nature of spec
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A. The amount of time budgeted to complete the engagement
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89. An auditor should obtain sufficient knowledge of an entity's accounting system to understand theA. Safeguards used to limit access to computer facilitiesB. Process used to prepare significant accounting estimatesC. Procedures used to assure proper aut
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B. Process used to prepare significant accounting estimates
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131. What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if the tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?A. Modify
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D. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
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25. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?A. Inquiring of the client's legal counsel concerning pending litigationB. Comparing the financial statements to anticipated resultsC. Searc
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B. Comparing the financial statements to anticipated results
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36. An auditor may decide to perform only substantive procedures for specific assertions because the auditor believes:A. Control policies and procedures are unlikely to pertain to the assertions.B. The entity's control environment, monitoring, and control
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A. Control policies and procedures are unlikely to pertain to the assertions.
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140. In a PPS sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 has an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error o
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B. $2,000
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17. Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude ofA. Objective judgmentB. Independent integrityC. Professional ske
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C. Professional skepticism
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15. A difference of opinion regarding the results of a sample cannot be resolved between the assistant who performed the auditing procedures and the in-charge auditor. The assistant shouldA. Accept the judgment of the more experienced in-charge auditorB.
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C. Document the disagreement and ask to be disassociated from the resolution of the matter
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45. A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remain in the suspense account at year end, the auditor would be most concerned aboutA. Suspense debits that management believes wil
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A. Suspense debits that management believes will benefit future operations
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69. "There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." The foregoing passage most likely is from a (an)A. Cl
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C. Management representation letter
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87. In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated toA. Determine whether control procedures have been placed in operationB. Perform procedures to understand the design of internal
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D. Search for significant deficiencies in the operation of the entity's internal control
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122. A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning theA. Risk of assessing control risk too lowB. Expected population deviation rateC. Tolerable rateD. S
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D. Sample size
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Before accepting an engagement to audit a new client, a CPA is required to obtain:
a. an understanding of the prospective client's industry and business
b. a management representation letter
c. the uncertainty inherent in applying sampling procedures
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The prospective client's consent to make inquiries of the predecessor auditor, if any
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8. A document in an auditor's working papers includes the following statement: "Our audit is subject to the inherent risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will inform you of fraud tha
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1. A document in an auditor's working papers includes the following statement: "Our audit is subject to the inherent risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will inform you of fraud that comes to our attention, unless it is inconsequential." This passage is most likely from a(an)?B. Engagement letter
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136. The use of the ratio estimation sampling technique is most effective whenA. The calculated audit amounts are approximately proportional to the client's book amounts.B. A relatively small number of differences exist in the population.C. Estimating pop
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A. The calculated audit amounts are approximately proportional to the client's book amounts.
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117. An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider The average doll
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C. No Yes
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83. Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted?A. The entity has no formal written code of conduct.B. The integrity of the entity's management is
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B. The integrity of the entity's management is suspect.
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65. Which of the following statements ordinarily is not included among the written representations made by the chief executive officer and the chief financial officer?A. Sufficient audit evidence has been made available to the auditor to permit the issuan
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A. Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion.
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59. An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if theA. Client receives financial assistance from a federal government agencyB. Audit evidence that is necess
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C. Employees' actions affect the auditor's ability to rely on management's representations
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80. Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment whenA. External policies established by parties outside the entity
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B. Management is dominated by on individual who is also a shareholder.
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115. As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population wasA. Less than the risk of assessing control risk too low, based
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D. More than the deviation rate in the auditor's sample
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68. Which of the following is not required documentation in an audit in accordance with GAAS?A. A written engagement letter formalizing the level of service to be renderedB. A flowchart depicting the segregation of duties and authorization of transactions
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B. A flowchart depicting the segregation of duties and authorization of transactions
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85. An auditor would most likely be concerned with internal control policies and procedures that provide reasonable assurance about theA. Methods of assigning production tasks to employeesB. Appropriate prices the entity should charge for its productsC. E
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D. Entity's ability to process and summarize financial data
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Which of the following statements would appear in an auditor's engagement letter?
a. fees for our services are based on our regular per diem rates, plus travel and other out-of pocket expenses
b during the course of our audit we may observe opportunitie
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after performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.
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111. Samples to test internal control procedures are intended to provide a basis for an auditor to conclude whetherA. The control procedures are operating effectively.B. The financial statements are materially misstated.C. The risk of incorrect acceptance
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A. The control procedures are operating effectively.
