ABFA4155 – Audit & Assurance

Multiple-Choice Questions
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1. Recording, classifying, and summarizing economic events in a logical manner for the purpose
of providing financial information for decision making is commonly called:
a. finance.
b. auditing.
c. accounting.
d. economics.

2. In the audit of historical financial statements, which of the following accounting bases is the
most common?
a. Regulatory accounting principles.
b. Cash basis of accounting.
c. International financial reporting standards.
d. Liquidation basis of accounting.

3. Any service that requires a CA firm to issue a report about the reliability of an assertion that is
made by another party is a(n):
a. accounting and bookkeeping service.
b. attestation service.
c. assurance service.
d. tax service.

4. Three common types of attestation services are:

a. audits, reviews, and “other” attestation services.
b. audits, verifications, and “other” attestation services.
c. reviews, verifications, and “other” attestation services.
d. audits, reviews, and verifications.

5. Providing quantitative information that management and others can use to make decisions is
the function of:
a. management information systems.
b. auditing.
c. finance.
d. accounting.

6. An audit of historical financial statements most commonly includes the:

a. statement of financial position, the statement of profit or loss and comprehensive
income, and the statement of cash flows.
b. statement of profit or loss and comprehensive income, the statement of cash flows, and
the statement of net working capital.
c. statement of cash flows, the statement of financial position, and the retained earnings
statement.
d. statement of financial position, the statement of profit or loss and comprehensive
income, and the statement of cash flows.

7. An operational audit has as one of its objectives to:

a. determine whether the financial statements fairly present the entity’s operations.
b. evaluate the feasibility of attaining the entity’s operational objectives.
c. make recommendations for improving performance.
d. report on the entity’s relative success in attaining profit maximization.

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8. An audit of historical financial statements is most often performed to determine whether the:
a. organization is operating efficiently and effectively.
b. entity is following specific procedures or rules set down by some higher authority.
c. management team is fulfilling its fiduciary responsibilities to shareholders.
d. none of these choices.

9. An examination of part of an organization’s procedures and methods for the purpose of

evaluating efficiency and effectiveness is what type of audit?
a. Operational audit.
b. Compliance audit.
c. Financial statement audit.
d. Production audit.

10. An audit to determine whether an entity is following specific procedures or rules set down by
some higher authority is classified as a(n):
a. audit of financial statements.
b. compliance audit.
c. operational audit.
d. production audit.

11. Which of the following is a type of audit evidence?

a. Oral responses to the auditor from employees of the company under audit.
b. Written communications from company employees or outsiders.
c. Observations made by an auditor.
d. Evidence may take any of the above forms.

12. Which of the following services provides the lowest level of assurance on a financial
statement?
a. A review.
b. An audit.
c. Neither service provides assurance on financial statements.
d. Each service provides the same level of assurance on financial statements.

13. The three requirements for becoming a CA include all but which of the following?
a. Uniform CA examination requirement.
b. Educational requirements.
c. Character requirements.
d. Experience requirement.

14. In “auditing” financial accounting data, the primary concern is with:

a. determining whether recorded information properly reflects the economic events that
occurred during the accounting period.
b. determining if fraud has occurred.
c. determining if taxable income has been calculated correctly.
d. analyzing the financial information to be sure that it complies with government
requirements.

15. Financial statement users often receive unreliable financial information from companies.
Which of the following is not a common reason for this?
a. Complex business transactions.
b. Large amounts of data.
c. Lack of firsthand knowledge about the business.
d. Each of these choices is a common reason for unreliable financial information.

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16. Which one of the following is more difficult to evaluate objectively?
a. Presentation of financial statements in accordance with generally accepted accounting
principles.
b. Compliance with government regulations.
c. Efficiency and effectiveness of operations.
d. All three of the above are equally difficult.

17. Which of the following can be significantly affected by an audit?

a. Business risk.
b. Information risk.
c. The risk-free interest rate.
d. All of these are correct.

18. The trait that distinguishes auditors from accountants is the:

a. auditor’s ability to interpret accounting principles generally accepted in the United
States.
b. auditor’s education beyond the Bachelor’s degree.
c. auditor’s ability to interpret FASB Statements.
d. auditor’s accumulation and interpretation of evidence related to a company’s financial
statements.

19. Which one of the following is not one of the three General Standards?
a. Proper planning and supervision.
b. Independence of mental attitude.
c. Adequate training and proficiency.
d. Due professional care.

20. The General Standards stress the importance of:

a. evidence accumulation.
b. personal qualities the auditor should possess.
c. communicating the auditor’s findings to the reader.
d. all of the above.

21. The generally accepted auditing standard that requires “Adequate technical training and
proficiency” is normally interpreted as requiring the auditor to have:
a. formal education in auditing and accounting.
b. adequate practical experience for the work being performed.
c. continuing professional education.
d. all of the above.

22. In any case in which the CA or the CA’s assistants are not qualified to perform the work, a
professional obligation exists to:
a. acquire the requisite knowledge and skills.
b. suggest someone else who is qualified to perform the work.
c. decline the engagement.
d. any of the above.

23. Statements on Auditing Standards provide auditors of privately held companies with ______
guidance regarding the conduct of financial statement audits.
a. fairly extensive
b. some limited
c. practically no
d. specific and detailed

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24. Which of the following statements most accurately captures the intent of the standards of field
work?
a. Field work standards are primarily concerned with personal attributes necessary during
the conduct of the audit.
b. Field work standards provide extensive guidance regarding the conduct of an audit.
c. Field work standards are primarily directed at the auditor’s planning, understanding of
internal control, and evidence accumulation.
d. Field work standards are primarily concerned with the conduct of substantive testing as
opposed to testing of internal controls.

25. The Statements on Auditing Standards issued by the Auditing Standards Board:
a. are interpretations of generally accepted auditing standards.
b. are the equivalent of laws for audit practitioners.
c. must be followed in all situations.
d. are optional guidelines which an auditor may choose to follow or not follow when
conducting an audit.

26. An auditor need not abide by a particular auditing standard if the auditor believes that:
a. the issue in question is immaterial in amount.
b. the requirement of the standard is impractical to perform.
c. the requirement of the standard is impossible to perform.
d. any of the above three are correct.

27. The general standard states that due care is to be exercised in the performance of an audit.
This standard is generally interpreted to require:
a. objective review of the adequacy of the technical training of firm personnel.
b. thorough review of the existing internal control structure.
c. critical review of work done at every level of supervision.
d. periodic review of a CA firm’s quality control procedures.

28. Which of the following statements best describes the primary purpose of Statements on
Auditing Standards?
a. They are guides intended to set forth auditing procedures that are applicable to a variety
of situations.
b. They are procedural outlines that are intended to narrow the areas of inconsistency and
divergence of auditor opinion.
c. They are authoritative statements, enforced through the Code of Professional Conduct,
and are intended to limit the degree of auditor judgment.
d. They are interpretations that are intended to clarify the meaning of “generally accepted
auditing standards.”

29. The auditor’s judgment concerning the overall fairness of presentation of financial position,
results of operations, and changes in cash flow is applied within the framework of:
a. quality control.
b. generally accepted auditing standards which include the concept of materiality.
c. the auditor’s evaluation of the audited company’s internal control.
d. accounting principles.

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30. A basic objective of a CA firm is to provide professional services to conform to professional

standards. Reasonable assurance of achieving this basic objective is provided through:
a. continuing professional education.
b. compliance with generally accepted reporting standards.
c. a system of quality control.
d. a system of peer review.

31. Within the context of quality control, the primary purpose of continuing professional
education and training activities is to enable a CA firm to provide its personnel with:
a. technical training that assures proficiency as a valuation expert.
b. professional education that is required in order to perform with due professional care.
c. knowledge required to fulfill assigned responsibilities.
d. knowledge required to perform a peer review.

32. Williams & Co., a member of the Private Companies Practice Section, is to have a “peer
review.” The peer review can be performed by:
a. a CA firm selected by Williams & Co.
b. a review team selected by the state society.
c. a only.
d. either a or b.

33. Which of the following is not an essential component of quality control?

a. Policies and procedures to ensure that firm personnel are actively engaged in marketing
strategies.
b. Policies and procedures to ensure that the work performed by firm personnel meet
applicable professional standards.
c. Policies to ensure that personnel maintain their independence in fact and in appearance.
d. Policies that ensure that monitoring activities are effectively applied.

34. To emphasize the fact that the auditor is independent, the addressee of the audit report is
usually not:
a. the company’s management.
b. the stockholders of the client company.
c. the board of directors of the client company.
d. either b or c.

35. The purpose of the introductory paragraph in the standard unqualified report is:
a. to identify the entity that was audited.
b. to identify the financial statements that were audited and the dates and time periods
covered by the report.
c. to communicate the responsibilities of management in preparing the financial statements
and to clarify the respective roles of management and the auditor.
d. all of the above.

36. The scope paragraph of the standard unqualified audit report states that the audit is designed
to:
a. discover all errors and/or irregularities.
b. discover material errors and/or irregularities.
c. conform to generally accepted accounting principles.
d. obtain reasonable assurance whether the statements are free of material misstatement.

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37. Which of the following is not an essential condition for issuing the standard unqualified audit
opinion?
a. All statements are included in the financial statements.
b. The general standards have been followed in all respects.
c. The financial statements are prepared in accordance with regulatory principles.
d. Sufficient appropriate audit evidence has been accumulated.

38. The audit report date on a standard unqualified report indicates:

a. the last day of the fiscal period.
b. the date on which the financial statements were filed with the Securities and Exchange
Commission.
c. the last date on which users may institute a lawsuit against either client or auditor.
d. the last day of the auditor’s responsibility for the review of significant events that
occurred subsequent to the date of the financial statements.

39. As a result of management’s refusal to permit the auditor to physically examine inventory, the
auditor has not accumulated sufficient appropriate evidence to conclude whether financial
statements are stated in accordance with IFRS. The auditor must depart from the unqualified
audit report because:
a. the financial statements have not been prepared in accordance with IFRS.
b. the scope of the audit has been restricted by circumstances beyond either the client’s or
auditor’s control.
c. the auditor has lost independence.
d. the scope of the audit has been restricted.

40. An adverse opinion is issued when the auditor believes:

a. some parts of the financial statements are materially misstated or misleading.
b. the financial statements would be found to be materially misstated if an investigation
were performed.
c. the auditor is not independent.
d. the overall financial statements are so materially misstated that they do not present fairly
the financial position or results of operations and cash flows in conformity with IFRS.

41. A disclaimer of opinion may be issued in which of the following instances?

a. The auditor has doubts related to an entity’s ability to continue as a going concern.
b. There are highly material misstatements in the financial statements.
c. The auditor’s scope has been restricted due to circumstances beyond the client’s control.
d. A disclaimer may be issued for circumstances discussed in a and c.

42. Whenever an auditor issues a standard unqualified audit report, the implication is the auditor:
a. does not know if the financial statements are presented fairly in accordance with IFRS.
b. does not believe the financial statements are presented fairly in accordance with IFRS.
c. believes the financial statements to be presented fairly in accordance with IFRS except
for a specific aspect of them.
d. believes the financial statements are presented fairly in accordance with IFRS.

43. If a misstatement is immaterial to the financial statements of the entity for the current period,
but is expected to have a material effect in future periods, it is appropriate to issue a(n):
a. adverse opinion.
b. qualified opinion.
c. unqualified opinion.
d. disclaimer of opinion.
44. When determining whether an exception is “highly material,” the extent to which the
exception affects different elements of the financial statements must be considered. This

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concept is called:
a. materiality.
b. pervasiveness.
c. financial analysis.
d. ratio analysis.

45. When the auditor believes a company’s financial statements are misleading because they were
not prepared in conformity with IFRS, the auditor must issue a(n):
a. qualified opinion.
b. adverse opinion.
c. disclaimer of opinion.
d. qualified or an adverse opinion, depending on materiality.

46. The only unqualified opinions which contain modified wording (excluding an explanatory
paragraph) relate to:
a. the use of other auditors.
b. material uncertainties.
c. substantial doubt about continuing as a going concern.
d. lack of consistent application of IFRS.

47. The second standard of reporting requires the auditor to call attention to circumstances in
which accounting principles have not been consistently observed in the current period relative
to the preceding period. IFRS requires that changes in accounting principles be to a(n):
a. more conservative principle.
b. equal or better principle.
c. preferable principle.
d. principle allowed by the company’s auditing firm.

48. A CA may wish to emphasize specific matters regarding the financial statements even though
she intends to express an unqualified opinion. Normally, such explanatory information is:
a. included in the scope paragraph.
b. included in the opinion paragraph.
c. included in a separate paragraph in the report.
d. included in the introductory paragraph.

49. An auditor who issues a qualified opinion because she was unable to obtain sufficient
appropriate evidence should describe the limitations in an explanatory paragraph. The auditor
should also refer to the limitation in the:
Scope Opinion Notes to the
paragraph paragraph financial statements
a. Yes No Yes
b. Yes Yes Yes
c. No Yes No
d. Yes Yes No

50. When the auditor evaluates the effect of a change in accounting principle, the materiality of
the change should be evaluated based on:
a. the prior years presented.
b. the current year effect of the change.
c. whatever basis the auditor considers appropriate.
d. the effect on total assets.

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51. Conditions requiring a departure from an unqualified audit report include all but which of the
following?
a. Management refused to allow the auditor to confirm significant trade receivable for
which there were no alternative procedures performed.
b. Management decided not to allow the auditor to confirm significant trade receivable, but
the auditor obtained sufficient appropriate evidence by examining subsequent cash
receipts.
c. The audit partner’s dependent child received a gift of 100 shares of a client’s stock for
her birthday from a grandparent.
d. Management has determined that non-current assets should be reported in the statement
of financial position at their replacement values rather than historical costs. The auditors
do not concur.

52. The introductory paragraph of the standard audit report states that the financial statements are:
a. the responsibility of the auditor.
b. the responsibility of management.
c. the joint responsibility of management and the auditor.
d. none of the above.

53. The introductory paragraph of the standard audit report states that the financial statements and
the opinion expressed about those statements are:
a. the responsibility of the auditor.
b. the responsibility of management.
c. the joint responsibility of management and the auditor.
d. none of the above.

54. The introductory paragraph of the standard audit report states that the auditor is:
a. responsible for the financial statements and the opinion on them.
b. responsible for the financial statements.
c. responsible for the opinion on the financial statements.
d. jointly responsible for the financial statements with management.

55. The audit report indicates that (1) management is responsible for the content of the financial
statements and (2) the auditor is responsible for evaluating the appropriateness of the
accounting principles chosen by management. Which paragraph contains those statements?
a. Both are in the introductory paragraph.
b. Both are in the scope paragraph.
c. Both are in the opinion paragraph.
d. None of the above are true.

56. Which of the following is a false statement about the audit report?
a. The opinion paragraph is related to the first and fourth reporting standards.
b. The auditor is required to state a conclusion about whether the company followed
generally accepted accounting principles.
c. The opinion paragraph may follow any form deemed appropriate by the auditor.
d. The auditor should express an opinion about the financial statements taken as a whole.

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57. If the statement of financial position of a company is dated December 31, 2007, the audit
report is dated February 8, 2008, and both are released on February 15, 2008, this indicates
that the auditor has searched for subsequent events that occurred up to:
a. December 31, 2007.
b. February 8, 2008.
c. February 15, 2008.
d. none of these.

58. The least severe type of audit report for disclosing departures from IFRS is the:
a. adverse opinion.
b. disclaimer of opinion.
c. qualified opinion.
d. report on unaudited financial statements.

59. Whenever an auditor issues a qualified opinion, the implication is that the auditor:
a. does not know if the financial statements are presented fairly.
b. does not believe the financial statements are presented fairly.
c. believes the financial statements are presented fairly.
d. believes the financial statements are presented fairly “except for” a specific aspect of
them.

60. The necessity to issue a disclaimer of opinion may arise because of:
a. a severe limitation on the scope of the audit.
b. a lack of independence between the auditor and client.
c. either a or b.
d. neither a nor b.

