1. The passage of the Sarbanes-Oxley Act led to the establishmentof 7.

With regard to marketing professional services, the IFACCode of

the:
a. Auditing Standards Board.
b. Accounting Enforcement Releases Board.
c. Public Company Accounting Oversight Board.
d. Securities and Exchange Commission.
Ethics for Professional Accountants indicates that
a. Direct marketing is prohibited.
b. Marketing is allowed if lawful.
c. Marketing should be honest and truthful.
d. Marketing of audit services is prohibited.

ANSWER: C ANSWER: C

2. Which of the following is correct concerning membershipon the 8. Based on the IFAC Code of Ethics for
Public Company Accounting Oversight Board? ProfessionalAccountants,threats to independence arise from all of
a. Only two of its members may be CPAs. thefollowing except:
b. It is composed of nine members. a. Self-interest.
c. All members must also currently be active in publicaccounting. b. Advocacy.
d. A majority of members must be or have been accounting c. The audit relationship.
educators. d. Intimidation.

ANSWER: A ANSWER: C

3. With respect to the acceptance of contingent fees
forprofessionalservices, the IFAC Code of Ethics for
ProfessionalAccountantsindicates that the accounting firm
a. Should not accept contingent fees.
b. Should establish appropriate safeguards around acceptanceof a
contingent fee.
c. Should accept contingent fees only for assurance servicesother than
audits of financial statements.
d. Should accept contingent fees if it is customary in the country.
ANSWER: B
4. The audit partner in charge of an audit of a public company may
only
a. Be in charge of the audit of that one company.
b. Perform the role as long as he or she also performs the
“second partner review” for that audit.
c. Perform that role for five consecutive years.
d. Perform the role if he or she has proper AICPA issuer
accreditation.
9. If an audit firm discovers threats to independence withrespectto an
audit engagement, the IFAC Code of Ethics
forProfessionalAccountants indicates that the firm should
a. Immediately resign from the engagement.
b. Notify the appropriate regulatory body.
c. Document the issue.
d. Evaluate the significance of the threats and apply appropriate
safeguards to reduce them to an acceptable level.
ANSWER: D
10. In all cases, audit reports must
a. Be signed by the individual who performed the audit procedures.
b. Certify the accuracy of the quantitative information which was
audited.
c. Communicate the auditor’s finding to the general public.
d. Inform readers of the degree of correspondence between the
quantifiable information and the established criteria.
ANSWER: D

ANSWER: C 11. The framework for auditing and related services as addressed by
PSA excludes
5. The Public Company Accounting Oversight Board(PCAOB) is not a. Review
responsible for standards related to b. Compilation
a. Accounting. c. Tax services
b. Attestation. d. Agreed upon procedure
c. Auditing.
d. Quality control. ANSWER: C

ANSWER: A 12. Indicate the level of assurance provided by audit and related
services.
6. A PCAOB engagement that focuses on the sufficiencyof a CPA a b c d
firm’s quality control system is most likely to bereferred to as a(n) Audit High High Negative Absolute
a. Financial statement audit. Review Moderate None Moderate High
b. Inspection. Agreed-upon None None None Limited
c. Peer review. procedures
d. Quality control Compilation None None None None

