1. Which one of the following statements is correct concerning the concept of materiality?A. Materiality is determined by reference to guidelines established by the AICPA.B. Materiality depends only on the dollar amount of an item relative to other items in

the financial statements.C. Materiality depends on the nature of an item rather than the dollar amount.D. Materiality is a matter of professional judgment.

See pages 316-17

2. The concept of materiality would be least important to an auditor in determining the

A. known misstatements are significant enough to cause the auditor to modify his or her opinion.

B. need for disclosure of a particular fact or transaction.C. effects of direct financial interest in the client upon the CPA's independence.D. scope of the CPA's audit program relating to various accounts.

See page 316

3. The primary factor that influences the auditor's decision about materiality is to determine:

A. whether cost benefit considerations should influence the scope of the audit.B. the amount of misstatement that will influence a reasonable person relying on

the financial statements.C. the appropriate percent of total revenues to use.D. the size of a recorded accounts balance, such as total plant assets.

See page 321

4. In general, the lower the amount of tolerable misstatement, theA. greater the amount of evidence that is needed.B. higher the risk of material misstatement in an assertion.C. greater the expected level of control risk.D. lower the expected level of inherent risk.

See page 322

5. Another term that is used to materiality at the account balance level is:

A. overall materiality.B. risk of misstatement.C. tolerable misstatement.D. tolerable risk.

See page 320

6. When planning the audit, the auditor will normally make preliminary decisions about:

A. financial statement level materiality – yes; account balance level materiality – yes.

B. financial statement level materiality – no; account balance level materiality – yes.

C. financial statement level materiality – yes; account balance level materiality – no.

D. financial statement level materiality – no; account balance level materiality – no.

See pages 317

7. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of

A. a review of prior years' working papers.B. an evaluation of the entity's internal control structure.C. specialized audit programs.D. analytical procedures.

See pages 324-25

8. Analytical procedures used in planning an audit should focus on identifyingA. material weakness in the internal control structure.B. areas that may represent specific risks relevant to the audit.C. the predictability of financial data from individual transactions.D. the various assertions that are embodied in the financial statements.

See page 330

9. For all audits of financial statements made in accordance with GAAS, the use of analytical procedures is required to some extent

A. the planning stage – yes; as a substantive test – yes; in the final review stage – yes.

B. the planning stage – no; as a substantive test – yes; in the final review stage – yes.

C. the planning stage – yes; as a substantive test – no; in the final review stage – no.

D. the planning stage – yes; as a substantive test – no; in the final review stage – yes.

See page 324

10. Which of the following best describes the steps involved in performing analytical procedures?

A. (1) Identify calculations and comparisons to be made, (2) perform the calculations, (3) investigate significant unexpected differences, and (4) determine effects on audit planning.

B. (1) Identify calculations and comparisons to be made, (2) develop an expectation range, (3) perform the calculations, (4) identify significant differences, (5) investigate significant unexpected differences, and (6) determine effects on audit planning.

C. (1) Identify calculations and comparisons to be made, (2) perform the calculations, (3) identify significant differences, (4) investigate significant unexpected differences, and (5) determine effects on audit planning.

D. (1) Identify calculations and comparisons to be made, (2) develop an expectation range, (3) perform the calculations, (4) identify significant differences, and (5) investigate significant unexpected differences.

See page 324

11. Which of the following factors would decrease the effectiveness of analytical procedures?

A. Analytical procedures specifically relate to the assertion.B. The analytical procedure is based on a stable relationship.C. Data was developed by a private company with generally weak internal

controls.D. Expectations are developed using a variety of sources.

See page 327

12. Accounts payable for Widget Technologies, Inc. in the current year is not growing as fast as cost of sales, and accounts payable turnover is significant lower than prior years and industry averages. Gross margins have also significantly increased.   Which of the following audit objectives is most likely misstated based on the evidence above?

A. the completeness of purchases and accounts payableB. the occurrence of cost of salesC. the existence of accounts payableD. the classification of purchases and accounts payable

See page 335

1. In the KPMG 2003 Fraud Survey, largest average annual cost of fraud was due to:

A. Consumer Fraud.B. Medical / Insurance Fraud.C. Fraudulent Financial Reporting.D. Computer Crime.

See page 350

2. Low barriers to entry, high degree of competition and declining margins would be considered one of which of the following risk factors?