61. When the auditor determines the financial statements are fairly stated and then determines
that he is not independent, the auditor should issue:
a. an adverse opinion.
b. a disclaimer of opinion.
c. either a qualified opinion or an adverse opinion.
d. either a qualified opinion or an unqualified opinion with modified wording.

62. If the auditor lacks independence, a disclaimer of opinion must be issued:

a. if the client requests it.
b. only if it is highly material.
c. only if it is material but not highly material.
d. in all cases.

63. Misstatements must be compared with some measurement base before a decision can be made
about materiality. A commonly accepted measurement base includes:
a. net income.
b. total assets.
c. working capital.
d. all of the above.

64. When comparing misstatements with a measurement base, the auditor must consider the
pervasiveness of the misstatement. An example of a pervasive misstatement is a(n):
a. understatement of inventory.
b. understatement of retained earnings caused by a miscalculation of dividends payable.
c. misclassification of notes payable as a long-term liability when it should be current.
d. misclassification of salary expense as a selling expense when it should be allocated
equally to both selling and administrative expense.

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65. The Ringgit amount of some misstatements cannot be accurately measured. For example, if
the client were unwilling to disclose an existing lawsuit, the auditor must estimate the likely
effect on:
a. net income.
b. users of the financial statements.
c. the auditor’s exposure to lawsuits.
d. management’s future decisions.

66. Of the two major categories of scope restrictions, those caused by a client and those caused by
conditions beyond the control of either a client or auditor, the effect on the auditor’s report is:
a. the same for either.
b. more serious for client-imposed restrictions.
c. more serious for conditions beyond the control of a client or auditor.
d. negligible.

67. Whenever there is a scope restriction, the appropriate response is to issue a(n):
a. disclaimer of opinion.
b. adverse opinion.
c. qualified opinion.
d. unqualified report, a qualification of scope and opinion, or a disclaimer, depending on
materiality.

68. Which of the following is least likely to cause uncertainty about the ability of an entity to
continue as a going concern?
a. A client’s lawsuit against another company which claims the other company has
infringed on its patent.
b. Loss of major customers.
c. Significant recurring operating losses.
d. Working capital deficiencies.

69. The client has presented all required financial statements with the exception of the statement
of cash flows. The auditor has completed the audit and is satisfied that all other statements are
presented fairly. The auditor:
a. may issue either an unqualified or a qualified opinion.
b. must issue an adverse opinion with “except for” in the opinion paragraph.
c. may issue an unqualified opinion.
d. must issue a qualified opinion with “except for” in the opinion paragraph.

70. When a disclaimer is issued because the auditor lacks independence:

a. no report title is included on the report.
b. a one-paragraph audit report is issued.
c. the only reason cited for issuing the disclaimer is the lack of independence.
d. all of the above are correct.

71. When an auditor issues a qualified report, an adverse report, or a disclaimer, the auditor:
a. has not performed a satisfactory audit.
b. is not satisfied that the financial statements are presented fairly.
c. either a or b.
d. none of these.

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72. When a client has not applied IFRS consistently from the prior year to the current year, the
auditor does not concur with the appropriateness of the change, and the change in IFRS has a
material effect on the financial statements, the auditor should issue a(n):
a. disclaimer.
b. adverse opinion.
c. unqualified opinion.
d. qualified opinion.

73. Matters for which an auditor may believe an explanatory paragraph should be added to the
audit report include all but which of the following?
a. The existence of significant related party transactions.
b. Material uncertainties not disclosed in the footnotes.
c. Important events occurring subsequent to the statement of financial position date.
d. Each of the above should result in an explanatory paragraph being added to emphasize
the matter.

74. Which of the following is not a change that affects consistency and, therefore, does not
require an explanatory paragraph?
a. Change in accounting principle, such as a change from LIFO to FIFO.
b. Change in reporting entity, such as the inclusion of an additional company in combined
financial statements.
c. Change in an estimate, such as a decrease in the life of an asset for depreciation
purposes.
d. Correction of errors by changing from non-IFRS to IFRS.

75. Items that materially affect the comparability of financial statements generally require
disclosure in the footnotes. If the client refuses to properly disclose the item, the auditor may
be required to issue:
a. the disclaimer.
b. an unqualified opinion.
c. a qualified opinion.
d. an adverse opinion.

76. Auditors sometimes encounter situations in which the outcome of a matter cannot be
reasonably estimated at the time the financial statements are issued. These matters are referred
to as:
a. inestimable matters.
b. non sequiturs.
c. uncertainties.
d. in-suspense matters.

77. When there is uncertainty about a company’s ability to continue as a going concern, the
auditor’s concern is the possibility that the client may not be able to continue its operations or
meet its obligations for a “reasonable period of time.” For this purpose, a reasonable period of
time is considered not to exceed:
a. six months from the date of the financial statements.
b. one year from the date of the financial statements.
c. six months from the date of the audit report.
d. one year from the date of the audit report.

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78. When the auditor concludes that there is substantial doubt about the entity’s ability to
continue as a going concern, the appropriate audit report would be:
a. an unqualified opinion with an explanatory paragraph.
b. a disclaimer of opinion.
c. neither a nor b.
d. either a or b.

79. An auditor may not issue a qualified opinion when:

a. a scope limitation prevents the auditor from completing an important audit procedure.
b. the auditor’s report refers to the work of a specialist.
c. the auditor lacks independence with respect to the audited entity.
d. an accounting principle at variance with IFRS is used.

80. When a company’s financial statements contain a departure from IFRS with which the auditor
concurs, the departure should be explained in:
a. the scope paragraph.
b. an explanatory paragraph that appears before the opinion paragraph.
c. the opinion paragraph.
d. an explanatory paragraph after the opinion paragraph.

81. Which of the following representations does an auditor make explicitly and which implicitly
when issuing an unqualified opinion?
Conformity Adequacy of
with IFRS disclosure
a. Explicitly Explicitly
b. Explicitly Implicitly
c. Implicitly Explicitly
d. Implicitly Implicitly

82. William Gregory, CA, is the principal auditor for a multi-national corporation. Another CA
has examined and reported on the financial statements of a significant subsidiary of the
corporation. Gregory is satisfied with the independence and professional reputation of the
other auditor, as well as the quality of the other auditor’s examination. With respect to his
report on the consolidated financial statements, taken as a whole, Gregory:
a. must not refer to the examination of the other auditor.
b. must refer to the examination of the other auditor.
c. may refer to the examination of the other auditor.
d. may refer to the examination of the other auditor, in which case Gregory must include in
the auditor’s report on the consolidated financial statements a qualified opinion with
respect to the examination of the other auditor.

83. A company has changed its method of inventory valuation from an unacceptable one to one in
conformity with generally accepted accounting principles. The auditor’s report on the
financial statements of the year of the change should include:
a. no reference to consistency.
b. a reference to a prior period adjustment in the opinion paragraph.
c. an explanatory paragraph that justifies the change and explains the impact of the change
on reported net income.
d. an explanatory paragraph explaining the change.

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84. Whenever the client imposes restrictions on the scope of the audit, the auditor should be
concerned that management may be trying to prevent discovery of misstatements. In such
cases, the auditor will likely issue a:
a. disclaimer of opinion in all cases.
b. qualification of both scope and opinion in all cases.
c. disclaimer of opinion whenever materiality is in question.
d. qualification of both scope and opinion whenever materiality is in question.

85. CAs issue several types of “special audit reports.” Which of the following circumstances
would not require the issuance of a special audit report?
a. The client’s financial statements are prepared using the cash basis.
b. The client’s financial statements are prepared using the accrual basis.
c. The CA has been retained to audit only the current assets.
d. The CA has been retained to review the internal control system, not the financial
statements.

86. When a qualified or adverse opinion is issued, the qualifying paragraph is inserted:
a. between the introductory and scope paragraphs.
b. between the scope and opinion paragraphs.
c. after the opinion paragraph, as a fourth paragraph.
d. immediately after the address, as the first paragraph.

87. Which of the following is not a primary category of attestation report?

a. Compilation report.
b. Review report.
c. Audit report.
d. Special audit report based on a basis of accounting other than IFRS.

88. In which of the following situations would the auditor most likely issue an unqualified report?
a. The client valued ending inventory by using the replacement cost method.
b. The client valued ending inventory by using the Next-In-First-Out (NIFO) method.
c. The client valued ending inventory at selling price rather than historical cost.
d. The client valued ending inventory by using the First-In-First-Out (FIFO) method, but
showed the replacement cost of inventory in the Notes to the Financial Statements.

89. Which of the following statements is true?

a. The auditor is required to issue a disclaimer of opinion in the event of a material
uncertainty.
b. The auditor is required to issue a disclaimer of opinion in the event of a going concern
problem.
c. The auditor is required to issue a disclaimer of opinion for a material uncertainty and for
a going concern problem.
d. The auditor has the option, but is not required, to issue a disclaimer of opinion for a
material uncertainty or for a going concern problem.

90. A qualified report can take the form of:

a. a qualification of both the scope and the opinion.
b. a qualification of the opinion alone.
c. either a or b.
d. neither a nor b.

91. The use of a qualification of the opinion alone is restricted to those situations in which the:
a. scope of the auditor’s examination has been restricted.

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b. financial statements have not been prepared in accordance with IFRS.
c. auditor is not independent.
d. auditor was hired to do a “review” or “compilation.”

92. The primary concern(s) in assessing materiality when a client has failed to follow IFRS
include(s):
a. the total Ringgit error in the accounts involved compared with some base.
b. the nature of the item.
c. the qualitative nature of the item.
d. all of the above.

93. The most common case in which conditions beyond the client’s and auditor’s control cause a
scope restriction is an engagement:
a. agreed upon after the client’s statement of financial position date.
b. where the client won’t allow the auditor to confirm receivables for fear of offending its
customers.
c. where the auditor doesn’t have enough staff to satisfactorily audit all of the client’s
foreign subsidiaries.
d. where the client is going through Chapter 11 bankruptcy.

94. When the auditor cannot perform procedures and the amounts are so material that a disclaimer
of opinion rather than a qualified opinion is required, the:
a. opinion paragraph will state “does not present fairly.”
b. opinion paragraph will state “presents fairly.”
c. scope paragraph will be unchanged from the standard unqualified opinion.
d. scope paragraph will be deleted.

95. When misstatements are so material that an adverse opinion is issued, a scope paragraph
would be:
a. qualified.
b. unchanged.
c. deleted.
d. expanded to identify the additional procedures which the auditor performed.

96. When the client fails to make adequate disclosure in the body of the statements or in the
related footnotes, it is the responsibility of the auditor to:
a. inform the reader that disclosure is not adequate, and to issue an adverse opinion.
b. inform the reader that disclosure is not adequate, and to issue a qualified opinion.
c. present the information in the audit report and issue an unqualified or qualified opinion.
d. present the information in the audit report and to issue a qualified or an adverse opinion.

97. The “unqualified report with explanatory paragraph” and the “unqualified report with
modified wording”:
a. arise as a result of an incomplete audit.
b. arise when the financial statements are not “presented fairly.”
c. meet the criteria of a complete audit with satisfactory results.
d. meet the criteria of a complete audit but with unsatisfactory results.

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98. Which of the following is not a cause of an explanatory paragraph or modified wording to be
added to the standard unqualified report?
a. Emphasis of a matter.
b. Reports involving other auditors.
c. Auditor disagrees with client’s departure from IFRS.
d. Lack of consistent application of IFRS.

99. Which of the following is not one of the principal CA firm’s alternatives when issuing a report
if a different CA firm performed part of the audit?
a. Issue a joint report signed by both CA firms.
b. Make no reference to the other CA firm in the audit report, and issue the standard
unqualified opinion.
c. Make reference to the other auditor in the report by using modified wording (a shared
opinion or report)
d. A qualified opinion or disclaimer, depending on materiality, is required if the principal
auditor is not willing to assume any responsibility for the work of the other auditor.

100. Brown Co.’s financial statements adequately disclose uncertainties that concern future events,
the outcome of which are not reasonably estimable. The auditor’s report should include a(n):
a. unqualified opinion.
b. “subject to” qualified opinion.
c. “except for” qualified opinion.
d. adverse opinion.

101. Which of the following requires recognition in the auditor’s opinion as to consistency?
a. The correction of an error in the prior year’s financial statements resulting from a
mathematical mistake in capitalizing interest.
b. A change in the estimate of provisions for warranty costs.
c. The change from the cost method to the equity method of accounting for investments in
common stock.
d. A change in depreciation method which has no effect on current year’s financial
statements but is certain to affect future years.

102. When an auditor encounters a situation involving more than one of the conditions requiring a
departure from a standard unqualified report, the auditor should modify his or her opinion for
each condition unless one has the effect of neutralizing the others. In which of the following
situations would the auditor not include more than one modification in the report?
a. There is a material scope limitation, and the auditor is not independent.
b. There is a material IFRS violation, and the auditor is not independent.
c. There is a material scope limitation, and there is substantial doubt about the company’s
ability to continue as a going concern.
d. There is a substantial doubt about the company’s ability to continue as a going concern,
and information about the causes of the uncertainties is not adequately disclosed in a
footnote.

103. While performing services for their clients, professionals have a duty to provide a level of
care which is:
a. free from judgment errors.
b. superior.
c. greater than average.
d. reasonable.

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104. Which of the following may give rise to a business failure?

a. An erroneous audit opinion is issued.
b. Management may make ill-advised business decisions.
c. Auditors may fail to uncover employee fraud.
d. Poorly trained auditors may perform a company’s audit.

105. A(n) _____ failure occurs when an auditor issues an erroneous opinion as the result of an
underlying failure to comply with auditing standards.
a. business
b. audit
c. audit risk
d. process

106. The standard of due care to which the auditor is expected to adhere is referred to as the:
a. prudent person concept.
b. common law doctrine.
c. due care concept.
d. vigilant person concept.

107. Under the laws of agency, partners of a CA firm may be liable for the work of others on
whom they rely. This would not include:
a. employees of the CA firm.
b. employees of the audit client.
c. other CA firms engaged to do part of the audit work.
d. specialists employed by the CA firm to provide technical advice on the audit.

108. Audit contracts (engagement letters):

a. may be either oral or written.
b. must be written.
c. must be written and notarized.
d. must be written if the client is regulated by the Securities and Exchange Commission.

109. An individual who is not party to the contract between a CA and the client, but who is known
by both and is intended to receive certain benefits from the contract is known as:
a. a third party.
b. a common law inheritor.
c. a tort.
d. a third-party beneficiary.

110. _____ risk represents the possibility that the auditor concludes after conducting an adequate
audit that the financial statements were fairly stated when they were actually misstated.
a. Business
b. Process
c. Audit
d. Failure

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111. In connection with the audit of financial statements, an independent auditor could be
responsible for failure to detect a material fraud if:
a. statistical sampling techniques were not used on the audit engagement.
b. the auditor planned the audit in a negligent manner.
c. accountants performing important parts of the work failed to discover a close
relationship between the treasurer and the cashier.
d. the fraud was perpetrated by one employee who circumvented the existing internal
controls.

112. Which of the following most accurately describes fraud?

a. Absence of reasonable care.
b. Lack of slight care.
c. Knowledge and intent to deceive.
d. Extreme or unusual negligence without the intent to deceive.

113. If the CA negligently failed to properly prepare and file a client’s tax return, the CA may be
liable for:
a. the penalties the client owes the IRS.
b. the penalties and interest the client owes.
c. the penalties and interest the client owes, plus the tax preparation fee the CA charged.
d. the penalties and interest, the tax preparation fee, and the amount of tax that was
underpaid.

114. Historically, most major lawsuits against CA firms have dealt with:
a. disputes over income tax preparation services.
b. disputes arising in the performance of MAS contracts.
c. disputes over the accuracy of bookkeeping services.
d. audited and unaudited financial statements.

115. Which of the following statements is true?

a. Gross negligence may constitute constructive fraud.
b. Constructive fraud is also termed recklessness.
c. Fraud requires the intent to deceive.
d. All three above are true.