ANSWER: B ANSWER: A
13. The primary goal of the CPA in performing the attest function is
to
a. Detect fraud
b. Examine individual transactions so that the auditor may certify as
to their validity
c. Determine whether the client's assertions are fairly stated
d. Assure the consistent application of correct accounting procedures
ANSWER: C
14. Assurance engagement
a. Is an engagement in which a practitioner is engaged to issue, or
does issue, a written communication that expresses a conclusion
about the reliability of a written assertion that is the responsibility of
another party.
b. Is a systematic process of objectively obtaining and evaluating
evidence regarding assertions about economic actions and events to
ascertain the degree of correspondence between those assertions and
established criteria and communicating the results to interested users.
c. Is an engagement in which the auditor provides a moderate level of
assurance that the information subject to the engagement is free of
material misstatement.
d. Is an engagement intended to enhance the credibility of
information about a subject matter by evaluating whether the subject
matter conforms in all material respects with suitable criteria, thereby
improving the likelihood that the information will meet the needs of
an intended user.
ANSWER: D
15. The criteria for evaluating quantitative information vary. For
example, in the audit of historical financial statements by CPA firms,
the criteria are usually
a. Generally accepted auditing standards.
b. Generally accepted accounting principles.
c. Regulations of the Bureau of Internal Revenue.
d. Regulations of the Securities and Exchange Commission.
ANSWER: B
16. Which of the following is an appraisal activity established within
an entity as a service to the entity?
a. External auditing
b. Financial auditing
c. Internal auditing
d. Compliance auditing
ANSWER: C
17. Which statement is correct regarding the relationship between
internal auditing and the external auditor?
a. Some judgments relating to the audit of the financial statements are
those of the internal auditor.
b. The external audit function's objectives vary according to
management's requirements.
c. Certain aspects of internal auditing may be useful in determining
the nature, timing and extent of external audit procedures.
d. The external auditor is responsible for the audit opinion expressed,
however that
responsibility may be reduced by any use made of internal auditing.
ANSWER: C
18. Generally accepted auditing standards are
a. Required procedures to be used to gather evidence tosupport
financial statements.
b. Policies and procedures designed to provide reasonableassurance
that the CPA firm and its personnel complywith professional
standards.
c. Pronouncements issued by the Auditing Standards Board.
d. Rules acknowledged by the accounting professionbecause of their
universal application.
ANSWER: C
19. Which of the following is most likely to be unique tothe audit
work of CPAs as compared to work performed bypractitioners of
other professions?
a. Due professional care.
b. Competence.
c. Independence.
d. Complex body of knowledge.
ANSWER: C
20. According to the standards of the profession, which of
thefollowing circumstances will prevent a CPA performing
auditengagements from being independent?
a. Obtaining a collateralized automobile loan from a
financialinstitution client.
b. Litigation with a client relating to billing for consultingservices for
which the amount is immaterial.
c. Employment of the CPA’s spouse as a client’s director of internal
audit.
d. Acting as an honorary trustee for a not-for-profit organization
client.
ANSWER: C
1. Which of the following is not a financial statement 5. An audit engagement letter least likely includes
assertion relating to account balances? a. A reference to the inherent limitation of an audit that
a. Rights and obligations some material misstatements may remain
b. Existence undiscovered.
c. Completeness b. Identification of specific audit procedures that the
d. Valuation and competence auditor needs to undertake.
c. Description of any letters or reports that the auditor
ANSWER: D expects to submit to the client.
d. Arrangements concerning the involvement of internal
2. The risk that an auditor will conclude, based on substantive auditors and other client’s staff.
tests, that a material misstatement does not exist in an
account balance when, in fact, such misstatement does exist ANSWER: B
is referred to as
a. Detection risk 6. Which of the following actions may be appropriate if the
b. Inherent risk auditor is unable to agree to a change of the engagement
c. Sampling risk and is not permitted to continue the original engagement:
d. Nonsampling risk I. Issue a qualified opinion due to a significant
scope limitation.
ANSWER: A II. Auditor should withdraw from the engagement.
III. Consider whether there is any obligation to report
3. Relationship between control risk and detection risk is to the board of directors or shareholders the
ordinarily circumstances necessitating withdrawal.
a. Direct a. I, II, III
b. Parallel b. I and II
c. Inverse c. II and III
d. Equal d. I only

ANSWER: C ANSWER: C

4. Which of the following statements is not correct about
materiality?
a. An auditor’s consideration of materiality is influenced
by the auditor’s perception of the needs of a
reasonable person who will rely on the financial
statements
b. An auditor considers materiality for planning purposes
in terms of the largest aggregate level of
misstatements that could be material to any one of the
financial statements
c. The concept of materiality recognizes that some
matters are important for fair presentation of financial
statements in conformity with GAAP, while other
matters are not important.
d. Materiality judgments are made in light of surrounding
circumstances and necessarily involve both
quantitative and qualitative judgments
ANSWER: B
7. To obtain an understanding of a continuing client’s
business in planning an audit, an auditor most likely would
a. Read specialized industry journals
b. Perform tests of details of transactions and balances
c. Review prior-year working papers and the permanent
file for the client.
d. Re-evaluate client’s internal control environment.
ANSWER: C
8. Analytical procedures, which means the analysis of
significant ratios and trends including the resulting
investigation of fluctuations and relationships that are
inconsistent with other relevant information or which
deviate from predicted amounts, are not required to be
applied
a. Overall review stage of the audit
b. At the planning stage of the audit
c. As substantive procedures
d. None of the above