A. incentives and pressures for fraudulent financial reportingB. opportunity for fraudulent financial reportingC. attitudes and rationalization for misappropriation of assetsD. incentives and pressures for misappropriation of assets

See page 357

3. Inadequate segregation of duties or independent checks would be considered one of which of the following risk factors?

A. incentives and pressures for fraudulent financial reportingB. opportunity for misappropriation of assetsC. attitudes and rationalization for misappropriation of assetsD. opportunity for fraudulent financial reporting

See page 359

4. Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult substance over form questions would be considered one of which of the following risk factors?

A. incentives and pressures for fraudulent financial reportingB. opportunity for fraudulent financial reportingC. attitudes and rationalization for misappropriation of assetsD. incentives and pressures for misappropriation of assets

See page 357

5. According to the KPGM 2003 Fraud Survey the most common method of uncovering fraud was:

A. anonymous tips.B. internal audit.C. internal control.D. external audit.

See page 361

6. Which of the following is NOT an important purpose of the brainstorming session among audit staff to discuss the risk of fraud?

A. Allow junior members of the audit team to benefit from more senior member's knowledge of the audit client and of how fraud might be perpetrated.

B. Allow more seasoned personnel a fresh set of eyes that might identify risks that otherwise might be overlooked.

C. Reduce the opportunity for fraud.D. Emphasize the possibility that fraud might exist in any audit.

See page 360

7. Your client is a sports franchise that has experienced five successive years of sold-out seasons. You use your understanding of the pricing structure for seats and luxury boxes and the number of games in the season to estimate ticket revenues. If these procedures fail to detect a material misstatement, this represents which of the following risks?

A. inherent riskB. control riskC. analytical procedures riskD. tests of details risk

See page 365

8. Which of the following risk components can be assessed in non-quantitative terms?A. audit risk – yes; control risk – yes; analytical procedures risk – yesB. audit risk – no; control risk – yes; analytical procedures risk – yesC. audit risk – no; control risk – no; analytical procedures risk – noD. audit risk – yes; control risk – no; analytical procedures risk – no

See pages 365-366

9. If audit risk (AR) is .02, inherent risk (IR) is 1.00, control risk (CR) is .10, and analytical procedures risk (AP) is .50, what is the appropriate level of test of details risk?

A. .02B. .04C. .40D. .75E. 1.00

See page 365

10. Which of the following represents a pervasive inherent risk factor?A. A company experiences low profitability relative to the industry and

operating results are sensitive to economic factors.B. The assertion is difficult to audit.C. An account is susceptible to misappropriation.D. The account involves complex accounting issues.

See page 368

11. Which of the following best describes the nature of a preliminary audit strategy?A. It is a detailed specification of auditing procedures to be performed.B. It represents the auditor's plan for meeting the general standards of GAAS.C. It represents the auditor's preliminary judgments about an audit approach

and reflects certain assumptions about the conduct of the audit.D. It is the auditor's plan for meeting the second standard of field work.

See page 374

12. Which of the following best describes the relationship between materiality, detection risk, and substantive audit evidence?

A. Holding materiality constant, if detection risk decreases the evidence from substantive tests should increase.

B. Holding detection risk constant, if materiality decreases the evidence from substantive tests should decrease.

C. Holding audit evidence constant, if materiality increases, detection risk should also increase.

D. There is no relationship between materiality, detection risk and substantive audit evidence.

See page 372

13. In developing a preliminary audit strategy an auditor specifies each of the following EXCEPT:

A. the extent of understanding of internal controls to be obtained.B. the planned assessed level of analytical procedures risk.C. the planned assessed level of control risk.D. the risk of being sued by financial statement users.

See page 374

14. The use of the lower assessed level of control risk approach is LEAST likely when

A. the auditor expects that controls related to an assertion are well designed and highly effective.

B. an assertion is affected by a high volume of routine transactions that are subject to processing controls.

C. the account to which an assertion pertains is affected primarily by infrequent transactions or adjusting entries.

D. the cost of performing more extensive procedures to obtain the understanding of the internal control structure and test controls will be more than offset by cost savings from performing less extensive substantive tests.