116. The principal issue to be resolved in cases involving alleged negligence is usually:
a. the amount of the damages suffered by plaintiff.
b. whether to impose punitive damages on defendant.
c. the level of care exercised by the CA.
d. whether defendant was involved in fraud.

117. In the auditing environment, failure to meet auditing standards is often:

a. an accepted practice.
b. a suggestion of negligence.
c. conclusive evidence of negligence.
d. tantamount to criminal behavior.

118. A common way for a CA firm to demonstrate its lack of duty to perform is by use of a(n):
a. expert witness’ testimony.
b. audit contract, or engagement letter.
c. management representation letter.
d. confirmation letter.

119. To succeed in an action against the auditor, the client must be able to show that:

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a. the auditor was fraudulent.
b. the auditor was grossly negligent.
c. there was a written contract.
d. there is a close causal connection between the auditor’s behavior and the damages
suffered by the client.

120. A group not typically included as “third parties” in common law is:
a. actual and potential stockholders.
b. bankers and other creditors of client.
c. employees of client.
d. none of the above; that is, all would be included.

121. Under common law, a foreseen user would be treated the same as:
a. a primary beneficiary.
b. the client.
c. a known third party.
d. all of the above.

122. Which of the following is not likely a factor in the increase in the number of lawsuits and
sizes of awards to plaintiffs related to auditor behavior?
a. Increased awareness of auditor responsibilities by users of financial statements.
b. CA firms are more willing to settle lawsuits.
c. Difficulty judges and jurors have in understanding legal matters.
d. Increased consciousness on the part of the SEC for its responsibility to protect investors.

123. A major purpose of federal securities regulations is to:

a. provide sufficient reliable information to the investing public who purchases securities in
the marketplace.
b. establish the qualifications for accountants who are members of the profession.
c. eliminate incompetent attorneys and accountants who participate in the registration of
securities to be offered to the public.
d. provide a set of uniform standards and tests for accountants, attorneys, and others who
practice before the Securities and Exchange Commission.

124. A CA is subject to criminal liability if the CA:

a. refuses to turn over requested audit documentation to a client.
b. performs an audit in a negligent manner.
c. willfully omits a material fact from a set of financial statements.
d. willfully breaches a contract with a client.

125. Which of the following best describes a trend in litigation involving CAs?
a. A CA cannot render an opinion unless the CA has audited all affiliates of a company.
b. A CA may not successfully assert that the CA had no motive to be part of a fraud.
c. A CA may be exposed to criminal as well as civil liability.
d. A CA is primarily responsible for a client’s footnotes filed with the SEC.

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126. Gregory & Hedrick, a medium-sized CA firm, employed Elise as a staff accountant. Elise
was negligent while auditing several of the firm’s clients. Under these circumstances, which
of the following statements is true?
a. Elise would have no personal liability for negligence.
b. Gregory & Hedrick is not liable for Elise’s negligence because CAs are generally
considered to be independent contractors.
c. Gregory & Hedrick would not be liable for Elise’s negligence if Winters disobeyed
specific instructions in the performance of the audits.
d. Gregory & Hedrick can recover against its insurer on its malpractice policy even if one
of the partners was also negligent in reviewing Elise’s work.

127. The objective of the ordinary audit of financial statements is the expression of an opinion on:
a. the fairness of the financial statements.
b. the accuracy of the financial statements.
c. the accuracy of the annual report.
d. the statement of financial position and statement of profit or loss and comprehensive
income.

128. Auditors accumulate evidence to:

a. defend themselves in the event of a lawsuit.
b. justify the conclusions they have otherwise reached.
c. satisfy the requirements of the Insurance Act.
d. enable them to reach conclusions about the fairness of the financial statements.

129. The responsibility for adopting sound accounting policies and maintaining adequate internal
control rests with the:
a. stakeholders.
b. company management.
c. financial statement auditor.
d. company’s internal audit department.

130. The auditor’s best defense when material misstatements are not uncovered is to have
conducted the audit:
a. in accordance with auditing standards.
b. as effectively as reasonably possible.
c. in a timely manner.
d. only after an adequate investigation of the management team.

131. If management insists on financial statement disclosures that the auditor finds unacceptable,
the auditor can:
a. issue an adverse audit report.
b. issue a qualified audit report.
c. withdraw from the engagement.
d. choose any of these three courses of action.

132. If management insists on financial statement disclosures that the auditor finds unacceptable,
the auditor can do all but which of the following?
a. Issue an adverse audit report.
b. Issue a disclaimer of opinion.
c. Withdraw from the engagement.
d. Issue a qualified audit report.

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133. Which of the following is not one of the reasons that auditors provide only reasonable
assurance on the financial statements?
a. The auditor commonly examines a sample, rather than the entire population of
transactions.
b. Accounting presentations contain complex estimates which involve uncertainty.
c. Fraudulently prepared financial statements are often difficult to detect.
d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases.

134. Which of the following statements is most correct regarding errors and fraud?
a. An error is unintentional, whereas fraud is intentional.
b. Frauds occur more often than errors in financial statements.
c. Errors are always fraud and frauds are always errors.
d. Auditors have more responsibility for finding fraud than errors.

135. Which of the following is not one of the three categories of assertions?
a. Assertions about classes of transactions and events for the period under audit
b. Assertions about financial statements and correspondence to IFRS
c. Assertions about account balances at period end
d. Assertions about presentation and disclosure

136. If a short-term note payable is included in the trade payable balance on the financial
statement, there is a violation of the:
a. completeness assertion.
b. existence assertion.
c. cutoff assertion.
d. classification and understandability assertion.

137. Professional skepticism requires auditors to possess a(n) ______ mind.

a. introspective
b. questioning
c. intelligent
d. unbelieving

138. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance
that misstatements, whether caused by errors or fraud, that are not ________ are detected.
a. important to the financial statements
b. statistically significant to the financial statements
c. material to the financial statements
d. identified by the client

139. Fraudulent financial reporting is most likely to be committed by whom?

a. Line employees of the company.
b. Outside members of the company’s board of directors.
c. Company management.
d. The company’s auditors.

140. Which of the following would most likely be deemed a direct-effect illegal act?
a. Violation of federal employment laws.
b. Violation of federal environmental regulations.
c. Violation of federal income tax laws.
d. Violation of civil rights laws.

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141. The concept of reasonable assurance indicates that the auditor is:
a. not an insurer of the correctness of the financial statements.
b. not responsible for the fairness of the financial statements.
c. responsible only for issuing an opinion on the financial statements.
d. responsible for finding all misstatements.

142. Tests of details of balances are specific procedures intended to:

a. test for monetary errors in the financial statements.
b. prove that the accounts with material balances are classified correctly.
c. prove that the trial balance is in balance.
d. identify the details of the internal control system.

143. Which of the following is the auditor least likely to do when aware of an illegal act?
a. Discuss the matter with the client’s legal counsel.
b. Obtain evidence about the potential effect of the illegal act on the financial statements.
c. Contact the local law enforcement officials regarding potential criminal wrongdoing.
d. Consider the impact of the illegal act on the relationship with the company’s
management.

144. The auditor gives an audit opinion on the fair presentation of the financial statements and
associates his or her name with it when, on the basis of adequate evidence, the auditor
concludes that the financial statements are unlikely to mislead:
a. investors.
b. management.
c. a prudent user.
d. the reader.

145. The responsibility for the preparation of the financial statements and the accompanying
footnotes belongs to:
a. the auditor.
b. management.
c. both management and the auditor equally.
d. management for the statements and the auditor for the notes.

146. When engaged to audit the financial statements, it is acceptable for the auditor to prepare:
a. the financial statements for the client.
b. the footnotes for the client.
c. a draft of the financial statements for the client.
d. a draft of the financial statements and footnotes for the client.

147. The auditor has considerable responsibility for notifying users as to whether or not the
statements are properly stated. This imposes upon the auditor a duty to:
a. provide reasonable assurance that material misstatements will be detected.
b. be a guarantor of the fairness in the statements.
c. be equally responsible with management for the preparation of the financial statements.
d. be an insurer of the fairness in the statements.

148. “The auditor should not assume that management is dishonest, but the possibility of
dishonesty must be considered.” This is an example of:
a. unprofessional behavior.
b. an attitude of professional skepticism.
c. due diligence.
d. a rule in the ACCA’s Code of Professional Conduct.

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149. If the auditor were responsible for making certain that all of management’s assertions in the
financial statements were absolutely correct:
a. bankruptcies could no longer occur.
b. bankruptcies would be reduced to a very small number.
c. audits would be much easier to complete.
d. audits would not be economically feasible.

150. The auditor’s best defense when existing material misstatements in the financial statements
are not uncovered in the audit is:
a. the audit was conducted in accordance with generally accepted accounting principles.
b. the financial statements are client’s responsibility.
c. client is guilty of contributory negligence.
d. none of the above.

151. Fraudulent financial reporting is often called:

a. management fraud.
b. theft of assets.
c. defalcation.
d. embezzlement.

152. Which of the following statements is true?

a. It is usually easier for the auditor to uncover frauds than errors.
b. It is usually easier for the auditor to uncover errors than frauds.
c. It is usually equally difficult for the auditor to uncover errors or frauds.
d. Usually, none of the above statements is true.

153. Auditing standards make _____ distinction(s) between the auditor’s responsibilities for
searching for errors and fraud.
a. little
b. a significant
c. no
d. various

154. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover
the fraud is:
a. greater for management fraud because managers are inherently more deceptive than
employees.
b. greater for management fraud because of management’s ability to override existing
internal controls.
c. greater for employee fraud because of the higher crime rate among blue collar workers.
d. greater for employee fraud because of the larger number of employees in the
organization.

155. Which of the following statements is correct with respect to the auditor’s responsibilities
relative to the detection of indirect-effect illegal acts?
a. The auditor has no responsibility for searching for indirect-effect illegal acts.
b. The auditor has the same responsibility for searching for indirect-effect illegal acts as
any other potential misstatement that may occur.
c. Auditors have responsibility for searching for any illegal act, whether direct-effect or
indirect-effect.
d. None of the above is correct.

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156. When the auditor has reason to believe an illegal act has occurred, the auditor should:
a. inquire of management at a level above those likely to be involved with the illegality.
b. consult with the client’s legal counsel.
c. consider accumulating additional evidence to determine if there is actually an illegal act.
d. do all three of the above.

157. When the auditor knows that an illegal act has occurred, the auditor must:
a. report it to the proper governmental authorities.
b. consider the effects on the financial statements, including the adequacy of disclosure.
c. withdraw from the engagement.
d. issue an adverse opinion.

158. Why does the auditor divide the financial statements into smaller segments?
a. Using the cycle approach makes the audit more manageable.
b. Most accounts have few relationships with others and so it is more efficient to break the
financial statements into smaller pieces.
c. The cycle approach is used because auditing standards require it.
d. All of the above are correct.

159. Why does the auditor divide the financial statements into segments around the financial
statement cycles?
a. Most auditors are trained to audit cycles as opposed to entire financial statements.
b. The approach aids in the assignment of tasks to different members of the audit team.
c. The cycle approach is required by auditing standards.
d. None of the above is correct.

160. The most important general ledger account included in and affecting several cycles is the:
a. cash account.
b. inventory account.
c. income tax expense and liability accounts.
d. retained earnings account.

161. Which of the following statements is true?

a. Audit objectives follow and are closely related to management assertions.
b. Management’s assertions follow and are closely related to the audit objectives.
c. The auditor’s primary responsibility is to find and disclose fraudulent management
assertions.
d. Assertions about presentation and disclosure deal with whether the accounts have been
included in the financial statements at appropriate amounts.

162. Which of the following statements is true regarding the distinction between general audit
objectives and specific audit objectives for each account balance?
a. The specific audit objectives are applicable to every account balance on the financial
statements.
b. The general audit objectives are applicable to every account balance on the financial
statements.
c. The general audit objectives are stated in terms tailored to the engagement.
d. All of the above statements are true.

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163. Which of the following statements about the existence and completeness assertions is not
true?
a. The existence and completeness assertions emphasize different audit concerns.
b. Existence deals with overstatements and completeness deals with understatements.
c. Existence deals with understatements and completeness deals with overstatements.
d. The completeness assertion deals with unrecorded transactions.

164. Which of the following management assertions is not associated with transaction-related audit
objectives?
a. Occurrence
b. Classification and understandability
c. Accuracy
d. Completeness

165. Which of the following statements is not true?

a. Balance-related audit objectives are applied to account balances.
b. Transaction-related audit objectives are applied to classes of transactions.
c. Balance-related audit objectives are applied to the ending balance in statement of
financial position accounts.
d. Balance-related audit objectives are applied to both beginning and ending balances in
statement of financial position accounts.

166. In testing for cutoff, the objective is to determine:

a. whether all of the current period’s transactions are recorded.
b. whether transactions are recorded in the correct accounting period.
c. a and b are correct.
d. neither a nor b is correct.

167. The detail tie-in objective is not concerned that the details in the account balance:
a. agree with related subsidiary ledger amounts.
b. are properly disclosed in accordance with IFRS.
c. foot to the total in the account balance.
d. agree with the total in the general ledger.

168. The detail tie-in is part of the_______ assertion for account balances.
a. classification
b. valuation and allocation
c. rights and obligations
d. completeness

169. Which of the following is not a proper match of a transaction-related audit objective and
management assertion?
a. Accuracy and cutoff.
b. Classification and classification.
c. Posting and summarization with accuracy.
d. Occurrence and occurrence.

170. Which of the following statements is not correct?

a. There are many ways an auditor can accumulate evidence to meet overall audit
objectives.
b. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional
responsibility.
c. It is appropriate to minimize the cost of accumulating evidence.
d. Gathering evidence and minimizing costs are equally important considerations that affect

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the approach the auditor selects.

171. If the auditor has obtained a reasonable level of assurance about the fair presentation of the
b financial statements through understanding internal control, assessing control risk, testing
controls, and analytical procedures, then the auditor:
a. can issue an unqualified opinion.
b. can significantly reduce other substantive tests.
c. can write the engagement letter.
d. needs to do additional tests of controls so that the assurance level can be increased.

172. After the auditor has completed all audit procedures, it is necessary to combine the
information obtained to reach an overall conclusion as to whether the financial statements are
fairly presented. This is a highly subjective process that relies heavily on:
a. generally accepted auditing standards.
b. the ACCA’s Code of Professional Conduct.
c. generally accepted accounting principles.
d. the auditor’s professional judgment.

173. Which of the following combinations is correct?

a. Existence relates to whether amounts included occurred.
b. Occurrence relates to whether balances exist.
c. Existence relates to whether amounts included exist.
d. None of the above is true.

174. If an auditor conducted an audit in accordance with auditing standards, which of the following
would the auditor likely detect?
a. Unrecorded transactions.
b. Incorrect postings of recorded transactions.
c. Counterfeit signatures on paid checks.
d. Fraud involving collusion.

175. Which of the following statements best describes the auditor’s responsibility with respect to
illegal acts that do not have a material effect on the client’s financial statements?
a. Generally, the auditor is under no obligation to notify parties other than personnel within
the client’s organization.
b. Generally, the auditor is under an obligation to see that stockholders are notified.
c. Generally, the auditor is obligated to disclose the relevant facts in the auditor’s report.
d. Generally, the auditor is expected to compel the client to adhere to requirements of the
Foreign Corrupt Practices Act.

176. Which of the following statements best describes the auditor’s responsibility regarding the
detection of fraud?
a. The auditor is responsible for the failure to detect fraud only when such failure clearly
results from nonperformance of audit procedures specifically described in the
engagement letter.
b. The auditor must extend auditing procedures to actively search for evidence of fraud in
all situations.
c. The auditor must extend auditing procedures to actively search for evidence of fraud
where the examination indicates that fraud may exist.
d. The auditor is responsible for the failure to detect fraud only when an unqualified
opinion is issued.

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177. The essence of the attest function is to:

a. assure the consistent application of correct accounting procedures.
b. determine whether the client’s financial statements are fairly stated.
c. examine individual transactions so that the auditor may certify as to their validity.
d. detect collusion and fraud.