ANSWER: C
9. As the acceptable level of detection risk decreases, the
assurance directly provided from
a. Substantive tests should decrease.
b. Tests of controls should increase.
c. Substantive tests should increase.
d. Test of controls should decrease.
ANSWER: C
10. When performing a financial statement audit, auditors are
required to explicitly assess the risk of material
misstatement due to
a. Fraud
b. Business risk
c. Illegal acts
d. Errors
ANSWER: A
11. An auditor is unable to obtain absolute assurance that
misstatements due to fraud will be detected for all of the
following except
a. Falsified documentation
b. Employee collusion
c. Professional skepticism
d. Need to apply professional judgment in evaluating
fraud risk factors
ANSWER: C
12. According to PSA 400 – Risk Assessments and Internal
Control, audit risk means
a. The risk that an auditor’s substantive procedures will
not detect a misstatement that exists in an account
balance or class of transactions that could be material,
individually or when aggregated with misstatements in
other balances or classes.
b. The risk that the auditor gives an inappropriate audit
opinion when the financial statements are materially
misstated.
c. The risk that a misstatement, that could occur in an
account balance or class of transactions and that could
be material, individually or when aggregated with
misstatements in other balances or classes, will not be
prevented or detected and corrected on a timely basis
by the accounting and internal control systems.
d. The susceptibility of an account balance or class of
transactions to misstatements that could be material,
individually or when aggregated with misstatements in
other balances or classes, assuming that there were no
related internal controls.
ANSWER: B
13. An auditor decides to increase the assessed level of control
risk from that originally planned on the basis of audit
evidence gathered and evaluated. To achieve an overall
audit risk level that is substantially the same as the planned
audit risk level, the auditor would
a. Decrease substantive testing.
b. Decrease detection risk.
c. Increase materiality levels.
d. Increase inherent risk.
ANSWER: B
14. Which of the following statements is true?
a. If control risk is assessed at maximum, the timing of
related substantive tests should be changed from year-
end to an interim date.
b. If control risk is assessed at maximum, the extent of
related substantive tests should be changed from a
larger to smaller sample.
c. If control risk is assessed at maximum, the nature of
related substantive tests should be changed from more
to less effective.
d. If control risk is assessed at maximum, the nature of
related substantive tests should be changed from less
to more effective.
ANSWER: D
15. Which of the following is incorrect regarding PSA 315?
a. The purpose of this PSA is to establish standards and
to provide guidance on obtaining an understanding of
the entity and its environment, including its internal
control, and on assessing the risks of material
misstatement in a financial statement audit.
b. This PSA requires the auditor to make risk
assessments at the financial statement and assertion
levels based on an appropriate understanding of the
entity and its environment, including its internal
control.
c. The requirements and guidance of this PSA are to be
applied in conjunction with the requirements and
guidance provided in other PSAs.
d. This PSA discusses the auditor’s responsibility to
determine overall responses and to design and perform
further audit procedures whose nature, timing, and
extent are responsive to the risk assessments.
ANSWER: D
16. The assessment of the risks of material misstatement at the
financial statement level is affected by the auditor’s
understanding of the control environment. Weaknesses in
the control environment ordinarily will lead the auditor to
a. Conduct some audit procedures at an interim date
rather than at period end.
b. Have more confidence in internal control and the
reliability of audit evidence generated internally
within the entity.
c. Modify the nature of audit procedures to obtain more
persuasive audit evidence.
d. Decrease the number of locations to be included in the
audit scope.
ANSWER: C
20. Which of the following statements is correct concerning an
auditor’s required communication with those charged with
governance of an audit client?
a. This communication is required to occur before the
auditor’s report on the financial statements is issued.
b. Significant audit adjustments proposed by the auditor
and recorded by management need not be
communicated to those charged with governance.
c. Any significant matter communicated to the audit
committee also should be communicated to
management.
d. This communication should include discussion of any
significant disagreements with management
concerning the financial statements.