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88. In obtaining an understanding of an entity's internal control policies and procedures that are relevant to audit planning, and auditor is required to obtain knowledge about theA. Design of the policies and procedures pertaining to the internal control
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A. Design of the policies and procedures pertaining to the internal control components
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6. Which of the following matters generally is included in an auditor's engagement letter?A. Management's responsibility for the entity's compliance with laws and regulationsB. The factors to be considered in settling preliminary judgments about materiali
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A. Management's responsibility for the entity's compliance with laws and regulations
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18. The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to 1. Give guidance to the staff regarding both technical and personnel aspects of the audit2. Provide an opportunity
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1. Give guidance to the staff regarding both technical and personnel aspects of the audit
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9. An auditor's engagement letter most likely would include a statement regarding:A. Management's responsibility to provide certain written representations to the auditorB. Conditions under which the auditor may modify the preliminary judgment about mater
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A. Management's responsibility to provide certain written representations to the auditor
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50. At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's
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C. Obtain additional evidence regarding the valuation of inventory
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90. When obtaining an understanding of an entity's internal control, an auditor should concentrate on the implementation of the procedures becauseA. The procedures may be operating effectively but may not be documented.B. Management may implement procedur
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D. Management may establish appropriate procedures but not enforce compliance with them.
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133. An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when theA. Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate.B. Samp
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D. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.
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113. An auditor may decide to increase the risk of incorrect rejection whenA. Increased reliability from the sample is desired.B. Many differences (audit value minus recorded value) are expected.C. Initial sample results do not support the planned level o
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D. The cost and effort of selecting additional sample items is low.
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96. Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control?A. The auditor should design and apply tests of controls to discover deficiencies that could result in material
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D. The auditor need not search for deficiencies but should document and communicate any significant deficiencies and material weaknesses that are discovered.
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34. When assessing the risk of material misstatement, an auditor is required to document:I. The basis for the assessmentII. Significant risks identified and the related controls that were evaluatedA. I onlyB. II onlyC. Both I & IID. Neither I nor II
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I. The basis for the assessmentII. Significant risks identified and the related controls that were evaluated
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118. The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a(an)A. Clock card or time ticketB. Employee Form W-2C. Employee personnel recordD. Payroll register entry
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D. Payroll register entry
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61. "There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The forgoing passage is most likely from aA. R
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C. Management representation letter
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66. An auditor's working papers serve mainly to:A. Provide the principal support for the auditor's reportB. Satisfy the auditor's responsibilities concerning the Code of Professional ConductC. Monitor the effectiveness of the CPA firm's quality control pr
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A. Provide the principal support for the auditor's report
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127. An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the Variability in the dollar amounts R
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A. Yes Yes
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109. In confirming a client's accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial t
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B. Individual invoices
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129. An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales
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A. Tolerable rate (7%) was less than the achieved upper precision limit (8%).
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38. Which of the following matters is an auditor required to communicate to an entity's audit committee:I. Disagreements with management about matters significant to the entity's financial statements that have been satisfactorily resolvedII. Initial selec
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I. Disagreements with management about matters significant to the entity's financial statements that have been satisfactorily resolvedII. Initial selection of significant accounting policies in emerging areas that lack authoritative guidance
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29. Which of the following statements reflects an auditor's responsibility for detecting 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
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D. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.
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27. When obtaining an understanding of the entity and its environment, including its internal control, the auditor is required to document:I. The discussion concerning the susceptibility of the financial statements to material misstatementII. The risk ass
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I. The discussion concerning the susceptibility of the financial statements to material misstatementII. The risk assessment procedures performed
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57. When considering the use of management's written representations as audit evidence about the completeness assertion, an auditor should understand that such representations:A. Complement, but do not replace, substantive tests designed to support the as
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A. Complement, but do not replace, substantive tests designed to support the assertion
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82. When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes thatA. Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness.B. Adequate
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A. Internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness.
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20. Inherent risk and control risk differ from detection risk in that theyA. Arise from the misapplication of auditing proceduresB. May be assessed in either quantitative or nonquantitative termsC. Exist independently of the financial statement auditD. Ca
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C. Exist independently of the financial statement audit
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139. Which of the following would be an advantage in using classical variable sampling rather than PPS sampling?A. An estimate of the standard deviation of the population's recorded amounts is not required.B. The auditor rarely needs the assistance of a c
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C. Inclusion of zero and negative balances generally does not require special design considerations.