See page 375

1. According to COSO, a system of internal control should address which of the following?

A. reliability of financial reporting – yes; compliance with applicable laws and

regulations – yes; effectiveness and efficiency of operations – yesB. reliability of financial reporting – yes; compliance with applicable laws and

regulations – no; effectiveness and efficiency of operations – noC. reliability of financial reporting – yes; compliance with applicable laws and

regulations – no; effectiveness and efficiency of operations – yesD. reliability of financial reporting – yes; compliance with applicable laws and

regulations – yes; effectiveness and efficiency of operations – no

See page 391

2. Which of the following is NOT a component of an entity's internal control?A. audit riskB. control activitiesC. information and communicationD. control environment

See page 392

3. Which of the following is NOT an inherent limitation associated with any system of internal control?

A. Management can override prescribed policies and procedures for personal gain.

B. Internal auditors may focus more on efficiency and effectiveness issues than on compliance with internal controls.

C. Individuals may collude to circumvent the system of internal control.D. Individuals may exercise poor judgment in making implementing internal

controls because of inadequate information or time constraints.

See page 393

4. Which of the following components of an entity's internal control includes the organizational structure of information technology?

A. control activitiesB. control environmentC. information and communicationD. quality control systems

See page 419

5. Computer general control procedures are normally considered part ofA. the control environment.B. risk assessment.C. information and communication.D. control activities.

See page 406

6. Which of the following represents an inappropriate segregation of duties in information technology?

A. combining computer operations and network administrationB. combining systems analysis and programmingC. combining computer operations and the library functionD. combining network administration and database administration

See page 447

7. As part of management's process of risk assessment management should put controls in place to assess which of the following risks?

A. fraud risk – no; inherent risk – yes; business risk - noB. fraud risk – yes; inherent risk – yes; business risk - noC. fraud risk – yes; inherent risk – yes; business risk - yesD. fraud risk – yes; inherent risk – no; business risk - no

See page 403

8. Which of the following factors are included in a firm's control environment?A. integrity and ethical values – yes; segregation of duties – yes; commitment to

competence - yesB. integrity and ethical values – no; segregation of duties – yes; commitment to

competence - yesC. integrity and ethical values – yes; segregation of duties – no; commitment to

competence - yesD. integrity and ethical values – yes; segregation of duties – yes; commitment to

competence – noE. integrity and ethical values – yes; segregation of duties – no; commitment to

competence - no

See page 397

9. If the auditor is able to collect evidence that computer general controls are strong, then the auditor can conclude that:

A. application controls function properly and put the correct transactions on exception reports.

B. computer applications are more likely to operate consistently over time.C. computer processed transactions are adequately supported by source

documents.D. the risk of batch totals failing to detect misstatements is low.

See page 408

10. Which of the following is NOT an important risk associated with information technology?

A. It may produce a transaction trail that is available for audit purposes for only a short period of time.

B. The decreased human involvement in IT processing can obscure errors that might be observed in manual systems.

C. Management is less likely to be aware of the risks associated with IT than the risks associated with manual systems.

D. There is often less documentary evidence of the performance of control procedures in computer systems than in manual systems.

See page 443

11. Which of the following is NOT an important reason for obtaining an understanding of internal control?

A. to support a control risk assessment below the maximum for an assertionB. to identify types of potential misstatementsC. to consider factors that affect the risk of material misstatementD. to design substantive tests to provide reasonable assurance of detecting the

misstatement related to specific assertions

See page 422

12. Which of the following is NOT one of the characteristics of management's philosophy and operating style?

A. approach to taking and monitoring business risksB. monitoring policies for developing and modifying accounting systemsC. conscientiousness and conservatism in developing accounting estimatesD. its attitudes and actions toward financial reporting

See page 398

13. Information processing controls over the financial reporting process address:A. the risk of misstatements in accounting estimates.B. the risk of misstatements in the choice of accounting principles.C. the risk of misstatement in summarizing information from databases in

spreadsheets for presentation in the financial statements.D. the risk that the audit committee is ineffective.

See pages 410-411

14. Segregation of duties involves segregating:A. authorization, custody of assets, and delivery and receipt of goods and

services.B. authorization, cash receipt, and custody of assets.C. authorization, custody of assets, and recorded accountability.D. authorization, recorded accountability, and financial reporting.