ANSWER: D
17. The assessment of the risks of material misstatement at the
financial statement level is affected by the auditor’s
understanding of the control environment. Weaknesses in
the control environment ordinarily will lead the auditor to
a. Have more confidence in internal control and the
reliability of audit evidence generated internally
within the entity.
b. Decrease the number of locations to be included in the
audit scope.
c. Conduct some audit procedures at an interim date
rather than at period end.
d. Modify the nature of audit procedures to obtain more
persuasive audit evidence.

ANSWER: D

18. Analytical procedures used during risk assessment in an

audit should focus on
a. Enhancing the auditor’s understanding of the client’s
business.
b. Reducing the scope of tests of controls and substantive
tests.
c. Providing assurance that potential material
misstatements will be identified.
d. Assessing the adequacy of the available evidence.

ANSWER: A

19. The in-charge auditor most likely would have a supervisory

responsibility to explain to the staff assistants
a. What benefits may be attained by the assistants’
adherence to established time budgets.
b. Why certain documents are being transferred from the
current file to the permanent file.
c. How the results of various auditing procedures
performed by the assistants should be evaluated.
d. That immaterial fraud is not to be reported to the
client’s audit committee.

ANSWER: C
1. In assessing the objectivity of a client’s internal auditors, 6. This organization developed a set of criteria that provide
the CPA would be most likely to consider internal auditor. management with a basis to evaluate controls not only over
a. Education levels financial reporting, but also over the effectiveness and
b. Organizational status within the company. efficiency of operations and compliance with laws and
c. Training and supervisory skills. regulations:
d. Experience. a. Financial Accounting Standards Board.
b. Committee of Sponsoring Organizations (COSO).
ANSWER: B c. Foreign Corrupt Practices Corporation.
d. Cohen Commission.

2. Tests of controls do not ordinarily address:

a. How a control was applied. ANSWER: B
b. The consistency with which a control was applied.
c. The cost effectiveness of the way a control was 7. Which of the following is most likely to be considered a
applied. risk assessment procedure relating to internal control?
d. By whom a control was applied. a. Trace a transaction through the information system
relevant to financial reporting.
ANSWER: C b. Take test counts of the year-end inventory.
c. Perform a test of a control relating to payroll.
d. Confirm accounts receivable.
3. Which of the following would be least likely to be regarded
as a test of a control?
a. Tests of signatures on purchase orders. ANSWER: A
b. Tests of the additions to property by physical
inspection. 8. Which of the following is not a component of the control
c. Comparisons of the signatures on cancelled checks to environment?
the authorized check signer list.
a. Risk assessment.
d. Recalculation of payroll deductions.
b. Organizational structure.
c. Integrity and ethical values.
ANSWER: B d. Commitment to competence.

4. Which of the following is not considered one of the five ANSWER: A

major components of internal control?
a. Risk assessment
9. A control deficiency that is less severe than a material
b. Monitoring
weakness, but important enough to merit attention by those
c. Control activities responsible for oversight of the company's financial
d. Segregation of duties reporting is referred to as a(n):
a. Control deficiency.
ANSWER: D b. Inherent limitation.
c. Reportable deficiency.
d. Significant deficiency.
5. On financial statement audits, it is required that the auditors
obtain an understanding of internal control, including:
a. Its operating effectiveness. ANSWER: D
b. Performing tests of controls for all material controls.
c. Whether it has been implemented (placed in
operation).
d. Its ability to provide reasonable assurance.