178. The primary difference between an audit of the statement of financial position and an audit of
the statement of profit or loss and comprehensive income is that the audit of the statement of
profit or loss and comprehensive income deals with the verification of:
a. transactions.
b. authorisations.
c. costs.
d. cutoffs.

179. The auditor’s evaluation of the likelihood of material employee fraud is normally done
initially as a part of:
a. tests of controls.
b. tests of transactions.
c. understanding the entity’s internal control.
d. the assessment of whether to accept the audit engagement.

180. When using the cycle approach to segmenting the audit, the reason for treating capital
acquisition and repayment separately from the acquisition of goods and services is that:
a. the transactions are related to financing a company rather than to its operations.
b. most capital acquisition and repayment cycle accounts involve few transactions, but each
is often highly material and therefore should be audited extensively.
c. both a and b are correct.
d. neither a nor b is correct.

181. In describing the cycle approach to segmenting an audit, which of the following statements is
not true?
a. All general ledger accounts and journals are included at least once.
b. Some journals and general ledger accounts are included in more than one cycle.
c. The “capital acquisition and repayment” cycle is closely related to the “acquisition of
goods and services and payment” cycle.
d. The “inventory and warehousing” cycle may be audited at any time during the
engagement since it is unrelated to the other cycles.

182. Which of the following journals would be included most often in the various audit cycles?
a. Cash receipts journal.
b. Cash disbursements journal.
c. General journal.
d. Sales journal.

183. Transaction cycles begin and end:

a. at the beginning and end of the fiscal period.
b. at the statement of financial position date.
c. at January 1 and December 31.
d. at the origin and final disposition of the company.

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184. After general audit objectives are understood, specific audit objectives for each account
balance on the financial statements can be developed. Which of the following statements is
true?
a. There should be at least one specific objective for each relevant general objective.
b. There will be only one specific objective for each relevant general objective.
c. There will be many specific objectives developed for each relevant general objective.
d. There must be one specific objective for each general objective.

185. An auditor should recognize that the application of auditing procedures may produce evidence
indicating the possibility of errors or fraud and therefore should:
a. plan and perform the engagement with an attitude of professional skepticism.
b. not rely on internal controls that are designed to prevent or detect errors or fraud.
c. design audit tests to detect unrecorded transactions.
d. extend the work to audit most recorded transactions and records of an entity.

186. Auditors must make decisions regarding what evidence to gather and how much to
accumulate. Which of the following is not a decision that must be made by auditors related to
evidence?
a. Audit procedure to use.
b. Sample size.
c. Timing of audit procedures.
d. Each of the above is a decision that must be made.

187. The third standard of fieldwork requires the auditor to accumulate sufficient appropriate
evidence to support the opinion issued. Because of the nature of audit evidence, it is:
a. unlikely the auditor will be completely convinced that the opinion is correct.
b. likely the auditor will be completely convinced that the opinion is correct.
c. unlikely the auditor will arrive at a conclusion.
d. likely that the auditor would change his/her mind about the opinion if he/she took the
time to gather additional evidence.

188. Which of the following forms of evidence is most reliable?

a. General ledger account balances.
b. Confirmation of trade receivable balance received from a customer.
c. Internal memo explaining the issuance of a credit memo.
d. Copy of month-end adjusting entries.

189. Which of the following is not a characteristic of the reliability of evidence?

a. Effectiveness of client internal controls.
b. Education of auditor.
c. Independence of information provider.
d. Timeliness.

190. Which of the following is not a characteristic of the reliability of evidence?

a. Qualification of individual providing information.
b. Auditor’s direct knowledge.
c. Degree of subjectivity.
d. Degree of objectivity.

191. Calculating the gross margin as a percent of sales and comparing it with previous periods is
what type of evidence?
a. Physical examination.
b. Analytical procedures.
c. Observation.

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d. Inquiry

192. Audit evidence obtained directly by the auditor will not be reliable if:
a. the auditor lacks the qualifications to evaluate the evidence.
b. it is provided by the client’s attorney.
c. the client denies its veracity.
d. it is impossible for the auditor to obtain additional corroboratory evidence.

193. Appropriate of evidence is a measure of the:

a. quantity of evidence.
b. quality of evidence.
c. sufficiency of evidence.
d. meaning of evidence.

194. Which of the following statements regarding the relevance of evidence is correct?
a. To be relevant, evidence must pertain to the question at hand.
b. To be relevant, evidence must be persuasive.
c. To be relevant, evidence must relate to multiple audit objectives.
d. To be relevant, evidence must be evaluated in terms of the general audit objectives.

195. Two determinants of the persuasiveness of evidence are:

a. competence and sufficiency.
b. relevance and reliability.
c. appropriateness and sufficiency.
d. independence and effectiveness.

196. Three common types of confirmations used by auditors are (1) negative confirmations, (2)
blank form positive confirmations, and (3) positive confirmations with information included.
Place the confirmations in order of reliability from highest to lowest.
a. 1, 2, 3.
b. 3, 2, 1.
c. 2, 3, 1.
d. 3, 1, 2.

197. When auditors use documents to support recorded transactions, the process is often called:
a. inquiry.
b. confirmation.
c. vouching.
d. physical examination.

198. An example of an external document is:

a. employees’ time reports.
b. bank statements.
c. purchase order for company purchases.
d. carbon copies of checks.

199. A document which the auditor receives from the client, but which was prepared by someone
outside the client’s organization, is a(n):
a. confirmation.
b. internal document.
c. external document.
d. inquiry.

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200. “Evaluations of financial information made by a study of plausible relationships among

financial and non financial data involving comparisons of recorded amounts to expectations
developed by the auditor” is a definition of:
a. analytical procedures.
b. tests of transactions.
c. tests of balances.
d. auditing.

201. Unusual fluctuations occur when:

a. significant differences are not expected but do exist.
b. significant differences are expected but do not exist.
c. significant differences are expected and do exist.
d. either a or b is true.

202. When analytical procedures reveal no unusual fluctuations, the implication is that:
a. there are no material errors or irregularities.
b. there are no material errors.
c. there are no material irregularities.
d. the possibility of a material error or irregularity is lessened.

203. Which of the following is not a purpose of analytical procedures?

a. Understand the client’s industry.
b. Assess the client’s ability to continue as a going concern.
c. Identify misstatements.
d. Reduce detailed audit tests.

204. Which of the following forms of evidence would be least persuasive in forming the auditor’s
opinion?
a. Responses to auditor’s questions by the president and controller regarding the
investments account.
b. Correspondence with a stockbroker regarding the quantity of client’s investments held in
street name by the broker.
c. Minutes of the board of directors authorizing the purchase of stock as an investment.
d. The auditor’s count of marketable securities.

205. Which of the following statements is not true? “The evidence-gathering technique of inquiry:
a. cannot be regarded as conclusive.”
b. requires the gathering of corroborative evidence.”
c. is the auditor’s principal method of evaluating the client’s internal control.”
d. does not provide evidence from an independent source.”

206. Which of the following statements is not correct?

a. It is possible to vary the sample size from one unit to 100% of the items in the
population.
b. The decision of how many items to test will not be influenced by the increased costs of
performing the additional tests.
c. The decision of how many items to test must be made by the auditor for each audit
procedure.
d. The sample size for any given procedure is likely to vary from audit to audit.

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207. “The detailed description of the results of the four evidence decisions for a specific audit” is
recorded on an:
a. audit procedure.
b. audit program.
c. audit dictionary.
d. audit guide.

208. Auditors will replace tests of details with analytical procedures when possible because the:
a. analytical procedures are more reliable.
b. tests of details are more expensive.
c. analytical procedures are more persuasive.
d. tests of details are more difficult to interpret.

209. Which of the following statements is not correct?

a. Persuasiveness of evidence is partially determined by the reliability of evidence.
b. The quantity of evidence obtained determines its sufficiency.
c. The auditor need not consider the independence of an information source when obtaining
evidence.
d. Evidence obtained directly by the auditor is ordinarily more reliable than evidence
obtained from other sources.

210. Which one of the following is not one of the primary purposes of audit documentation?
a. A basis for planning the audit.
b. A record of the evidence accumulated and the results of the tests.
c. A basis for review by supervisors and partners.
d. A basis for determining work deficiencies by peer review teams.

211. Which of the following is not a type of audit evidence?

a. Auditor discussion with client employees.
b. Examination of credit memos issued at the end of the year.
c. Recalculation of discounts issued on sales invoices.
d. All of the above are types of audit evidence.

212. When the auditor is gathering evidence, if the source of the evidence is independent of the
client, the evidence is normally:
a. not reliable.
b. reliable.
c. not reliable unless the provider is qualified to provide the evidence.
d. reliable if the provider has no reason to be biased.

213. Which of the following is an example of objective evidence?

a. A letter written by client’s attorney discussing the likely outcome of outstanding
lawsuits.
b. The physical count of securities and cash.
c. Inquiries of the credit manager about the collectibility of noncurrent trade receivable.
d. Observation of cobwebs on some inventory bins.

214. Most auditors would consider samples to be insufficient if they contain only the
a. largest Ringgit items from the population.
b. largest Ringgit items from a population, even though these items make up a large portion
of the total population.
c. items with a high likelihood of misstatement.
d. items that are representative of the population.

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215. Which of the following statements regarding documentation is not correct?
a. Documentation includes examining client records such as general ledgers and supporting
journals.
b. Internal documents are documents that are generated within the company and used to
communicate with external parties.
c. External documents are documents that are generated outside of the company and are
used to communicate the results of a transaction.
d. All of the above are correct statements.

216. When making decisions about evidence for a given audit, the auditor’s goal is to obtain a
sufficient amount of timely, reliable evidence that is relevant to the information being
verified, and to do so:
a. no matter the cost involved in obtaining such evidence.
b. at any cost because the costs are billed to the client.
c. at the lowest possible total cost.
d. None of the above.

217. Physical examination is the inspection or count by the auditor of items such as:
a. cash or inventory only.
b. cash, inventory, canceled checks, and sales documents.
c. cash, inventory, canceled checks, and tangible non-current assets.
d. cash, inventory, securities, notes receivable, and tangible non-current assets.

218. Which of the following is an example of vouching?

a. Trace inventory purchases from the acquisitions journal to supporting invoices.
b. Trace selected sales invoices to the sales journal.
c. Trace details of employee paychecks to the payroll journal.
d. All of the above are examples of vouching.

219. Which of the following statements about confirmations is true?

a. Confirmations are expensive and so are often not used.
b. Confirmations may inconvenience those asked to supply them, but they are widely used.
c. Confirmations are sometimes not reliable and so auditors use them only as necessary.
d. None of the above statements are true.

220. Traditionally, confirmations are used to verify:

a. individual transactions between organizations, such as sales transactions.
b. bank balances and trade receivables.
c. non-current asset additions.
d. all three of the above.

221. To be considered reliable evidence, confirmations must be controlled by:

a. a client employee responsible for trade receivable.
b. a financial statement auditor.
c. a client’s internal audit department.
d. any of the above.

222. When practical and reasonable, the confirmation of a sample of trade receivable is:
a. not useful in most audits.
b. rarely performed.
c. required.
d. optional.

223. The Auditing Standards Board has concluded that analytical procedures are so important that
they are required during:

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a. planning and testing phases.
b. planning and completion phases.
c. testing and completion phases.
d. planning, testing, and completion phases.

224. Which of the following statements regarding analytical procedures is not correct?
a. The definition of analytical tests emphasizes a comparison of client’s data to IFRS.
b. Analytical procedures are required on all audits.
c. Analytical procedures can be used as substantive tests.
d. For certain accounts with small balances, analytical procedures alone may be sufficient
evidence.

225. A benefit obtained from comparing the client’s data with industry averages is that it provides
a(n):
a. indication of the likelihood of financial problems.
b. indication where errors exist in the statements.
c. benchmark to be used in evaluating a client’s budgets.
d. comparison of “what is” with “what should be.”
Which of the following is not a correct combination of terms and related type of audit
226. evidence?
a. Foot – reperformance.
b. Compare – documentation.
c. Vouch – documentation.
d. Trace – analytical procedures.

227. Which of the following is not a correct combination of terms and related type of audit
evidence?
a. Inquire – inquiries of client.
b. Count – physical examination.
c. Recompute – documentation.
d. Read – documentation.

228. Which of the following situations would most likely require special audit planning?
a. Inventory consists of precious stones.
b. Some items of factory and office equipment do not bear identification numbers.
c. Depreciation methods used on the client’s tax return differ from those used on the books.
d. Assets costing less than $500 are expensed even though their expected life exceeds one
year.

229. Which of the following is not one of the major types of analytical procedures?
a. Compare client with industry averages.
b. Compare client with prior year.
c. Compare client with budget.
d. Compare client with SEC averages.

230. What is the overall objective of audit documentation?

a. Defend against claims of a deficient audit.
b. Provide a basis for reviewing the work of subordinates.
c. Provide reasonable assurance that the audit was conducted in accordance with standards.
d. None of the above.

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231. An important benefit of industry comparisons is as:

a. an aid to understanding the client’s business.
b. an indicator of errors.
c. an indicator of irregularities.
d. a least-cost indicator for audit procedures.

232. The permanent files included as part of audit documentation do not normally include:
a. a copy of the current and prior years’ audit programs.
b. copies of articles of incorporation, bylaws and contracts.
c. information related to the understanding of internal control.
d. results of analytical procedures from prior years.

233. Negative confirmations of receivable are less effective than positive confirmations of
receivables because:
a. they do not produce evidence that is statistically quantifiable.
b. the auditor cannot infer that all non-respondents have verified their account information.
c. some recipients may report incorrect balances that require extensive follow-up.
d. a majority of recipients usually lack the willingness to respond objectively.

234. An auditor would be least likely to use confirmations in connection with the examination of:
a. inventories.
b. long-term debt.
c. property, plant, and equipment.
d. stockholders’ equity.

235. Those procedures specifically outlined in an audit program are primarily designed to
a. prevent litigation.
b. detect errors or irregularities.
c. test internal systems.
d. gather evidence.

236. Evidence is generally considered appropriate when:

a. it has been obtained by random selection.
b. there is enough of it to afford a reasonable basis for an opinion on financial statements.
c. it has the qualities of being relevant, objective, and free from known bias.
d. it consists of written statements made by managers of the enterprise under audit.

237. Given the economic constraints in which auditors collect evidence, the auditor normally
gathers evidence that is:
a. irrefutable.
b. conclusive.
c. persuasive.
d. completely convincing.

238. The auditor is concerned that a client is failing to bill customers for shipments. An audit
procedure that would gather relevant evidence would be to:
a. select a sample of duplicate sales invoices and trace each to related shipping documents.
b. trace a sample of shipping documents to related duplicate sales invoices.
c. trace a sample of Sales Journal entries to the Trade receivable subsidiary ledger.
d. compare the total of the Schedule of Trade receivable with the balance of the Trade
receivable account in the general ledger.

239. Relevance can be considered only in terms of:

a. general audit objectives.

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b. specific audit objectives.
c. transaction audit objectives.
d. balance audit objectives.

240. Audit documentation should possess certain characteristics. Which of the following is not one
of the important characteristics?
a. Audit files should be properly identified.
b. Audit documentation should be indexed and cross-referenced.
c. Audit documentation should clearly indicate the audit work performed.
d. All of the above are essential characteristics.

241. Which of the following statements is not a correct use of the terminology?
a. Evidence obtained from an independent source outside the client organization is more
reliable than that obtained from within.
b. Documentary evidence is more reliable when it is received by the auditor directly from
an independent third party.
c. Documents that originate outside the company are considered more reliable than those
that originate within the client’s organization.
d. External evidence, such as communications from banks, is generally regarded as more
reliable than answers obtained from inquiries of the client.

242. Evidence is usually more persuasive for statement of financial position accounts when it is
obtained:
a. as close to the statement of financial position date as possible.
b. only from transactions occurring on the statement of financial position date.
c. from various times throughout the client’s year.
d. from the time period when transactions in that account were most numerous during the
fiscal period.