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94. Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?A. Inquiry of client personnelB. Inspection of documents and reportsC. Observation o
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D. Preparation of system flowcharts
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54. When assessing the internal auditors' competence, the independent CPA should obtain information about theA. Organizational level to which internal auditors reportB. Educational background and professional certification of internal auditorsC. Policies
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B. Educational background and professional certification of internal auditors
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72. After determining that a related party transaction has, in fact, occurred, an auditor shouldA. Add a separate paragraph to the auditor's standard report to explain the transactionB. Perform analytical procedures to verify whether similar transactions
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C. Obtain an understanding of the business purpose of the transaction
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56. During an audit, an internal auditor may provide direct assistance to an independent CPA in Obtaining an understanding Performing tests Performing of internal control of controls substantive testsA. No No NoB. Yes No NoC. Yes Yes NoD
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D. Yes Yes Yes
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74. Which of the following procedures most likely could assist an auditor in identifying related party transactions?A. Performing tests of controls concerning the segregation of dutiesB. Evaluating the reasonableness of management's accounting estimatesC.
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C. Reviewing confirmations of compensating balance arrangements
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14. 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 theA. Evidence to be gathered to provide a sufficient basis for the auditor's opinionB. Procedu
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D. Timing of inventory observation procedures to be performed
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33. Which of the following statements is correct concerning an auditor's responsibility to report fraud?A. The auditor is required to communicate to the client's audit committee all minor fraudulent acts perpetrated by low-level employees, even if the amo
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D. The disclosure of fraudulent activities to parties other than the client's senior management and its audit committee is not ordinarily part of the auditor's responsibility.
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70. Which of the following most likely would indicate the existence of related parties?A. Writing down obsolete inventory just before year-endB. Failing to correct previously identified internal control deficienciesC. Depending on a single product for the
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D. Borrowing money at an interest rate significantly below the market rate
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47. The auditor's inventory observation test counts are traced to the client's inventory listing to test for which of the following financial statement assertions?A. CompletenessB. Rights & ObligationsC. Valuation or AllocationD. Classification & Understa
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A. Completeness
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11. In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the A. Timing of audit proceduresB. Cost-benefit of gathering evidenceC. Selected audit techniquesD. Financial statement assertions
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D. Financial statement assertions
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5. An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:A. Management's responsibility for errors and the illegal activities of employees that
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B. The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies that come to the auditor's attention
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84. Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?A. The entity announced that the internal audit function would be el
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C. The chief financial officer waived approvals on all checks to one vendor to expedite payment.
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31. Which of the following factors would most likely heighten the auditor's concern about the risk of fraudulent financial reporting?A. Inability to generate cash flows from operations while reporting substantial earnings growthB. Management's lack of int
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A. Inability to generate cash flows from operations while reporting substantial earnings growth
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130. An auditor is testing internal control procedures that are evidenced on an entity's vouchers by matching random numbers with voucher numbers. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by ano
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B. Has been properly voided
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43. Which of the following procedures would yield the most appropriate evidence?A. A scanning of trial balancesB. An inquiry of client personnelC. A comparison of beginning and ending retained earningsD. A recalculation of bad debt expense
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D. A recalculation of bad debt expense
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67. The audit working paper that reflects the major components of an amount reported in the financial statements is the:A. Interbank transfer scheduleB. Carryforward scheduleC. Supporting scheduleD. Lead schedule
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D. Lead schedule
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53. Miller Retailing, Inc. maintains a staff of three full-time internal auditors who report directly to the controller. In planning to use the internal auditors to provide assistance in performing the audit, the independent auditor most likely willA. Pla
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A. Place limited reliance on the work performed by the internal auditors
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79. Management philosophy and operating style most likely would have a significant influence on an entity's control environment whenA. The internal auditor reports directly to managementB. Management is dominated by one individualC. Accurate management jo
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B. Management is dominated by one individual
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52. Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements?A. The assumptions used in developing the prior year's accounting estimates have changed.B. Differe
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B. Differences between reconciliations of control accounts and subsidiary records are not investigated.
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103. An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with theA. Collection of receivablesB. Purchase of merchandise inven
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A. Collection of receivables
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91. Which of the following techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of an internal control procedure?A. Confirmation with outside partiesB. Inquiry of client personnelC. Recomputation
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D. Observation of client personnel
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112. An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales
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B. 4.5%
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37. Regardless of the assessed level of control risk, an auditor would perform someA. Tests of controls to determine the effectiveness of internal control policiesB. Analytical procedures to verify the design of internal control proceduresC. Substantive t
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C. Substantive tests to restrict detection risk for significant transactions classes
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98. Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to management and those charged with governance?A. Management's failure to renegotiate unfavorable long-term purchase commitmentsB.
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C. Evidence of a lack of objectivity by those responsible for accounting decisions
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101. Audit evidence concerning segregation of duties ordinarily is best obtained byA. Performing tests of transactions that corroborate management's financial statement assertionsB. Observing the employees as they apply control proceduresC. Obtaining a fl
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B. Observing the employees as they apply control procedures
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60. The date of the management representation letter should be as of the date of theA. Balance sheetB. Latest interim financial informationC. Auditor's reportD. Latest related party transaction
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C. Auditor's report
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