See page 407

15. Using computer editing to perform a limit test to determine that only data falling within predetermined limits are processed by the computer is a form of:

A. computer general controls.B. computer application controls.C. controls over management discretion in financial reporting.D. the control environment.

See pages 409-410

16. Which of the following would NOT be considered an example of a performance review performed as part of the control activities component of internal controls?

A. Management reviews reports that summarize the detail of account balances such as an aged trial balance of accounts, reports of cash disbursements by department, or reports of sales activity and gross profit by customer or region, salesperson, or product line.

B. A department head compares actual performance versus budgets, forecasts, or prior-period amounts.

C. A manager regularly review the relationship of different sets of data such as

nonfinancial operating data and financial data (for example, comparison of hotel occupancy statistics with revenue data).

D. A manager annually reviews and documents the performance of employees in an annual human resource review.

See page 412

17. An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's

A. program for tests of controls.B. understanding of the system.C. understanding of the types of irregularities that are probable, given the

present system.D. documentation of the study and evaluation of the system.

See page 430

18. Which of the following statements regarding auditor documentation of the client's internal control structure is correct?

A. Documentation must include flowcharts.B. Documentation must include procedural write-ups.C. No documentation is necessary, although it is desirable.D. No one particular form of documentation is necessary and the extent of

documentation may vary.

See page 429

19. Which of the following most likely constitutes a weakness in the internal controls of an EDP system?

A. The control clerk establishes control over data received by the EDP department and reconciles control totals after processing.

B. The application programmer identifies programs required by the systems design and flowcharts the logic of these programs.

C. The systems analyst reviews output and controls the distribution of output from the EDP department.

D. The accounts payable clerk prepares data for computer processing and enters the data into the computer.

See page 447-451

1. Which of the following best describes the process for assessing control risk?A. (1) Perform tests of controls, and (2) evaluate the evidence and assess control

risk.B. (1) Identify necessary controls, (2) perform tests of controls, and (3) evaluate the

evidence and assess control risk.C. (1) Identify potential misstatements that could occur, (2) identify necessary

controls, (3) perform tests of controls, and (4) evaluate the evidence and assess control risk.

D. (1) Consider the knowledge acquired from obtaining the understanding of internal control, (2) identify potential misstatements that could occur, (3) identify necessary controls, (4) perform tests of controls, and (5) evaluate the evidence and assess control risk.

See page 470

2. Which of the following represents the necessary control and the test of control that would control the risk of duplicate payment of an accounts payable voucher?

A. Necessary control; The computer matches check information with the supporting voucher: Test of control; Submit test data to see that the computer appropriately matches check information with voucher information.

B. Necessary control; The computer electronically cancels the voucher and supporting information when the check is issued: Test of control; Submit test data to see that the computer rejects duplicate payments.

C. Necessary control; The computer matches voucher date with the check date: Test of control; Submit test data to see that the computer appropriately matches dates on the voucher and on the check.

D. Necessary control; There is separate duties for approving voucher and signing checks: Test of control; Observe segregation of duties

See page 472

3. Controls over the completeness assertion generallyA. start by capturing information about a transaction when it is initiated and then

follow the transaction forward through receipt or deliver and recording.B. compare information associated with the recording of transactions with

information associated with the passage of title, which is normally captured during the delivery or receipt of goods and services.

C. compare information associated with the recording of transactions with information obtained both with the delivery or receipt of goods and services and information associated with the initiation of the transaction.

D. compare information associated with the recording of transactions with information created when the transaction is initiated.

See page 471

4. When obtaining an understanding of internal controls the auditor identifies important programmed application controls over the occurrence of sales, however, the auditor also has serious concerns about the adequacy of the control environment due to a weak tone at the top about control consciousness.   Which of the following best describes how the auditor should respond to this situation when planning tests of occurrence of sales?

A. The auditor could assess control risk as low for an assertion after performing computer assisted audit techniques on controls relevant to that assertion.

B. The auditor could assess control risk as low for an assertion after performing computer assisted audit techniques on controls relevant to that assertion and assessing the adequacy of segregation of duties.

C. The auditor will probably assess control risk at the maximum irrespective of the quality of the programmed application controls.

D. The auditor could assess control risk as low for an assertion if significant performance reviews are placed in operation.