243. Which of the following statements is not correct concerning audit documentation?
a. Audit documentation is merely required to defend against claims that the auditor
performed a deficient audit.
b. The only time anyone has a legal right to examine audit documentation is when the
documentation is subpoenaed by a court as legal evidence.
c. Audit documentation is the primary frame of reference used by supervisory personnel to
evaluate the sufficiency of evidence.
d. All of the above are incorrect statements.

244. Which of the following statements is not true?

a. A large sample of highly competent evidence is not persuasive unless it is relevant to the
objective being tested.
b. A large sample of evidence that is neither competent nor timely is not persuasive.
c. A small sample of only one or two pieces of relevant, competent, and timely evidence
lacks persuasiveness.
d. The persuasiveness of evidence can be evaluated after considering its competence and its
sufficiency.

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245. Which of the following statements is not correct?

a. Analytical procedures are used to isolate accounts or transactions that should be
investigated more extensively.
b. For certain immaterial accounts, analytical procedures may be the only evidence needed.
c. In some instances, other types of evidence may be reduced when analytical procedures
indicate that an account balance appears reasonable.
d. Analytical procedures use comparisons and relationships to determine which account
balances are in error.

246. Which of the following statements is not correct?

a. The effectiveness of the client’s internal control has a significant effect on the reliability
of most types of evidence.
b. Since the auditor performs analytical procedures, these will be reliable even if internal
controls provide inaccurate data.
c. Both physical examination and mechanical accuracy are likely to be highly reliable if the
internal control is effective.
d. A specific type of evidence is rarely sufficient by itself to provide reliable evidence to
satisfy any audit objective.

247. Audit evidence supporting the financial statements consists of the underlying accounting data
and all corroborating information available to the auditor. Which of the following is an
example of corroborating information?
a. Minutes of meetings.
b. General and subsidiary ledgers.
c. Accounting manuals.
d. Worksheets supporting cost allocations.

248. Which of the following discoveries through the use of analytical procedures would indicate a
relatively high risk of financial failure?
a. A decline in gross margin percentages.
b. An increase in the balance in non-current assets.
c. An increase in the ratio of allowance for uncollectible accounts to gross trade receivable,
while at the same time trade receivable turnover also decreased.
d. A higher than normal ratio of long-term debt to net worth as well as a lower than average
ratio of profits to total assets.

249. Which of the following statements is correct regarding the costs involved in obtaining
evidence?
a. Cost of obtaining evidence is a valid reason for excluding that evidence from the audit.
b. Physical examination is the most expensive type of audit evidence.
c. The least expensive type of evidence is analytical procedures.
d. Each of the above is correct.

250. A common comparison occurs when the auditor calculates the expected balance and compares
it with the actual balance. The auditor’s expected account balance may be determined by:
a. using industry standards.
b. using Dun and Bradstreet reports.
c. relating it to some other statement of financial position or statement of profit or loss and
comprehensive income account or accounts.
d. inquiry of the client.

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251. Two analytical procedures available to the auditor are:

 Compare current year’s balances with the preceding year.
 Compare details of a particular account’s balance with the preceding year.
Shortcomings of these two procedures are that:
a. the first ignores relationships of data to other data and the second fails to consider
growth or decline in business activity.
b. the first fails to consider growth or decline in business activity and the second ignores
relationships of data to other data.
c. both fail to consider growth or decline in business activity and ignore relationships of
data.
d. it is difficult, time consuming, and, therefore, costly to perform these procedures.

252. Which of the following statements relating to the competence of evidential matter is always
true?
a. Evidence from outside an enterprise is always reliable.
b. Accounting data developed under satisfactory conditions of internal control are more
relevant than data developed under unsatisfactory internal control conditions.
c. Oral representations made by management are not reliable evidence.
d. Evidence must be both reliable and relevant to be considered appropriate.

253. Which of the following is not one of the three main reasons why the auditor should properly
plan engagements?
a. To enable proper on-the-job training of employees.
b. To enable the auditor to obtain sufficient appropriate evidence.
c. To avoid misunderstandings with the client.
d. To help keep audit costs reasonable.

254. Avoiding misunderstandings with the client is important for:

a. good client relations.
b. facilitating high-quality work at a reasonable cost.
c. either a or b, but not both.
d. both a and b.

255. A measure of how willing the auditor is to accept that the financial statements may be
materially misstated after the audit is completed and an unqualified opinion has been issued is
the:
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

256. A measure of the auditor’s assessment of the likelihood that there are material misstatements
in an account before considering the effectiveness of the client’s internal control is called:
a. control risk.
b. acceptable audit risk.
c. statistical risk.
d. inherent risk.

257. When inherent risk is high, there will need to be:

a. more evidence accumulated.
b. more experienced staff assigned to the work.
c. either a or b, but not both.
d. both a and b.

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258. The auditor is likely to accumulate more evidence when the audit is for a company:
a. whose stock is publicly traded.
b. which has large amounts of debt.
c. which is to be sold in the near future.
d. All three of the above.

259. Which of the following is not typically included in initial audit planning?
a. Client acceptance/continuation decisions.
b. Determination of the purpose of the audit.
c. Obtain an understanding with the client.
d. Perform preliminary analytical procedures.

260. Initial audit planning involves four matters. Which of the following is not one of these?
a. Develop an overall audit strategy.
b. Request that bank balances be confirmed.
c. Schedule engagement staff and audit specialists.
d. Identify the client’s reason for the audit.

261. Most auditors assess inherent risk as high for related parties and related-party transactions
because:
a. of the accounting disclosure requirement.
b. of the lack of independence between the parties.
c. both a and b.
d. it is required by generally accepted accounting principles.

262. Which of the following is not correct regarding the communications between successor and
predecessor auditors?
a. The burden of initiating the communication rests with the predecessor auditor.
b. The burden of initiating the communication rests with the successor auditor.
c. The predecessor auditor must receive their former client’s permission prior to divulging
information to the successor auditor
d. The predecessor auditor may choose to provide a limited response to a successor auditor.

263. A successor auditor may perform which of the following for a new audit client?
a. Speak to local attorneys, banks and other businesses regarding the company’s reputation.
b. Speak to the predecessor auditor about disagreements they had with management.
c. Interview client personnel to better understand the business and associated risks.
d. All of the above.

264. A CA firm may choose to not continue working with an audit client for which of the
following reasons?
a. Conflicts over past audits.
b. Disagreements regarding the type of opinion to issue.
c. Disagreements regarding audit fees.
d. All of the above.

265. Which of the following is not a potential effect of an auditor’s decision that a lower
acceptable audit risk is appropriate?
a. More evidence is accumulated.
b. Less evidence is accumulated.
c. Special care is required in assigning experienced staff.
d. Review of audit documentation is performed by personnel not assigned to the
engagement.

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266. It is easier and more common to implement increased evidence accumulation for inherent risk
than for acceptable audit risk because:
a. inherent risk can usually be isolated to one or two accounts.
b. inherent risk applies to the entire audit.
c. acceptable audit risk and sample sizes are set statistically.
d. acceptable audit risk does not impact on the amount of evidence which must be
accumulated.

267. Which of the following statements is true regarding communications between predecessor and
successor auditors?
a. The burden of initiating the communication rests with the predecessor.
b. The predecessor should attempt to respond fully and truthfully to the successor’s
inquiries.
c. The predecessor should communicate with the successor only if the client is public.
d. There is no requirement that the predecessor and successor communicate.

268. Investigating new clients with a focus on assessing the auditor’s potential relationship with
that new client is a critical element in determining:
a. inherent risk.
b. acceptable audit risk.
c. statistical risk.
d. financial risk.

269. The purpose of an engagement letter is to:

a. document the CA firm’s responsibility to external users of the audited financial
statements.
b. document the terms of the engagement in writing to minimize misunderstandings.
c. notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated.
d. all of the above.

270. One means of informing the client that the auditor is not responsible for the discovery of all
acts of fraud is the:
a. engagement letter.
b. representation letter.
c. responsibility letter.
d. client letter.

271. Which of the following normally signs the engagement letter for an audit of a public
company?
a. Corporate treasurer.
b. Chief financial officer.
c. Chairman of the board of directors.
d. Audit committee.

272. Which of the following normally signs the engagement letter for an audit of a private
company?
a. Management.
b. Board of directors representative.
c. Audit committee representative.
d. None of the above.

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273. An understanding of a client’s business and industry and knowledge about operations are
essential for doing an adequate audit. For a new client, most of this information is obtained:
a. from the predecessor auditor.
b. from the Securities and Exchange Commission.
c. from the permanent file.
d. at the client’s premises.

274. Which of the following factors partially explains the increased importance of understanding
the client’s business?
a. Expansion of business to include global operations.
b. Increased connectedness of clients with their suppliers and customers via technology.
c. Increased importance of human capital and other intangible assets.
d. All of the above.

275. The least effective method of identifying related parties for a public company would be a(n):
a. inquiry of management.
b. review of SC filings.
c. review of the purchases and sales journals for the period under audit.
d. examination of stockholders’ listings to identify principal stockholders.

276. An official record of meetings of the board of directors and stockholders is included in the
corporate:
a. bylaws.
b. charter.
c. minutes.
d. license.

277. An understanding of a company’s industry and external environment includes:

a. general economic conditions.
b. the extent of competition within the industry.
c. regulatory requirements.
d. all of the above.

278. Which of the following is not likely to be a related party?

a. Affiliated companies.
b. A major stockholder of the company.
c. A warehouse employee.
d. The chief executive officer.

279. Related parties are commonly identified in which of the following ways?
a. Review of SC filings.
b. Examination of stockholder listings.
c. Inquiry of management.
d. All of the above.

280. A tour of the client’s facilities is helpful in obtaining an understanding of the operations
because:
a. the auditor will be able to assess the physical safeguards over assets.
b. the auditor may be better able to assess certain inherent risks.
c. the auditor obtains a broader perspective about the company as a whole.
d. all of the above.

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281. Which of the following is most likely to occur at the beginning of an initial audit
engagement?
a. Prepare a rough draft of the financial statements and of the auditor’s report.
b. Study and evaluate the system of internal administrative control.
c. Determine the client’s reason for an audit.
d. Consult with and review the work of the predecessor auditor prior to discussing the
engagement with the client management.

282. An auditor should examine minutes of the board of directors’ meetings:

a. through the date of the financial statements.
b. through the date of the audit report.
c. only at the beginning of the audit.
d. on a test basis.

283. The first standard of field work, which states that the work is to be adequately planned and
that assistants, if any, are to be properly supervised, recognizes that:
a. early appointment of the auditor is advantageous to the auditor and the client.
b. acceptance of an audit engagement after the close of the client’s fiscal year is generally
not permissible.
c. appointment of the auditor subsequent to the physical count of inventories requires a
disclaimer of opinion.
d. performance of substantial parts of the examination is necessary at interim dates.

284. The corporate minutes are the official record of the meetings of the board of directors and
stockholders. The minutes typically include authorisations related to:
a. significant acquisitions or dispositions of property, plant and equipment.
b. dividend payments.
c. management compensation.
d. all of the above.

285. An engagement letter sent to an audit client usually would not include a(n):
a. reference to the auditor’s responsibility for the detection of errors or irregularities.
b. estimation of the time to be spent on the audit work by audit staff and management.
c. statement that management advisory services would be made available upon request.
d. reference to management’s responsibility for the financial statements.

286. Which of the following is correct with respect to a company’s corporate charter?
a. The corporate charter is granted by the federal government and is required to recognize
the corporation as a separate entity.
b. The corporate charter includes the rules and procedures used to operate a corporation.
c. The corporate charter includes the exact name of the corporation, the date of
incorporation, and the types of business the corporation is authorized to conduct.
d. None of the above is correct.

287. Corporate bylaws include:

a. the corporation’s exact name.
b. the rules and procedures used to operation the corporation.
c. the kinds and amounts of capital stock the corporation is authorized to issue.
d. all of the above.

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288. In what order should the following steps occur?

A. Assess client business risk
B. Understand the client’s business and industry
C. Perform preliminary analytical procedures
D. Assess risk of material misstatements
a. D, B, C, A.
b. B, A, D, C.
c. B, D, A, C.
d. D, C, B, A.

289. Which of the following would be least likely to occur in assessing a client’s business risk?
a. Evaluating management controls.
b. Obtaining an understanding of the client’s industry.
c. Assess risks of material misstatements.
d. All of the above are equally likely to occur.

290. Which of the following statements is not correct with respect to analytical procedures?
a. Auditing standards emphasize the need for auditors to develop and use expectations.
b. Analytical procedures must be performed throughout the audit.
c. Analytical procedures may be performed at any time during the audit.
d. Analytical procedures use comparisons and relationships to assess whether account
balances appear reasonable.

291. The most widely used profitability ratio is the:

a. quick ratio.
b. profit margin.
c. return on assets.
d. earnings per share.

292. The purpose of the requirement in SAS No. 84 of having communication between the
predecessor and successor auditor is to:
a. allow the predecessor to disclose information which would otherwise be confidential.
b. help the successor auditor to evaluate whether to accept the engagement.
c. help the client by facilitating the change of auditors.
d. ensure the predecessor collects all unpaid fees prior to a change in auditor.

293. The predecessor auditor is required to respond to the request of the successor auditor for
information, but the response can be limited to stating that no information will be provided
when:
a. the predecessor auditor has poor relations with the successor auditor.
b. the client is dissatisfied with the predecessor’s work.
c. there are actual or potential legal problems between the client and the predecessor.
d. the predecessor believes that the client lacks integrity.

294. Which of the following is correct with respect to the use of analytical procedures?
a. Analytical procedures may be used in evaluating balances in the testing phase as long as
the auditor also uses them in assessing the going concern assumption.
b. Analytical procedures must be used throughout the audit.
c. Analytical procedures used in the testing phase of the audit are primarily used to direct
an auditor’s attention so that the auditor’s understanding of the business is improved.
d. None of the above is correct.

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295. Which of the following ratios is best used to assess a company’s ability to meet its long-term
debt obligations?
a. Quick ratio.
b. Return on common equity.
c. Debt to equity.
d. None of the above.

296. Which of the following statements is not correct?

a. Analytical procedures used in the planning phase of the audit are primarily directed at
understanding the client’s business and directing the auditor’s attention to areas that may
contain possible misstatements.
b. Analytical procedures used in the completion phase are primarily aimed at assessing
going concern and secondarily aimed at directing the auditor’s attention to areas that
may contain possible misstatements.
c. Analytical procedures must be used in the planning and completion phases of the audit,
and are optional in the testing phase.
d. Analytical procedures used in the completion phase are primarily aimed at directing the
auditor’s attention to areas that may contain possible misstatements and secondarily
aimed at assessing going concern.

297. Which of the following would not likely be classified as a related-party transaction?
a. An advance of one week’s salary to an employee.
b. Sales of merchandise between affiliated companies.
c. Loans or credit sales to the principal owner of the client company.
d. Exchanges of equipment between two companies owned by the same person.

298. Which of the following would not be found in the corporate charter?
a. The kinds and amount of capital stock authorized.
b. The date of incorporation.
c. The types of business activity that the corporation is allowed to conduct.
d. The rules and procedures adopted by the stockholders.

299. Which of the following would not usually be included in the minutes of the board of
directors?
a. The duties and powers of the corporate officers.
b. Declaration of dividends.
c. Authorisation of long-term loans.
d. All of the above would be included.

300. When are auditors likely to encounter judgment problems in the use of analytical procedures?
a. Whenever the auditor places reliance on management’s explanations for unusual
fluctuations in account balances without first developing independent expectations.
b. Whenever the auditor allows unaudited balances to unduly influence his/her expectations
of current balances.
c. Whenever the auditor fails to consider the pattern reflected by several unusual
fluctuations when trying to explain what caused them.
d. The auditor is likely to encounter judgment problems in each of the above instances.

301. The major concern when using nonfinancial data in analytical procedures is the:
a. accuracy of the nonfinancial data.
b. source of the nonfinancial data.
c. type of nonfinancial data.
d. presence of multiple sources of nonfinancial data.