ANSWER: C
10. Which of the following is an advantage of describing 15. Which of the following audit tests would be regarded as a
internal control through the use of a standardized test of a control?
questionnaire? a. Tests of the additions to property, plant, and
a. Questionnaires usually identify situations in which equipment by physical inspection.
internal control weaknesses are compensated for by b. Tests confirming receivables.
other strengths in the system. c. Tests of the signatures on canceled checks to board of
b. Questionnaires are more flexible than other methods director's authorizations.
of describing internal control. d. Tests of the specific items making up the balance in a
c. Questionnaires highlight weaknesses in the system. given general ledger account.
d. Questionnaires provide a clearer and more specific
portrayal of a client's system than other methods of ANSWER: C
describing internal control.
16. In the consideration of internal control, the operating
effectiveness of controls is tested by:
ANSWER: C
a. Substantive procedures.
b. Flowchart verification
11. Which of the following is not a responsibility that should c. Test of controls.
be assigned to a company's internal audit department? d. Decision tables
a. Approving disbursements
b. Evaluating internal control. ANSWER: C
c. Investigating potential merger candidates.
d. Reporting on the effectiveness of operating segments.
17. Which of the following is correct with respect to control
ANSWER: A
deficiencies discovered during an audit?
a. All such matters must be communicated to the audit
12. The internal control provisions of the Sarbanes-Oxley Act committee and regulatory agencies.
of 2002 apply to which companies in the United States:
b. Auditors must communicate and recommend
a. Only those companies included in the Fortune 500. corrections relating to all material weaknesses in
b. All companies. internal control to management.
c. SEC registrants. c. All control deficiencies are also significant
d. All non-public companies. deficiencies.
d. All material weaknesses in internal control should be
ANSWER: C reported to the audit committee.

13. Tests of controls are most likely to be performed when: ANSWER: D

a. The auditor wishes to assess control risk at the
maximum. 18. The major components of internal control include all of the
b. The client's control environment appears weak. following, except:
c. Controls seem weak and must be properly
a. Risk assessment.
documented. b. Control activities.
d. Inadequate substantive procedures exist to restrict c. Internal auditing.
audit risk to an acceptable level.
d. The control environment.
ANSWER: D
ANSWER: C
14. If the independent auditors decide that the work performed
by the internal auditors may have a bearing on their own 19. Which of the following is least likely to be considered a
procedures, they should consider the internal auditors': risk assessment procedure?
a. Independence and review skills. a. Analytical procedures.
b. Efficiency and experience. b. Inspection of documents.
c. Training and supervisory skills. c. Observation of the counting of inventory.
d. Competence and objectivity. d. Observation of the performance of certain accounting
procedures.
ANSWER: D
ANSWER: C
20. Which of the following factors would most likely be
considered an inherent limitation to an entity's internal
control?
a. Human judgment in the decision making process.
b. The ineffectiveness of the board of directors.
c. The complexity of the information processing
system.
d. The lack of management incentives to improve the
control environment.