See page 474

5. After obtaining an understanding of internal control and assessing control risk the auditors decided not to perform additional tests of controls. The auditor most likely concluded that the

A. additional evidence to support a further reduction in control risk was not cost beneficial to obtain.

B. assessed level of inherent risk exceeded the assessed level of control risk.C. internal controls were properly designed and justifiably may be relied upon.D. evidence obtained through tests of controls would not support an increased

level control risk.

See page 486

6. When an auditor increases the planned assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the

A. extent of tests of controls.B. planned level of detection risk.C. planned level of substantive tests.D. level of inherent risk.

See pages 486-7

7. Which of the following is not a step in an auditor's decision to asses control risk at below the maximum?

A. Evaluate the effectiveness of the internal control procedures with tests of controls.

B. Obtain an understanding of the entity's accounting system and control environment.

C. Perform tests of details of transactions to detect material misstatements in the financial statements.

D. Consider whether control procedures can have a pervasive effect on financial statement assertions.

See pages 470-75

8. The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that

A. specified controls requiring segregation of duties may be circumvented by collusion.

B. entity policies may be overridden by senior management.C. tests of controls may fail to identify procedures relevant to assertions.D. material misstatements may exist in the financial statement assertions.

See page 469

9. 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.C. reperformance.D. reconciliation.

See pages 488-9

10. If an auditor decides to assess control risk as low based on computer application control procedures, which of the following would not be part of the auditor's strategy for testing controls?

A. testing the effectiveness of computer general control procedures

B. testing the effectiveness of management controls over computer outputC. testing the effectiveness of manual follow-up proceduresD. testing the effectiveness of computer application control procedures

See pages 477

11. When control risk is assessed at the maximum level for all financial statement assertions, an auditor should document the auditor's

A. conclusion that control risk is at the maximum level – no; basis for concluding that control risk is at the maximum level – no.

B. conclusion that control risk is at the maximum level – no; basis for concluding that control risk is at the maximum level – yes.

C. conclusion that control risk is at the maximum level – yes; basis for concluding that control risk is at the maximum level – no.

D. conclusion that control risk is at the maximum level – yes; basis for concluding that control risk is at the maximum level – yes.

See pages 497

12. If an auditor submits test data on an on-line, real-time basis to test computer application controls, this is most likely done as part of which of the following approaches to testing controls?

A. parallel simulationB. test dataC. integrated test facilityD. systems control audit review file

See page 480

13. If the auditor assessed control risk as low for an assertion based on tests performed during the first 10 months of the year, which of the following would be LEAST LIKELY to be performed to update the auditor's conclusion about control risk?

A. The auditor would consider the significance of the assertion involved.B. The auditor would consider the results of the tests of controls used to make

that evaluation.C. The auditor would consider the evidential matter about design or operation

that may result from substantive test performed in the remaining period.D. The auditor would consider the changes in the industry and the entity's

operating environment.

See page 490

14. Which of the following factors would generally NOT influence the auditor's decision about sample size when making decisions about the extent of tests of controls?

A. the nature of the controlB. the operating effectiveness of the control environmentC. the frequency of operation of the controlD. the importance of the control

See pages 491-92

15. A dual-purpose test normally involves:A. performing analytical procedures and tests of controls simultaneously.B. using the same evidence to draw a conclusion for tests of controls and for

substantive tests.C. using the same evidence to draw a conclusion about tests of controls and to

develop a preliminary audit strategy.D. performing tests of details of transactions and analytical procedures

simultaneously.

See pages 493-494

16. An auditor makes the following assessments of internal controls for material transaction classes:•     Completeness assertion related to credit sales as high•     Existence and Occurrence assertion related to credit sales as low•     Completeness assertion related to the cash receipts function as low•     Existence and Occurrence assertion related to the cash receipts function as high•     Completeness assertion related to the sales returns function as low•     Existence and Occurrence assertion related to the sales and returns function as high

Based on these assessments the auditor is likely to conservatively set control risk for the existence of accounts receivable at:

A. low.B. moderate.C. high.D. maximum.

See pages 496-497

17. A material weakness in internal controls is one in which:A. there is less than a remote chance that a misstatement that is more than

inconsequential will occur.B. there is more than a remote chance that a misstatement that is more than

inconsequential will occur.C. there is less than a remote chance that a material misstatement will occur.D. there is more than a remote chance that a material misstatement will occur.