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302. An auditor searching for related party transactions should obtain an understanding of each
subsidiary’s relationship to the total entity because:
a. the business structure may be deliberately designed to obscure related party transactions.
b. this may reveal whether transactions would have taken place if the parties had been
unrelated.
c. transactions may have been consummated on terms equivalent to arm’s-length
transactions.
d. this may permit the audit of intercompany account balances to be performed as of
concurrent dates.

303. The first standard of fieldwork requires, in part, that audit work be properly planned. Proper
planning as intended by the first standard of fieldwork would occur when the auditor:
a. physically observes the movement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand.
b. uses negative trade receivable confirmations instead of positive confirmations because
the latter require mailing of second requests and review of subsequent cash collections.
c. compares all cash as of a particular date to avoid performing time-consuming cash cutoff
procedures.
d. eliminates the possibility of counting inventory items more than once by arranging to
make extensive test counts.

304. Early appointment of the independent auditor will enable:

a. a more thorough examination to be performed.
b. a proper study and evaluation of internal control to be performed.
c. sufficient competent evidential matter to be obtained.
d. a more efficient examination to be planned.

305. Whenever an auditor compares client data to client-prepared budgets, there are two special
concerns. Which of the following is not one of these concerns?
a. Assessing whether the budgets were realistic plans.
b. Client data may have been altered to conform to the budget.
c. A and B are both concerns.
d. Neither A nor B

306. An auditor who accepts an audit engagement and does not possess the industry expertise of
the business entity should:
a. engage financial experts familiar with the nature of the business entity.
b. obtain a knowledge of matters that relate to the nature of the entity’s business.
c. refer a substantial portion of the audit to another CA who will act as the principal
auditor.
d. first inform management that an unqualified opinion cannot be issued.

307. If it is probable that the judgment of a reasonable person would have been changed or
influenced by the omission or misstatement of information, then that information is, by
definition of FASB Statement No. 2:
a. material.
b. insignificant.
c. significant.
d. relevant.

308. The preliminary judgment about materiality is the amount by which the auditor
believes the statements could be misstated and still not affect the decisions of reasonable
users.
a. minimum
b. maximum

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c. mean average
d. median average

309. Auditors are responsible for determining whether financial statements are materially
misstated, so upon discovering a material misstatement they must bring it to the attention of:
a. regulators.
b. the audit firm’s managing partner.
c. no one in particular.
d. the client’s management.

310. The FASB definition of materiality emphasizes what class of financial statement users?
a. Regulators.
b. Informed investors.
c. Reasonable persons.
d. Potential investors.

311. When auditors allocate the preliminary judgment about materiality to account balances, the
materiality allocated to any given account balance is referred to as:
a. the materiality range.
b. the error range.
c. tolerable materiality.
d. tolerable misstatement.

312. Why do auditors establish a preliminary judgment about materiality?

a. To determine the appropriate level of audit experience required for the work.
b. So that the client can know what records to make available to the auditor.
c. To plan the appropriate audit evidence to accumulate and develop an overall audit
strategy.
d. None of the above.

313. Auditors are _____ to decide on the combined amount of misstatements in the financial
statements that they would consider material early in the audit.
a. permitted
b. required
c. not allowed
d. strongly encouraged

314. The preliminary judgment about materiality and the amount of audit evidence accumulated
are _____ related.
a. directly
b. indirectly
c. not
d. inversely

315. After the preliminary judgment about materiality has been established, auditors may:
a. not adjust it.
b. adjust it downward only.
c. adjust it upward only.
d. adjust it either downward or upward.

316. In an audit area that has a higher inherent risk, it would be prudent to:
a. increase the amount of audit evidence gathered.
b. assign more experienced staff to that area.
c. reduce the tolerable misstatement for the area.
d. do all of the above.

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317. Which of the following is least likely to be appropriate as the basis for determining the
preliminary judgment about materiality in the audit of financial statements?
a. Net income before taxes.
b. Current assets.
c. Owners’ equity.
d. Inventory.

318. Auditing standards _____ that the basis used to determine the preliminary judgment about
materiality be documented in the audit files.
a. permit
b. do not allow
c. require
d. strongly encourage

319. Amounts involving fraud are usually considered _____ important than unintentional errors of
equal Ringgit amounts.
a. less
b. no less
c. no more
d. more

320. Which of the following qualitative factors may significantly influence whether an item is
deemed to be material?
a. Misstatements that are otherwise minor may be material if there are possible
consequences arising from contractual obligations.
b. Misstatements that are otherwise immaterial may be material if they affect a trend in
earnings.
c. Amounts involving fraud are usually considered more important than unintentional
errors of equal Ringgit amounts.
d. All of the above may influence materiality.

321. Auditors generally allocate the preliminary judgment about materiality to the:
a. statement of financial position only.
b. statement of profit or loss and comprehensive income only.
c. statement of profit or loss and comprehensive income and statement of financial
position.
d. statement of cash flows.

322. Which of the following statements regarding inherent risk is correct?

a. The inherent risk assigned in the audit risk model is unaffected by the auditor’s
experience with client’s organization.
b. Most auditors set a low inherent risk in the first year of an audit and increase it if
experience shows that it was incorrect.
c. Most auditors set a high inherent risk in the first year of an audit and reduce it in
subsequent years as they gain experience, even when there is inherent risk.
d. The inherent risk assigned in the audit risk model is dependent upon the strengths in
client’s internal control system.

323. Auditors begin their assessments of inherent risk during audit planning. Which of the
following would not help in assessing inherent risk during the planning phase?
a. Obtaining client’s agreement on the engagement letter.
b. Obtaining knowledge about the client’s business and industry.
c. Touring the client’s plant and offices.
d. Identifying related parties.

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324. Auditors commonly allocate materiality to statement of financial position accounts rather than
statement of profit or loss and comprehensive income accounts because most statement of
profit or loss and comprehensive income misstatements have a(n) _____ effect on the
statement of financial position.
a. less
b. equal
c. undetermined
d. more

325. Which of the following is not a correct statement regarding the allocation of the preliminary
judgment about materiality to statement of financial position accounts?
a. Auditors expect certain accounts to have more misstatements than others.
b. The allocation has virtually no effect on audit costs because the auditor must collect
sufficient appropriate audit evidence.
c. Auditors expect to identify overstatements as well as understatements in the accounts.
d. Relative audit costs affect the allocation.

326. What is the primary means of dealing with risk in planning decisions related to audit
evidence?
a. Selection of more effective tests of details of balances.
b. Application of the audit risk model.
c. Establish a lower preliminary judgment about materiality.
d. All of the above.

327. The phrase “in our opinion” in the auditor’s report is intended to inform users that auditors:
a. guarantee fair presentation of the financial statements.
b. act as insurers of the accuracy of the statements.
c. certify the material presented in the statements by management.
d. base their conclusions about the statements on professional judgment.

328. An overstatement of an asset account has ____ effect on the statement of profit or loss and
comprehensive income than an understatement of a liability account.
a. a greater
b. less of an
c. the same
d. none of the above

329. Inherent risk is _______ related to detection risk and _______ related to the amount of audit
evidence.
a. directly, inversely
b. directly, directly
c. inversely, inversely
d. inversely, directly

330. The five steps in applying materiality are listed below in random order.
1. Estimate the combined misstatement.
2. Estimate the total misstatement in the segment.
3. Set preliminary judgment about materiality.
4. Allocate preliminary judgment about materiality to segments.
5. Compare combined estimate with preliminary judgment about materiality.
The correct sequence from start to finish would be:
a. 1 2 5 4 3.
b. 3 4 2 1 5.
c. 4 3 1 5 2.

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d. 5 1 3 2 4.

331. Which of the following statements is not correct?

a. Materiality is a relative rather than an absolute concept.
b. The most important base used as the criterion for deciding materiality is total assets.
c. Qualitative factors as well as quantitative factors affect materiality.
d. Given equal Ringgit amounts, frauds are usually considered more important than errors.

332. Since materiality is relative, it is necessary to have bases for establishing whether
misstatements are material. Normally, the most common base for deciding materiality is:
a. net income before taxes.
b. net working capital.
c. net income after taxes.
d. total assets.

333. Certain types of misstatements are likely to be more important than other types to users, even
if the Ringgit amounts are the same. Which of the following does not demonstrate this?
a. Amounts involving frauds are considered more important than errors of equal amount.
b. Misstatements that are otherwise minor may be considered material if there are possible
consequences arising from contractual obligations.
c. Misstatements that are otherwise immaterial may be material if they affect a trend in
earnings.
d. Each of the above demonstrates this concept.

334. The more effective the internal controls, the lower the risk factor that ______ assigned to
control risk.
a. should be
b. could be
c. is
d. must be

335. Allocating the preliminary judgment about materiality to financial statements segments is
necessary because:
a. evidence is accumulated for the financial statements as a whole so materiality does not
apply to them.
b. evidence is accumulated by segments rather than for the financial statements as a whole.
c. it is required by the AICA’s Code of Professional Conduct.
d. it is required by the SEC.

336. Which of the following statements is not correct?

a. Either an overstatement of an asset account or an understatement of a liability account
would have the same effect on the statement of profit or loss and comprehensive income.
b. A misclassification in the statement of financial position will have no effect on operating
income.
c. Either an overstatement of an asset account or an overstatement of a liability account
would have the same effect on the statement of profit or loss and comprehensive income.
d. Either an understatement of an asset account or an overstatement of a liability account
would have the same effect on the statement of profit or loss and comprehensive income.

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337. Regardless of how the preliminary judgment about materiality is allocated, the auditor must
be confident that total combined misstatements in all accounts are:
a. less than the preliminary judgment.
b. equal to the preliminary judgment.
c. more than the preliminary judgment.
d. less than or equal to the preliminary judgment.

338. Auditors frequently refer to the terms audit assurance, overall assurance, and level of
assurance to refer to ________.
a. detection risk
b. audit report risk
c. acceptable audit risk
d. none of the above

339. _____ misstatements are those where the auditor can determine the amount of the
misstatement in the account.
a. Potential
b. Likely
c. Known
d. Projected
340. When a different extent of evidence is needed for the various cycles, the difference is caused
by:
a. errors in the client’s accounting system.
b. a client’s need to achieve an unqualified opinion.
c. an auditor’s need to follow auditing standards.
d. an auditor’s expectations of errors and assessment of internal control.

341. If planned detection risk is reduced, the amount of evidence the auditor accumulates will:
a. increase.
b. decrease.
c. remain unchanged.
d. be indeterminate.

342. Likely misstatements can result from:

a. differences between management’s and an auditor’s judgment about account balances.
b. projections of misstatements based on an auditor’s tests of a sample from a population.
c. both a and b.
d. neither a nor b.

343. When discussing control risk (CR) and the audit risk model, which of the following is false?
a. CR is a measure of the auditor’s assessment of the likelihood that misstatements will not
be prevented or detected by internal control.
b. If the auditor concludes that internal control is completely ineffective to prevent or
detect errors, he/she would assign a low value (e.g., 0%) to CR.
c. The relationship between control risk and detection risk is inverse.
d. The relationship between control risk and evidence is direct.

344. Which of the following is not a good indicator of the degree to which statements are relied on
by external users?
a. Client’s size, as measured by total assets or total revenue.
b. Distribution of ownership among the public.
c. Nature and amount of liabilities.
d. Amount of net income or loss after taxes.

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345. If an auditor believes the chance of financial failure is high and there is a corresponding
increase in business risk for the auditor, acceptable audit risk would likely:
a. be reduced.
b. be increased.
c. remain the same.
d. be calculated using a computerized statistical package.

346. When management has an adequate level of integrity for the auditor to accept the engagement
but cannot be regarded as completely honest in all dealings, auditors normally:
a. reduce acceptable audit risk and increase inherent risk.
b. reduce inherent risk and control risk.
c. increase inherent risk and control risk.
d. increase acceptable audit risk and reduce inherent risk.

347. One accounting issue that does not require management to use significant judgments is:
a. the allowance for doubtful accounts.
b. the useful life of equipment for tax purposes.
c. obsolete inventory.
d. the liability for warranty payments.

348. Inherent risk is often low for an account such as:

a. inventory.
b. marketable securities.
c. cash.
d. trade receivable.

349. The auditor typically does not assess control risk and inherent risk for:
a. each audit objective.
b. each cycle.
c. each account.
d. the overall audit.

350. To what extent do auditors typically rely on internal controls of their public company clients?
a. Extensively
b. Only very little
c. Infrequently
d. Never

351. To what extent do auditors typically rely on internal controls of their private company clients?
a. Only as needed to complete the audit.
b. Only as the controls are expected to be effective.
c. Only as the client asks an auditor to test controls.
d. None of the above.

352. Acceptable audit risk is ordinarily set by the auditor during planning and:
a. held constant for each major cycle and account.
b. held constant for each major cycle but varies by account.
c. varies by each major cycle and by each account.
d. varies by each major cycle but is constant by account.

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354. A major difficulty in the application of the audit risk model is:
a. defining the terms of the model.
b. measuring the components of the model.
c. understanding the effect on other factors in the model when one factor is changed.
d. the failure of the Audit Standards Board to accept it and incorporate it into standards.

355. When setting a preliminary judgment about materiality:

a. more evidence is required for a low Ringgit amount than for a high Ringgit amount.
b. less evidence is required for a low Ringgit amount than for a high Ringgit amount.
c. the same amount of evidence is required for either low or high Ringgit amounts.
d. there is no relationship between it and the Ringgit amount of evidence needed.

356. When allocating materiality, most practitioners choose to allocate to:

a. the statement of profit or loss and comprehensive income accounts because they are
more important.
b. the statement of financial position accounts because there are fewer.
c. both statement of financial position and statement of profit or loss and comprehensive
income accounts because there could be errors on either.
d. all of the financial statements because there could be errors on other statements besides
the statement of profit or loss and comprehensive income and statement of financial
position.

357. When the auditor has the same level of willingness to risk that material misstatements will
exist after the audit is finished for all financial statement cycles:
a. a different extent of evidence will likely be needed for various cycles.
b. the same amount of evidence will be gathered for each cycle.
c. he/she has not followed generally accepted auditing standards.
d. the level for each cycle must be no more than 2% so that the entire audit does not exceed
10%.

358. Which of the following statements is not true?

a. Inherent risk is inversely related to detection risk.
b. Inherent risk is inversely related to evidence.
c. Inherent risk is the susceptibility of the financial statements to material error, assuming
no internal controls.
d. Inherent risk is the auditor’s assessment of the likelihood that errors exceeding a
tolerable amount exist in a segment before considering the effectiveness of internal
controls.

359. The audit risk model is:

a. a planning, testing, and evaluation model.
b. useful in evaluating results but of limited use in planning.
c. useful in planning, but of limited value in evaluating results.
d. useful when performing the tests of balances, but of little value in either the planning or
evaluation stages.

360. Which of the following underlies the application of generally accepted auditing standards,
particularly the standards of fieldwork and reporting?
a. The elements of materiality and relative risk.
b. The element of internal control.
c. The element of corroborating evidence.
d. The element of reasonable assurance.

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361. Which of the following is responsible for establishing a private company’s internal control?
a. Management.
b. Auditors.
c. Management and auditors.
d. Committee of Sponsoring Organizations.

362. Which of the following is not one of the three primary objectives of effective internal control?
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations
c. Compliance with laws and regulations
d. Assurance of elimination of business risk.

363. The Public Company Accounting Oversight Board states that reasonable assurance allows a:
a. small likelihood of ineffective internal controls.
b. remote likelihood that material misstatements will not be prevented or detected by
internal control.
c. likelihood that material misstatements will not be prevented or detected by
internal control.
d. high likelihood that material misstatements will not be prevented or detected by
internal control.

364. Two key concepts that underlie management’s design and implementation of internal control
are:
a. costs and materiality.
b. absolute assurance and costs.
c. inherent limitations and reasonable assurance.
d. none of the above.

365. Internal controls can never be considered as absolutely effective because:

a. their effectiveness is limited by the competency and dependability of employees.
b. controls always have inherent weaknesses that can be exploited.
c. controls are designed to prevent and detect only material misstatements.
d. none of the above.