ANSWER: A
1. Which of the following types of audit evidence is the least 6. In determining whether transactions have been recorded,
persuasive? the direction of the audit testing should be from the
a. Correspondence from the client’s attorney about a. Original source documents.
litigation. b. General journal entries.
b. Bank statements obtained from the client. c. General ledger balances.
c. Test counts of inventory performed by the auditor. d. Adjusted trial balance.
d. Prenumbered purchase order forms.
ANSWER: A
ANSWER: D
7. Which of the following is the best example of a substantive
2. Which of the following types of audit evidence is the most procedure?
persuasive? a. Confirmation of balances of accounts receivable.
a. Client work sheets supporting cost allocations. b. Examining a sample of cash disbursements to test
b. Prenumbered client purchase order forms. whether expenses have been properly approved.
c. Client representation letter. c. Flowcharting of the client’s cash receipts system.
d. Bank statements obtained from the client. d. Comparison of signatures on checks to a list of
authorized signers.
ANSWER: D
ANSWER: A
3. In testing the existence assertion for an asset, an auditor
ordinarily works from the 8. The auditor will most likely perform extensive tests for
a. Financial statements to the potentially unrecorded possible understatement of
items. a. Assets
b. Supporting evidence to the accounting records. b. Revenue
c. Accounting records to the supporting evidence. c. Capital
d. Potentially unrecorded items to the financial d. Liabilities
statements. ANSWER: D
ANSWER: C 9. Which of the following pairs of accounts would an auditor
4. An entity’s income statements were misstated due to the most likely analyze on the same working paper?
recording of journal entries that involved debits and credits a. Accrued interest receivable and accrued interest
to an unusual combination of expense and revenue payable.
accounts. The auditor most likely could have detected this b. Interest income and interest expense.
fraudulent financial reporting by c. Notes payable and notes receivable.
a. Evaluating the effectiveness of internal control. d. Notes receivable and interest income.
b. Performing analytical procedures designed to disclose
differences from expectations. ANSWER: D
c. Tracing a sample of journal entries to the general 10. The permanent file of an auditor’s working papers
ledger. generally would not include
d. Investigating the reconciliations between controlling a. Working trial balance
accounts and subsidiary records. b. Bond indenture agreements
ANSWER: B c. Flowchart of internal control
d. Lease agreements
5. Auditors try to identify predictable relationships when
using analytical procedures. Relationships involving ANSWER: A
transactions from which of the following accounts most 11. The audit working paper that reflects the major components
likely would yield the highest level of evidence? of an amount reported in the financial statements is the
a. Accounts receivable. a. Carryforward schedule
b. Accounts payable. b. Supporting schedule
c. Travel and entertainment expense. c. Interbank transfer schedule
d. Interest Expense. d. Lead schedule
ANSWER: D ANSWER: D
12. Which of the following statements is correct concerning the
use of negative confirmation requests?
a. Unreturned negative confirmation requests indicate
that alternative procedures are necessary.
b. Negative confirmation requests are effective when
detection risk is low.
c. Negative confirmation requests are effective when
understatements of account balances are suspected.
d. Unreturned negative confirmation requests rarely
provide significant explicit evidence.
ANSWER: D
13. An auditor selected items for test counts while observing a
client’s physical inventory. The auditor then traced the test
counts to the client’s inventory listing. This procedure most
likely obtained evidence concerning management’s
assertion of
a. Rights
b. Valuation
c. Existence
d. Completeness
ANSWER: D
14. The auditor is most likely to seek information from the
plant manager with respect to the
a. Deferral of procurement of certain necessary insurance
coverage.
b. Adequacy of the provision for uncollectible accounts.
c. Appropriateness of physical inventory observation
procedures.
d. Existence of obsolete machinery.
ANSWER: D
15. This consists of checking the mathematical accuracy of
documents or records.
a. Recalculation
b. Inspection
c. Reperformance
d. Confirmation
ANSWER: A
16. The competence of evidence available to an auditor is least
likely to be affected by
a. The sampling method employed by the auditor to
obtain a sample of such evidence.
b. The relationship of the preparer of such evidence to
the entity being audited.
c. The relevance of such evidence to the financial
statement assertion being investigated.
d. The timeliness of such audit evidence.
ANSWER: A
17. An advantage of statistical sampling over nonstatistical
sampling is that statistical sampling helps an auditor to
a. Measure the sufficiency of the evidential matter
obtained.
b. Reduce the level of audit risk and materiality to a
relatively low amount.
c. Eliminate nonsampling risk.
d. Minimize the failure to detect errors and frauds.
ANSWER: A
18. When the auditor goes through a population and selects
items for the sample without regard to their size, source, or
other distinguishing characteristics, it is called
a. Block selection
b. Haphazard selection
c. Systematic selection
d. Random selection
ANSWER: B
19. Which of the following statements is correct?
a. For a given tolerable rate, a larger sample size should
be selected as the expected population deviation rate
decreases.
b. As the population size doubles, the sample size also
should double.
c. The population size has little or no effect on sample
size except for very small populations.
d. The expected population deviation rate has little or no
effect on sample size.
ANSWER: C
20. Several risks are inherent in the evaluation of audit
evidence that has been obtained through the use of
statistical sampling. An example of a beta or Type II error
related to sampling risk is the failure to
a. Draw a random sample from the population.
b. Properly define the population to be sampled.
c. Reject the statistical hypothesis that a book value is
not materially misstated when the true book value is
materially misstated.
d. Accept the statistical hypothesis that the book value is
not materially misstated when the true book value is
not materially misstated.
ANSWER: C
1. The existence of audit risk is recognized by the statement in 5. When financial statements are affected by a material
the auditor’s standard report that the auditor departure from generally accepted accounting principles,
a. Assesses the accounting principles used and also the auditors should:
evaluates the overall financial statement presentation. a. Issue an unqualified report with an explanatory
b. Realizes some matters, either individually or in the paragraph.
aggregate, are important while other-matters are not b. Issue an "except for" qualification or a disclaimer of
important. opinion.
c. Is responsible for expressing an opinion on the c. Withdraw from the engagement.
financial statements, which are the responsibility of d. Issue an "except for" qualification or an adverse
management. opinion.
d. Obtains reasonable assurance about whether the
financial statements are free of material misstatement. ANSWER: D