See page 499

18. For a private company which of the following statements is true about reporting deficiencies in internal controls?

A. reporting in the auditor's report – none; reporting to the audit committee – only material weaknesses

B. reporting in the auditor's report – none; reporting to the audit committee – both significant deficiencies and only weaknesses

C. reporting in the auditor's report – only material weaknesses; reporting to the audit committee – both significant deficiencies and only weaknesses

D. reporting in the auditor's report – only material weaknesses; reporting to the audit committee – only material weaknesses

See pages 498-499

1. Which of the following best describes the steps involved in assessing the risk of material misstatements?

A. (1) Evaluate the type of potential misstatements that can occur, (2) evaluate the magnitude of potential misstatements, (3) evaluate the likelihood of potential misstatements.

B. (1) Assess inherent risk, (2) assess control risk, (3) assess detection risk.C. (1) Evaluate the magnitude of potential misstatements, (2) evaluate the likelihood

of potential misstatements.D. (1) Assess inherent risk, (2) assess control risk, (3) assess analytical procedures

risk, (4) assess test of details risk.

See page 515

2. A construction industry client uses the percentage of completion method to recognize revenue and expense on current projects. Which of the following best describes the types of potential misstatements that the auditor should be concerned

about?A. It is possible that inventory is overstated. The auditor should be alert to

problems with the existence and occurrence or valuation and allocation of inventory.

B. Significant revenues, expense, assets and liabilities arise from this accounting estimate. The auditor should be alert for problems with the valuation and allocation assertion.

C. A weak control environment may have a pervasive impact on many assertions.

D. Weak industry trends might impact the completeness of revenues.

See page 516

3. Analytical procedures for a retailer show significant increases in both profit margins and inventory turn days. Which of the following best describes the types of potential misstatements that the auditor should be concerned about?

A. The auditor should be concerned about revenue recognition problems.B. The auditor should be concerned about the completeness of inventory.C. The auditor should be concerned about the existence of inventory.D. The auditor should be concerned about the completeness of revenues.

See page 516

4. If the auditor plans to following a primarily substantive approach detection risk is normally assessed as:

A. maximum or moderateB. high or moderateC. moderate or lowD. low or very low

See page 519

5. If the auditor plans to follow a lower assessed level of control risk approach the auditor will usually plan:

A. less extensive substantive tests at year-end.B. more extensive substantive tests at year-end.C. less extensive substantive tests at an interim date.D. more extensive substantive tests at an interim date.

See page 519

6. Which of the following best contrasts tests of controls and substantive tests?A. Tests of controls are usually performed at interim and substantive tests are

usually performed at year-end.B. Both tests of controls and substantive tests are primarily designed to provide

evidence about control risk.C. Tests of control are designed to draw a conclusion about frequency of

deviations from proscribed controls and substantive tests are designed to draw conclusions about monetary errors.

D. Both tests of controls and substantive tests are always required by GAAS.

See page 521

7. Generalized audit software is normally NOT designed to perform which of the following?

A. Reconcile detail audit data with the general ledger.B. Perform tests on an entire population.C. Select and print audit samples.D. Assess detection risk.

See pages 521-22

8. Which of the following would NOT describe the nature of a substantive test?A. initial proceduresB. tests of details of accounting estimatesC. tests of details of disclosuresD. risk assessment procedures

See page 523

9. If an auditor sends a confirmation of a customers balance in accounts receivables, this best described as a(n):

A. initial procedure.B. analytical procedure.C. test of details of balances.D. test of details of accounting estimates.

See page 527

10. Which of the following factors would tend to increase sample sizes?A. The audit population is homogeneous.B. The auditor is willing to accept a large amount of tolerable misstatement.C. The audit population is a large audit population.D. The auditor is willing to accept a high level of detection risk.

See page 531

11. Which of the following would normally NOT be performed when auditing an accounting estimate?

A. Send a confirmation or obtain evidence from an outside third party.B. Perform procedures to review and test management's process in making the

estimate.C. Prepare an independent expectation of the estimate.D. Review subsequent transactions and events occurring prior to completing

the audit that pertain to the estimate.

See pages 528-9

12. As the acceptable level of detection risk decreases, the assurance directly provided from

A. substantive tests should increase.B. substantive tests should decrease.C. tests of controls should increase.D. tests of controls should decrease.