366. A major control available in a small company, which might not be feasible in a big company,
is:
a. a wider segregation of duties.
b. a voucher system.
c. fewer transactions to process.
d. the owner-manager’s personal interest and close relationship with personnel.

367. Which of the following is responsible for establishing internal controls for a public company?
a. Management.
b. Financial statement auditors.
c. Management and auditors.
d. Committee of Sponsoring Organizations.

368. Which of the following parties provides an assessment of the effectiveness of internal control
over financial reporting for public companies?
a. Management.
b. Financial statement auditors.
c. Management and the financial statement auditors.
d. Committee of Sponsoring Organizations.

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369. An act of two or more employees to steal assets or misstate records is frequently referred to
as:
a. collusion.
b. a material weakness.
c. a control deficiency.
d. Any of the above.

370. When the auditor attempts to understand the operation of the accounting system by tracing a
few transactions through the accounting system, the auditor is said to be:
a. tracing.
b. vouching.
c. performing a walk-through.
d. testing controls.

371. When one material weakness is present at the end of the year, management of a public
company must conclude that internal control over financial reporting is:
a. insufficient.
b. inadequate.
c. ineffective.
d. any of the above.

372. Management’s tests of operating effectiveness might include which of the following types of
procedures?
a. Inspection of relevant documentation
b. Inquiries of personnel
c. Reperformance of the application of controls
d. All of the above

373. Which of management’s concerns with respect to implementing internal controls is the auditor
primarily concerned?
a. Efficiency of operations.
b. Reliability of financial reporting.
c. Effectiveness of operations.
d. Compliance with applicable laws and regulations.

374. Which of the following activities would be least likely to strengthen a company’s internal
control?
a. Separating accounting from other financial operations.
b. Maintaining insurance for fire and theft.
c. Fixing responsibility for the performance of employee duties.
d. Carefully selecting and training employees.

375. Management must disclose material weaknesses in internal control:

a. whenever the weakness is deemed significant to a single class of transactions.
b. whenever the weakness is significant to overall financial reporting objectives.
c. if the weakness exists at the end of the year.
d. only if the auditor identifies the weakness as significant.

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376. When auditing a private company, the auditor should obtain an understanding of internal
control sufficient to:
a. provide reasonable protection against client fraud and defalcations by client employees.
b. assess control risk.
c. provide a basis for suggestions to the client for improving the accounting system.
d. provide a method for safeguarding assets, checking the accuracy and reliability of
accounting data, promoting operational efficiency, and encouraging adherence to
prescribed managerial policies.

377. The initial presumption in the audit of a public company is that control risk is:
a. low.
b. moderate.
c. high.
d. low or moderate, but not high.

378. To issue a report on internal control over financial reporting for a public company, an auditor
must:
a. evaluate management’s assessment process.
b. independently assess the design and operating effectiveness of internal control.
c. evaluate management’s assessment process and independently assess the design and
operating effectiveness of internal control.
d. test controls over significant account balances.

379. Which of the following factors may increase risks to an organization?

a. Geographic dispersion of company operations.
b. Quality of personnel.
c. Presence of new information technologies.
d. All of the above.

380. Which of the following statements is correct with respect to segregation of duties?
a. Employees should not have temporary and permanent custody of assets.
b. Employees who authorize transactions should not have custody of related assets.
c. It is permissible to allow an employee to open cash receipts and record those receipts.
d. None of the above is correct.

381. Authorisations can be either general or specific. Which of the following is not an example of a
general authorisation?
a. Automatic reorder points for raw materials inventory.
b. A sales manager’s authorisation for a sales return.
c. Credit limits for various classes of customers.
d. A sales price list for merchandise.

382. The most important type of protective measure for safeguarding assets is:
a. adequate segregation of duties among personnel.
b. proper authorisation of transactions.
c. the use of physical precautions.
d. adequate documentation.

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383. Which of the following is correct with respect to the design and use of business documents?
a. Only documents used for internal purposes must be prenumbered.
b. Documents should be designed for single purposes only to avoid confusion in their use.
c. Documents should be designed to be understandable only by those who use them.
d. None of the above statements is correct.

384. Which of the following is correct?

a. Approval is a policy decision implemented by employees.
b. Approval occurs as a matter of general policy and includes significant transactions only.
c. Authorisation is a policy decision for either a general class of transactions or specific
transactions.
d. None of the above is correct.

385. Which of the following principles is not necessary for the proper design and use of documents
and records?
a. Designed for a single use to increase efficiency of operations.
b. Constructed in a manner that encourages correct preparation.
c. Prepared at the time a transaction takes place.
d. Designed for multiple uses to increase efficiency of operations.

386. Narratives, flowcharts, and internal control questionnaires are three common methods of:
a. testing the internal controls.
b. documenting the auditor’s understanding of internal controls.
c. designing the audit manual and procedures.
d. documenting the auditor’s understanding of a client’s organizational structure.

387. _____ deal with ongoing or periodic assessment of the quality of internal control by
management.
a. Quality monitoring activities
b. Monitoring activities
c. Oversight activities
d. Management activities

388. Smaller public companies face challenges implementing effective internal control due to
______.
a. a lack of expertise
b. reduced importance
c. limited resources
d. limited available guidance

389. Which of the following is not one of the levels of an absence of internal controls?
a. Major deficiency.
b. Material weakness.
c. Significant deficiency.
d. Control deficiency.

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390. Which of the following is the correct definition of “control deficiency?”

a. A control deficiency exists if the design or operation of controls does not permit
company personnel to prevent or detect misstatements on a timely basis.
b. A control deficiency exists if one or more deficiencies exist that adversely affect a
company’s ability to prepare external financial statements reliably.
c. A control deficiency exists if the design or operation of controls results in a more than
remote likelihood that controls will not prevent or detect misstatements.
d. None of the above is a correct definition.

391. A(n) _______ deficiency exists if a necessary control is missing or not properly formulated.
a. control
b. significant
c. design
d. operating

392. To determine if a significant internal control deficiency or deficiencies are a material

weakness, they must be evaluated on their:
a. likelihood.
b. materiality, or significance.
c. both a and b are correct.
d. neither a nor b is correct.

393. The purpose of an entity’s accounting information and communication system is to ______.
a. initiate transactions
b. record and process transactions
c. monitor transactions
d. a and b only

394. 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.

395. If the results of tests of controls support the design and operations of controls as expected, the
auditor uses ____ control risk as the preliminary assessment.
a. a lower
b. the same
c. a higher
d. either a lower or higher

396. Internal controls normally include procedures designed to provide reasonable assurance that:
a. employees act with integrity when performing their assigned tasks.
b. transactions are executed in accordance with management’s authorisation.
c. decision processes leading to management’s authorisation of transactions are sound.
d. collusive activities would be detected by segregation of employee duties.

397. Which of the following is correct?

a. A significant deficiency is always a material weakness.
b. A reportable condition is always a material weakness.
c. A material weakness is less significant that a control deficiency.
d. A significant deficiency may be a material weakness.

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398. Which of the following is not a likely procedure to support the operating effectiveness of
internal controls?
a. Inquiry of client personnel.
b. Observation of control-related activities.
c. Re-performance of client procedures.
d. Each of the above is a likely procedure.

399. Before making the final assessment of internal control at the end of an integrated audit, the
auditor must:
a. test controls.
b. perform substantive tests of details.
c. a only.
d. both a and b.

400. Significant deficiencies and material weaknesses in internal control of a public company must
be reported to which of the following?
a. The Public Company Accounting Oversight Board.
b. Members of management who are responsible for the related area of the company.
c. Audit committee of the company’s board of directors.
d. None of the above.

401. Of the following statements about internal controls, which one is not valid?
a. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
b. Transactions must be properly authorized before such transactions are processed.
c. Because of the cost benefit relationship, a client may apply controls on a test basis.
d. Control procedures reasonably ensure that collusion among employees cannot occur.

402. Which of the following best describes the inherent limitations that should be recognized by an
auditor when considering the potential effectiveness of internal control?
a. Procedures that depend on segregation of duties can be circumvented by collusion.
b. Competent and honest client personnel provide an environment conducive to accounting
control and provide absolute assurance that effective control will be achieved.
c. Procedures designed to assure the execution and recording of transactions in accordance
with proper authorisations are effective against irregularities perpetrated by
management.
d. The benefits expected to be derived from effective internal accounting control usually do
not exceed the costs of such control.
403. Which of the following is not one of the subcomponents of the control environment?
a. Management’s philosophy and operating style.
b. Organizational structure.
c. Adequate segregation of duties.
d. Commitment to competence.

404. It is important for the CA to consider the competence of the clients’ personnel because their
competence bears directly and importantly upon the:
a. cost/benefit relationship of the system of internal control.
b. achievement of the objectives of internal control.
c. comparison of recorded accountability with assets.
d. timing of the tests to be performed.

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405. Audit evidence concerning proper segregation of duties normally is best obtained by:
a. direct personal observation of the employee who applies control procedures.
b. making inquiries of co-workers about the employee who applies control procedures.
c. preparation of a flowchart of duties performed and available personnel.
d. inspection of third-party documents containing the initials of who applied control
procedures.

406. Proper segregation of functional responsibilities calls for separation of:

a. authorisation, execution, and payment.
b. authorisation, recording, and custody.
c. custody, execution, and reporting.
d. authorisation, payment, and recording.

407. Internal controls are not designed to provide reasonable assurance that:
a. all frauds will be eliminated.
b. transactions are executed in accordance with management’s authorisation.
c. access to assets is permitted only in accordance with management’s authorisation.
d. company personnel comply with applicable rules and regulations.

408. Which of the following statements about auditor documentation of the client’s internal
controls is correct?
a. Documentation must include flow charts.
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.

409. Significant deficiencies are matters that come to an auditor’s attention and should be
communicated to an entity’s audit committee because they represent:
a. material frauds perpetrated by high-level management.
b. internal control deficiencies that could adversely affect a company’s ability to initiate,
record, process, or report external financial statements reliably.
c. flagrant violations of the entity’s documented conflict-of-interest policies.
d. intentional attempts by client personnel to limit the scope of the auditor’s field work.

410. How must significant deficiencies and material weaknesses be communicated to those
charged with governance?
a. Either oral or written communication is acceptable.
b. Oral communication is required.
c. Written communication is required.
d. None of the above.

411. Which of the following statements, if any, is correct?

a. The NASDAQ market requires listed companies to have audit committees that have only
independent directors.
b. The NASDAQ market requires listed companies to have audit committees that have a
minority of the positions held by independent directors.
c. The NASDAQ market recommends, but does not require, listed companies to have audit
committees.
d. The NASDAQ market recommends, but does not require, listed companies to have audit
committees that have a minority of the positions held by independent directors.

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412. When considering internal control, an auditor should be aware of the concept of reasonable
assurance, which recognizes that the:
a. segregation of incompatible functions is necessary to ascertain that internal control is
effective.
b. employment of competent personnel provides assurance that the objectives of internal
control will be achieved.
c. establishment and maintenance of internal control is an important responsibility of the
management and not of the auditor.
d. costs of internal control should not exceed the benefits expected to be derived from
internal control.

413. The financial statements are not likely to correctly reflect IFRS if the:
a. controls affecting the reliability of financial reporting are inadequate.
b. company’s controls do not promote efficiency.
c. company’s controls do not promote effectiveness.
d. company’s control do not promote compliance with applicable rules and regulations.

414. The primary emphasis by auditors is on controls over:

a. classes of transactions.
b. account balances.
c. both a and b, because they are equally important.
d. both a and b, because they vary from client to client.

415. The most important difference in a nonpublic company in assessing control risk is the ability
to assess control risk at _______ for any or all control-related objectives.
a. low
b. medium
c. high
d. none of the above

416. An auditor should consider two key issues when obtaining an understanding of a client’s
internal controls. These issues are:
a. the effectiveness and efficiency of the controls.
b. the frequency and effectiveness of the controls.
c. the design and utilization of the controls.
d. none of the above.

417. The independent auditor should acquire an understanding of the internal audit function as it
relates to the independent auditor’s study and evaluation of internal control because the:
a. audit programs, working papers, and reports of internal auditors can often be used as a
substitute for the work of the independent auditor’s staff.
b. procedures performed by the internal audit staff may eliminate the independent auditor’s
need for an extensive study and evaluation of internal control.
c. work performed by internal auditors may be a factor in determining the nature, timing,
and extent of the independent auditor’s procedures.
d. understanding of the internal audit function is an important substantive test to be
performed by the independent auditor.

418. To be effective, an internal audit department must be independent of:

a. operating departments.
b. the accounting department.
c. both a and b.
d. either a or b, but not both.

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419. Hanlon Bhd. maintains a large internal audit staff that reports directly to the chief financial
officer. Audit reports prepared by the internal auditors indicate that the system is functioning
as it should and that the accounting records are reliable. An independent auditor will
probably:
a. eliminate tests of controls.
b. increase the depth of the study and evaluation of administrative controls.
c. avoid duplicating the work performed by the internal audit staff.
d. place limited reliance on the work performed by the internal audit staff.

420. External financial statement auditors must obtain evidence regarding what attributes of an
internal audit (IA) department if the external auditors intend to rely on IA’s work?
a. Integrity
b. Objectivity
c. Competence
d. All of the above

421. When planning an audit, the auditor’s assessed level of control risk is:
a. determined by using actuarial tables.
b. calculated by using the audit risk model.
c. an economic issue, trading off the costs of testing controls against the cost of testing
balances.
d. calculated by using the formulas provided in the AICA’s auditing standards.

422. When a compensating control exists, the absence of a key control:

a. is no longer a concern because there is no longer a significant deficiency or material
weakness.
b. is a slight concern to the auditor.
c. could cause a material loss, so it must be tested using substantive procedures.
d. is magnified and must be removed from the sampling process and examined in its
entirety.

423. After considering a client’s internal controls, an auditor has concluded that it is well designed
and is functioning as intended. Under these circumstances the auditor would most likely:
a. perform tests of controls to the extent outlined in the audit program.
b. determine the control procedures that should prevent or detect errors and irregularities.
c. not increase the extent of predetermined substantive tests.
d. determine whether transactions are recorded to permit preparation of financial statements
in conformity with generally accepted accounting principles.

424. To obtain an understanding of an entity’s control environment, an auditor should concentrate

on the substance of management’s policies and procedures rather than their form because:
a. management may establish appropriate policies and procedures but not act on them.
b. the board of directors may not be aware of management’s attitude toward the control
environment.
c. the auditor may believe that the policies and procedures are inappropriate for that
particular entity.
d. the policies and procedures may be so weak that no reliance is contemplated by the
auditor.

425. A listing of all the things which the auditor will do to gather sufficient, competent evidence is
the:
a. audit strategy.
b. audit program.
c. audit procedure.
d. audit risk model.

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426. Collectively, procedures performed to obtain an understanding of the entity and its
environment, including internal controls, represent the auditor’s:
a. audit strategy.
b. tests of controls.
c. risk assessment procedures.
d. tests of transactions.

427. For efficiency, tests of controls are frequently done at the same time as:
a. analytical procedures.
b. compliance tests.
c. tests of transactions.
d. tests of details of balances.

428. Which of the following procedures are frequently performed in response to the auditor’s
assessment of the risk of material misstatement?
a. Analytical procedures
b. Tests of transactions
c. Tests of details of balances
d. All of the above

429. In which stage(s) of an audit can analytical procedures be performed?

a. In the planning stage.
b. In conjunction with tests of transactions and tests of details of balances.
c. In the completion stage.
d. During all three stages.

430. Tests of controls may include which of the following types of evidence?
a. Observation
b. Re-performance
c. Observation
d. All of the above

431. The purpose of tests of controls is to provide reasonable assurance that the:
a. accounting treatment of transactions and balances is valid and proper.
b. internal control procedures are functioning as intended.
c. entity has complied with IFRS disclosure requirements.
d. entity has complied with requirements of quality control.