ANSWER: D 6. The first paragraph of a standard unqualified audit report

for a nonpublic client is referred to as the:
2. When an auditor of financial statements has substantial a. Introductory paragraph.
doubt about an entity's ability to continue as a going b. Opinion paragraph.
concern because of the probable discontinuance of c. Explanatory paragraph.
operations, the auditor most likely would express a d. Scope paragraph.
qualified opinion if
a. Information about the entity's ability to continue as a ANSWER: A
going concern is not disclosed.
b. Management has no plans to reduce or delay future 7. A scope restriction is least likely to result in a(an):
expenditures. a. Disclaimer of opinion.
c. Negative trends and recurring operating losses appear b. Standard unqualified opinion.
to be irreversible. c. Qualified opinion.
d. The effects of the adverse financial conditions likely d. Adverse opinion.
will cause a bankruptcy filing.
ANSWER: D
ANSWER: A
8. For which of the following events would an auditor issue a
3. Which of the following procedures most likely would assist report that omits any reference to consistency?
an auditor in identifying conditions and events that may a. A change from an accounting principle that is not
indicate substantial doubt about an entity's ability to generally accepted to one that is generally accepted.
continue as a going concern? b. A change in the useful life used to calculate the pro
a. Inspecting title documents to verify whether any real vision for depreciation expense.
property is pledged as collateral. c. A change in the method of accounting for inventories.
b. Inquiring of the entity's legal counsel about litigation, d. Management’s lack of reasonable justification for a
claims, and assessments. change in accounting principle.
c. Performing cutoff tests of sales transactions with
customers with long-standing receivable balances. ANSWER: B
d. Evaluating the entity's procedures for identifying and
recording related party transactions. 9. Waikiki Co. uses the FIFO method of costing for its
international subsidiary’s inventory and LIFO for its
ANSWER: B domestic inventory. Under these circumstances, the
4. Which of the following is most accurate with respect to a auditor’s report on Waikiki’s financial statements should
CPA's responsibility in considering a going concern express an
question on financial statement audits? a. Unmodified opinion.
a. Based on audit procedures performed, assess whether b. Opinion qualified because of a lack of consistency.
there is substantial doubt about the entity's ability to c. Adverse opinion.
continue as a going concern. d. Opinion qualified because of a departure from GAAP.
b. Determine that related uncertainties are properly ANSWER: A
disclosed and make no mention in the audit report.
c. Perform analytical procedures aimed particularly at
assessing whether bankruptcy is probable.
d. Issue a report with a "going concern" modification
when failure is at least reasonably probable.

ANSWER: A
10. An uncertainty facing the firm relating to the possible
future results of litigation filed against client is most likely
to result in which of the following types of audit report?
a. Unqualified with emphasis-of-matter paragraph.
b. Qualified with a basis for qualification paragraph.
c. Adverse with a basis for adverse opinion paragraph.
d. Qualified due to a scope limitation.
13. Shanti, CPA, audited Dope Co.’s prior year financial
statements. These statements are presented with those of
the current year for comparative purposes without Shanti’s
auditor’s report, which expressed a qualified opinion. In
drafting the current year’s auditor’s report, Mau, CPA, the
successor auditor, should
I. Not name Shanti as the predecessor auditor.