See pages 518-9

13. As the acceptable level of detection risk decreases, an auditor may change theA. timing of substantive tests by performing them at an interim date rather than

at year-end.B. nature of substantive tests from a less effective to a more effective

procedure.C. timing of tests of controls by performing them at several dates rather than at

one time.D. assessed level on inherent risk to a higher amount.

See page 532

14. Which of the following conditions does NOT need to exist in order for the auditor to consider moving the timing of a substantive test to an interim date?

A. Internal control during the interim period and year-end is effective.B. There are no conditions or circumstances that might predispose

management to misstate the financial statements in the remaining period.C. Inherent risk would be assessed as low.D. The year-end balances of the accounts examined at the interim date are

reasonably predictable as to amount, relative significance, and composition.

See page 530

15. If detection risk is assessed as low the auditor will normally consider which of the following?

A. Perform more effective audit procedures, with larger samples sizes, at year-end.

B. Perform more effective audit procedures, with smaller samples sizes, at year-end.

C. Perform less effective audit procedures, with smaller samples sizes, at an interim date.

D. Perform more effective audit procedures, with smaller samples sizes, at an interim date.

See page 532

16. An auditor's decision either to apply analytical procedures as substantive tests or to perform tests of transaction and account balances usually is determined by the

A. availability of data aggregated at a high level.B. relative effectiveness of the tests.C. timing of tests performed at the balance sheet date.D. auditor's familiarity with industry trends.

See page 525

17. Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions form which of the following accounts most likely would yield the highest level of evidence using analytical procedures?

A. total revenues and number of sales for a retail grocerB. total revenues, the number of rooms, occupancy rates, and average room

rate for a hotelC. total revenues and the number of subscribers for a magazine

D. total interest expense and the average principal balance outstanding for a construction company building new homes

See page 525

18. After identifying related party transactions, an auditor most likely wouldA. substantiate that the transactions were consummated on terms equivalent to

those prevailing in arms-length transactions.B. discuss the implications of the transactions with third parties, such as the

entity's attorney and bankers.C. determine whether the transactions were approved by the board of directors

or other appropriate officials.D. ascertain whether the transactions would have occurred if the parties had

not been related.

See page 533-34

19. The purpose of an audit program for substantive tests is to:A. describe the nature of procedures to be performed - yes; describe the timing

of substantive – yes; ensure that audit evidence is obtained for all audit objectives – yes.

B. describe the nature of procedures to be performed - yes; describe the timing of substantive – yes; ensure that audit evidence is obtained for all audit objectives – not necessarily.

C. describe the nature of procedures to be performed - yes; describe the timing of substantive – not necessarily; ensure that audit evidence is obtained for all audit objectives – yes.

D. describe the nature of procedures to be performed - not necessarily; describe the timing of substantive – not necessarily; ensure that audit evidence is obtained for all audit objectives – yes.

See page 535

1. In the audit of Fine Host Corporation, the SEC found that the audit team, under the supervision of John Bacsik,

A. did not project the results of the sample on the entire population.B. used a sample size that was too small.C. did not use statistical sampling for substantive tests.D. did not use statistical sampling for tests of controls.

See page 551

2. An advantage to using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods

A. afford greater assurance than a nonstatistical sample of equal size.B. provide an objective basis for quantitatively evaluating sample risks.C. can more easily convert the sample into a dual purpose test useful for

substantive testing.D. eliminate the need to use judgment in determining appropriate sample sizes.

See page 556

3. The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the

A. effectiveness of the audit.B. efficiency of the audit.C. preliminary estimates of materiality levels.D. allowable risk of tolerable error.

See page 555

4. Which of the following is NOT related to nonsampling risk?A. human mistakes, such as failing to recognize errors in documentsB. applying auditing procedures inappropriate to the audit objectiveC. using nonstatistical sampling for procedures such as sending confirmationsD. misinterpreting the results of a sample

See page 554

5. The purpose of an audit sample for tests of controls is to:A. determine the estimated risk of assessing control risk too low.B. determine the estimated risk of assessing control risk too high.C. determine the estimated rate of deviations from prescribed control procedures

in a population.D. determine the estimated rate of deviation from prescribed control procedures

in a sample.