ANSWER: A II. Indicate the type of report issued by Shanti.

III. Indicate the substantive reasons for Shanti’s

11. Lee Jong Suk, CPA, completed gathering sufficient qualification.
appropriate audit evidence for the audit of Bae Suzy Co.’s
December 31, 2018 financial statements on March 6, 2019. a. II and III only.
A subsequent event requiring adjustment to the 2018 b. I and II only.
financial statements occurred on April 10, 2019 and came c. I only
to Lee Jong Suk’s attention on April 24, 2019. If the d. I, II, III.
adjustment is made without dis closure of the event, Lee
Jong Suk’s report ordinarily should be dated ANSWER: D
a. March 6, 2019.
b. Using dual dating.
c. April 24, 2019. 14. Compiled financial statements for the prior year presented
in comparative form with audited financial statements for
d. April 10, 2019.
the current year should be clearly marked to indicate their
status and
ANSWER: A
I. The report on the prior period should be reissued to
accompany the current period report.
12. A group engagement partner decides not to refer to the
audit of another CPA who audited a component of the II. The report on the current period should include as a
overall group financial statements. After making inquiries separate paragraph a description of the responsibility
assumed for the prior period’s financial statements.
about the other CPA’s professional reputation and
independence, the principal auditor most likely would a. I only.
a. Perform additional audit procedures based on the b. Both I and II.
significance of the subsidiary. Perform additional audit c. II only.
procedures based on the significance of the subsidiary. d. Either I or II.
b. Obtain written permission from the other CPA to omit
the reference in the principal auditor’s report. ANSWER: D
c. Document in the engagement letter that the principal
15. An audit client has refused to allow the auditors to perform
auditor assumes no responsibility for the other CPA’s
a generally accepted auditing procedure. The circumstance
work and opinion.
would normally result in the issuance of:
d. Add an emphasis-of-matter paragraph to the auditor’s
report indicating that the subsidiary’s financial
statements are not material to the consolidated a. An unqualified report with explanatory language.
financial statements. b. An "except for" qualification of the report.
c. A disclaimer of opinion.
ANSWER: A d. An adverse opinion.

ANSWER: C

16. If principal auditors make no reference to other auditors

whose work they have relied on as a part of the basis for
their report, the principal auditors:
a. Are issuing a qualified opinion.
b. Are issuing an inappropriate report.
c. Are not required to investigate the professional
reputation of the other auditors.
d. Are assuming full responsibility for the work of the
other auditors.

ANSWER: D
17. Which of the following will not result in qualification of
the auditors' report due to a scope limitation?
a. Reliance placed upon the report of other auditors.
b. Inadequacy in the accounting records.
c. Inability to obtain sufficient competent evidential
matter.
d. Restrictions imposed by the client.

ANSWER: A

18. When the auditor is unable to determine the amounts

associated with the illegal acts of client personnel because
of an inability to obtain adequate evidence, the auditor
should issue a(an):
a. Adverse opinion.
b. “Subject to” qualified opinion.
c. Disclaimer of opinion.
d. Unqualified opinion with a separate explanatory
paragraph.

ANSWER: C

19. Park, an independent auditor, was engaged to perform an

audit of the financial statements of Bogum Incorporated
one month after its fiscal year had ended. Although the
inventory count was not observed by Park, and accounts
receivable were not confirmed by direct communication
with debtors, Park was able to gain satisfaction by applying
alternative auditing procedures. Doe's audit report will
probably contain:
a. An unqualified opinion and an explanatory paragraph.
b. A standard unqualified opinion.
c. Either a qualified opinion or a disclaimer of opinion.
d. An "except for" qualification.

ANSWER: B

20. For a continuing audit client, when a complete set of

financial statements is presented on a comparative basis for
two years, the auditors' opinion would refer to:
a. Each of the years in the two-year period.
b. Each of the two years plus the preceding year.
c. Either one or both years at the option of the auditors.
d. Only the current year under audit.

ANSWER: A