See page 558

6. To determine the sample size for a test of controls, an auditor should consider

nature of the control, the frequency of operation of the control, the importance of the control, the tolerable deviation rate, the allowable risk of assessing control risk too low, the population size and the

A. expected deviation rate.B. upper precision limit.C. risk of incorrect acceptance.D. risk of incorrect rejection.

See page 562

7. If an auditor plans to assess control risk as low, which of the following best describes a reasonable range for the auditor's tolerable deviation rate?

A. 1% - 5%B. 2% - 7%C. 6% - 12%D. 11% - 20%

See page 563

8. Which of the following factors is associated with smaller sample sizes for tests of controls?

A. The control is a manual control.B. The control operates frequently (e.g., on every transaction)C. The auditor determines that he or she can accept a small amount of sampling

risk – the risk of assessing control risk too low.D. The auditor determines that he or she can accept a larger tolerable deviation

rate.

See page 562

9. Which of the following statements is correct concerning audit sampling for tests of controls?

A. The population size has little or no effect on determining sample size except for small populations (population sizes less than 5,000).

B. The expected population deviation rate has little or no effect on determining sample size except for small populations (population sizes less than 5,000).

C. For larger population sizes, as the population size doubles the sample size also should double.

D. For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases.

See page 562

10. 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. If other factors remain constant, compared to last year this will cause an increase in

A. tolerable rate.B. allowance for sampling risk.C. risk of assessing control risk too low.D. sample size.

See page 562

11. An auditor plans to examine a sample of 20 checks for countersignatures as prescribed by the client's internal control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and

A. evaluate the results as if the sample size had been 19.B. treat the missing check as a deviation for the purpose of evaluating the

sample.C. treat the missing check in the same manner as the majority of the other 19

checks, that is, countersigned or not.D. choose another check to replace the missing check in the sample.

See page 565

12. In the audit of the financial statements of Delta Company, the auditor determines that in performing a test of controls, the deviation rate in the sample does not support the planned control risk when, in fact, the true deviation rate in the population does support the planned control risk. This situation illustrates the risk of

A. assessing control risk too high.B. assessing control risk too low.C. incorrect rejection.D. incorrect acceptance.

See page 555

13. An auditor may use either of two statistical sampling approaches in substantive testing, probability-proportional-to-size (PPS) sampling or classical variables sampling. PPS sampling is primarily applicable in testing for

A. the number of errors in year-end sales cutoff.B. an overstatement of accounts receivable.C. an understatement of accounts payable.D. proper segregation of duties in accounts receivable collections.

See page 568

14. In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audit amount of $2,000. The projected misstatement of this sample was

A. $3,000.B. $4,000.C. $6,000.D. $8,000.

See page 576

15. Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (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 computer program to design an efficient sample.

C. Inclusion of zero and negative balances generally does not require special design considerations.

D. Any amount that is individually significant is automatically identified and selected.

See page 594

16. While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of

A. incorrect rejection.B. incorrect acceptance.C. assessing control risk too low.

D. assessing control risk too high.

See page 555

17. An advantage of using statistical sampling techniques is that such techniquesA. mathematically measure and control sampling risk.B. eliminate the need for judgmental decisions.C. define the values of tolerable error and risk of incorrect acceptance required

to provide audit satisfaction.D. have been established in the courts to be superior to judgment sampling.

See page 556

18. When planning a statistical PPS sample, which of the following factors would normally increase sample size compared to the same population for the previous year?

A. The population size in terms of book value has decreased.B. The auditor decides to accept a larger amount of tolerable misstatement.C. The auditor decides to accept a smaller amount of risk of incorrect

acceptance.D. The auditor estimates that the anticipated misstatement in the population

has decreased.

See page 571

19. The auditor's decision about the risk of incorrect acceptance affects which of the following factors in a statistical PPS sample?

A. tolerable misstatementB. reliability factorC. book value of the populationD. anticipated misstatement

See page 571

20. An auditor uses nonstatistical ratio estimation to evaluate the results of a sample.   The population book value was $2,000,000 and contained 350 items. The auditor selected 100 items with a book value of $500,000. The audited value of the sample was $480,000. The estimated audited value of the population is:

A. $1,980,000.B. $1,930,000.C. $1,920,000.D. $1,900,000.

See page 607