432. In the context of an audit of financial statements, substantive tests are audit procedures that:
a. may be eliminated under certain conditions.
b. are designed to discover significant subsequent events.
c. may be either tests of transactions, tests of balances, or analytical tests.
d. will increase proportionately with the auditor’s reliance on internal control.

433. Which of the following is not useful for obtaining an understanding of internal controls?
a. Make inquiries of the client’s personnel.
b. Examine documents and records.
c. Read industry trade magazines.
d. Observe client activities and operations.

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434. A system walkthrough is used to:

a. test balances.
b. test details of transactions.
c. gain an understanding of internal controls.
d. achieve all of the above.

435. The most important consideration in developing the audit plan and audit program is the:
a. client’s size.
b. client’s industry.
c. audit firm’s available personnel.
d. the audit risk model used in its planning form.

436. Tests of controls are directed toward the control’s:

a. efficiency.
b. effectiveness.
c. efficiency and effectiveness.
d. cost benefit ratio.

437. When the auditor finds that there are missing controls in an area of the accounting system, the
audit program in that area would be modified in such a way as to:
a. increase the amount of tests of controls.
b. increase the reliance on tests of controls.
c. cause the issuance of a qualified or adverse opinion.
d. eliminate the need for a test of controls.

438. A procedure designed to test for monetary misstatements directly affecting the correctness of
financial statement balances is a:
a. test of controls.
b. substantive test.
c. test of attributes.
d. monetary-unit sampling test.

439. Which of the following is not appropriate for purposes of testing the effectiveness of controls?
a. Make inquiries of client personnel.
b. Evaluate prior experience with the client.
c. Observe control-related activities.
d. Reperform client procedures.

440. Which of the following is not a direct result of performing analytical procedures?
a. Identify areas of potential misstatements.
b. Reduce detailed audit tests.
c. Understand the client’s business.
d. Identify specific errors in the accounts.

441. If no material differences are found using analytical procedures and the auditor concludes that
misstatements are not likely to have occurred:
a. other tests may be reduced.
b. it will be necessary to increase the tests of balances.
c. it will not be necessary to perform tests of balances.
d. it will be necessary to increase the tests of transactions.

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442. The primary emphasis in most tests of details of balances is on the:

a. statement of financial position accounts.
b. statement of profit or loss and comprehensive income accounts.
c. cash flow statement account.
d. all of the above.

443. Analytical procedures are defined in the auditing standards as:

a. compliance tests.
b. substantive tests.
c. tests of controls.
d. helpful procedures not possessing the validity of other tests available to the auditor.

444. Tests of transactions are used to determine whether ___________ have been satisfied.
a. compliance test requirements.
b. balance coverage requirements.
c. transaction-related audit objectives.
d. any of the above

445. Which of the following statements is not true?

a. Analytical procedures emphasize the overall reasonableness of transactions and balances.
b. Tests of controls are concerned with evaluating whether controls are sufficiently
effective to justify reducing control risk and thereby reducing analytical review
procedures.
c. Substantive tests of transactions emphasize the verification of transactions recorded in
the journals and then posted in the general ledger.
d. Tests of details of balances emphasize the ending balances in the general ledger.

446. Which of the following audit tests is usually the least costly to perform?
a. Analytical procedures.
b. Tests of controls.
c. Tests of balances.
d. Substantive tests of transactions.

447. Which of the following audit tests is usually the most costly to perform?
a. Analytical procedures.
b. Tests of controls.
c. Tests of balances.
d. Substantive tests of transactions.

448. Analytical procedures must be performed in:

a. the planning and testing stages.
b. conjunction with tests of transactions and tests of details of balances.
c. the planning and completion stages.
d. the planning, testing and completion stages.

449. Which of the following tests commonly occur together?

a. Substantive tests of transactions and tests of controls.
b. Substantive tests of transactions and obtaining an understanding of internal controls.
c. Analytical procedures and tests of controls.
d. All of the above commonly occur together.

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450. Which of the following relationships between types of tests and audit evidence is not correct?
a. Tests of details and documentation.
b. Tests of controls and observation.
c. Tests of details and observation.
d. Substantive tests of transactions and reperformance

451. Tests of controls are generally viewed as less expensive than tests of details. Which of the
following is not a reason that tests of controls are less expensive?
a. Auditors generally make inquiries and observations of the client resulting in little auditor
time being invested.
b. Tests of controls are often done on a large number of items in a very short period of
time.
c. Audit software often makes testing controls very easy and fast.
d. All of the above are reasons that tests of controls are less expensive than tests of details.

452. An increased extent of tests of controls is most likely to occur when:

a. it is a first-year audit.
b. the auditor is doing a “fraud audit.”
c. controls are effective and the preliminary control risk assessment is low.
d. controls are ineffective and the preliminary control risk assessment is high.

453. Many auditors perform extensive analytical procedures on audits because:

a. they are required by GAAS.
b. they pinpoint errors in accounts.
c. they indicate areas of potential risk and misstatement.
d. all of the above.

454. Which of the following types of procedures will be performed in an audit of internal control
over financial reporting?
a. Procedures to obtain an understanding of internal control
b. Tests of controls
c. Both a and b
d. Either a or b, but not both

455. Tests of details of balances focus on:

a. beginning of the year balances.
b. end of the year balances.
c. transaction details for the period under audit.
d. all of the above.

456. Auditors who test manual controls that rely on IT-generated reports must consider:
a. the benefits of relying on IT-generated reports.
b. the effectiveness of management’s review.
c. the controls related to the accuracy of the information in the report.
d. both b and c.

457. When an auditor believes that analytical procedures indicate a reasonable possibility of
misstatement, the auditor may:
a. perform additional analytical procedures.
b. decide to modify tests of details of balances.
c. either a or b.
d. neither a nor b.

458. If the results of the tests of controls, substantive tests of transactions, and analytical

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procedures are not consistent with the predictions, tests of details of balances will be:
a. eliminated.
b. increased.
c. unaffected.
d. changed.

459. When controls are deemed ineffective and assessed control risk is high for a private company,
there will be ______ emphasis placed on tests of controls.
a. no
b. relatively little
c. moderate
d. heavy

460. Tests of controls address each of the following questions except:

a. How were the procedures performed?
b. Why were the procedures performed?
c. Were the necessary procedures performed?
d. Who performed the procedures?

461. Which of the following audit tests would be regarded as a test of controls?
a. Comparison of the inventory pricing to vendors’ invoices.
b. Tests of the signatures on canceled checks to board of directors’ authorisations.
c. Tests of the additions to property, plant, and equipment by physical inspections.
d. Review of the specific items making up the balance in a given general ledger account.

462. Which of the following tests form the basis for an auditor’s report on internal control over
financial reporting?
a. Analytical procedures
b. Tests of transactions
c. Tests of controls
d. Tests of details of balances

463. After finishing the review phase of the study and evaluation of internal control in an audit, the
auditor should perform tests of controls on:
a. those controls that the auditor wants and plans to rely upon.
b. those controls in which material weaknesses were identified.
c. those controls that have a material effect upon the financial statement balances.
d. a random sample of the controls that were reviewed.

464. At what point in the audit are tests of details most appropriately designed?
a. Engagement evaluation.
b. Planning.
c. Testing.
d. Any of the above.

465. Which of the following is/are performed in an audit of internal control over financial
reporting?
a. Procedures to obtain an understanding of internal control
b. Tests of controls
c. Both a and b
d. Either a or b, but not both

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465. The reliance placed on substantive tests in relation to the reliance placed on internal control
varies in a relationship that is ordinarily:
a. parallel.
b. inverse.
c. direct.
d. equal.

466. Which of the following is ordinarily designed to detect possible material Ringgit errors on the
financial statements?
a. Tests of controls.
b. Analytical review procedures.
c. Computer controls.
d. None of the above.

467. Only _______ involve physical examination and confirmation.

a. tests of controls
b. tests of transactions
c. tests of balances
d. analytical procedures

468. Documentation is used in every type of test except ________.

a. tests of controls
b. tests of transactions
c. analytical procedures
d. tests of details

469. Procedures to obtain an understanding of internal control do not generally provide sufficient
evidence that a control is operating effectively, except in the case of:
a. well-defined controls in low risk cycles.
b. cycles that contain no significant deficiencies or material weaknesses.
c. automated controls.
d. all of the above.

470. An exception in a test of control indicates the _______ of misstatements.

a. amount
b. likelihood
c. amount and likelihood
d. neither the amount nor the likelihood

471. Which of the following is not a valid basis for omitting an audit test?
a. the difficulty and expense involved in testing a particular item.
b. the relative risk involved.
c. the degree of reliance on the relevant internal controls.
d. the relationship between the cost of obtaining evidence and its usefulness.

472. Which of the following ultimately determines the specific audit procedures necessary to
provide an independent auditor with a reasonable basis for the expression of an opinion?
a. The audit program.
b. The auditor’s judgment.
c. Generally accepted auditing standards.
d. The auditor’s working papers.

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473. Which of the following is not an account affected by the sales and collection cycle?
a. Cash
b. Trade receivable
c. Allowance for doubtful accounts
d. Gross margin

474. Which of the following is not one of the five classes of transactions included in the sales and
collection cycle?
a. Sales returns and allowances
b. Charge-off of uncollectible accounts
c. Bad debt expense
d. Depreciation expense

475. What event initiates a transaction in the sales and collection cycle?
a. Receipt of cash.
b. Delivery of product to a customer.
c. Identification of a new customer.
d. Customer request for goods.

476. A _________ is a document that indicates a request for merchandise by a customer.

a. sales invoice
b. vendor invoice
c. customer order
d. sales order

477. A _________ is a document that communicates the description, quantity, and related
information for goods ordered by a customer.
a. sales order
b. customer order
c. vendor invoice
d. sales invoice

478. What critical event must take place before goods can be shipped?
a. Determination of correct delivery address
b. Credit approval
c. Receipt of cash
d. Receipt of sales order from the customer

479. Before goods are shipped on account, a properly authorized person must:
a. prepare the sales invoice.
b. approve the journal entry.
c. approve the customer’s credit.
d. verify that the unit price is accurate.

480. A document prepared to initiate shipment of the goods sold is the:

a. sales order.
b. bill of lading.
c. sales invoice.
d. customer order.

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481. The document used to indicate to the customer the amount of a sale and payment due date is
the:
a. sales invoice.
b. bill of lading.
c. purchase order.
d. sales order.

482. At what point in the sales and collection cycle does the company first give up assets?
a. Sales approval
b. Credit approval
c. Cash collection
d. Shipment of goods

483. Most companies recognize sales revenue when:

a. sales are invoiced.
b. customer orders are received.
c. goods are shipped.
d. customer orders are approved.

484. Which of the following is not a business function within the “Sales” class of transactions?
a. Processing customer orders.
b. Granting credit.
c. Processing and recording sales returns and allowances.
d. Shipping goods.

485. The total of the individual account balances in the trade receivable master file equals the:
a. total sales for the period.
b. balance of the sales account in the general ledger.
c. total sales less the total cash received for the period.
d. balance of the trade receivable account in the general ledger.

486. A listing of amounts owed by customer which shows how long each component part has been
due is the:
a. trial balance.
b. working trial balance.
c. trade receivable trial balance.
d. aged trade receivable trial balance.

487 A document sent to each customer showing his or her beginning trade receivable balance and
the amount and date of each sale, cash payment received, any debit or credit memo issued,
and the ending balance is the:
a. trade receivable subsidiary ledger.
b. monthly statement.
c. remittance advice.
d. sales invoice.

488. The document that accompanies the customer’s payment is the:

a. credit memo.
b. remittance advice.
c. vendor invoice.
d. monthly statement.

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Multiple-Choice Questions
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489. The document that supports reductions in trade receivable is the:

a. bill of lading.
b. sales invoice.
c. credit memo.
d. monthly statement.

490. A document that initiates shipment of goods and indicates the description of the merchandise,
the quantity shipped, and customer name and address is the:
a. bill of lading.
b. sales invoice.
c. picking ticket.
d. vendor invoice.

491. When designing audit procedures, the direction of tests is a crucial step in satisfying the:
a. valuation objective.
b. cutoff objective.
c. completeness objective.
d. classification objective.

492. Which of the following documents is not commonly associated with the “cash receipts” class
of transactions?
a. Remittance advice.
b. Sales order.
c. Prelisting of cash receipts.
d. Cash receipts journal or listing.

493. The process which postpones entries for the collection of receivables to conceal an existing
cash shortage is referred to as:
a. kiting.
b. lapping.
c. floating.
d. shorting.

494. When sales invoices are automatically calculated and posted by a computer, the auditor may
be able to reduce substantive tests of transactions for which, if any, objective?
a. Accuracy
b. Existence
c. Completeness
d. None of the above

495. The ____________ is a contract between a carrier (e.g., a trucking company) and the seller of
goods that dictates the details surrounding the shipment of goods.
a. bill of lading
b. sales invoice
c. picking ticket
d. remittance advice

496. Some companies have customers send payments directly to an address maintained by a bank.
This is called a(n) _______ system.
a. direct deposit
b. funds transfer
c. lockbox
d. interbank transfer

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497. In many audits, no substantive tests of transactions are made for the ________ objective on
the grounds that understatement of sales is not a concern.
a. accuracy
b. existence
c. completeness
d. none of the above

498. The most important aspects of the billing function include all but which of the following?
a. Making sure that all shipments have been billed.
b. Making sure that no shipment has been billed more than twice.
c. Making sure that each shipment is billed at the correct amount.
d. All of the above are correct.

499. For the most part, the audit of the sales and collection cycle:
a. cannot be performed until the audit of cash is completed.
b. must be performed first so that the audit of the other cycles can rely on the data.
c. can be performed independently of the audit of other cycles.
d. must be performed simultaneously with the audit of the purchases and disbursements
cycle.

500. An audit procedure that compares the name, amount, and dates shown on remittance advices
with cash receipts journal entries and with related duplicate deposit slips would be effective in
detecting:
a. kiting.
b. lapping.
c. illicit write-offs of customers as uncollectible accounts.
d. sales without proper credit authorisation.

501. In which of the following will sales return and allowances not be recorded?
a. Sales returns and allowances transaction file
b. Trade receivable master file
c. Cash receipts journal
d. Sales returns and allowances will be recorded in all of the above

502. For most firms, the function of indicating credit approval is recorded on the:
a. sales order.
b. sales invoice.
c. customer order.
d. remittance advice.

503. The document used as the basis for recording sales transactions and updating the trade
receivable master file is the:
a. sales order.
b. bill of lading.
c. sales journal.
d. sales invoice.

504. When posting the sales journal, details of the journal are posted to “x” and journal totals are
posted to “y.”
a. x = the sales account. y = the general ledger.
b. x = the sales account. y = the trade receivable subsidiary ledger.
c. x = the trade receivable master file. y = the general ledger.
d. x = the trade receivable account in the general ledger. y = the sales account in the
general ledger.

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505. Credit memos are normally issued for what purpose(s)?
a. To maintain control of returned merchandise.
b. To facilitate record keeping.
c. To reduce customer frustration and sales losses.
d. Both a and b.

506. Proper auditing requires that an account receivable must be charged off by the client when:
a. the customer files for bankruptcy.
b. the account is at least six months old.
c. a collection agency cannot inspire customer to pay the debt.
d. the client company concludes that an amount is no longer collectible.

507. Who is generally responsible for opening receipts when a company uses a lockbox to speed
the handling of cash receipts?
a. Company personnel.
b. Temporary employees in the town where the lockbox is located.
c. Bank employees.
d. None of the above.

508. A document used to indicate authority to write an account receivable off as uncollectible is
the:
a. credit memo.
b. uncollectible account authorisation form.
c. debit memo.
d. none of the above.

509. After the auditor has identified the key internal controls and deficiencies and assessed control
risk for a private company, it is appropriate to decide whether:
a. substantive tests will be reduced sufficiently to justify costs of performing tests of
controls.
b. substantive tests will be increased sufficiently to justify costs of performing tests of
controls.
c. tests of controls will be increased sufficiently to justify costs of performing substantive
tests.
d. tests of controls will be reduced sufficiently to justify costs of performing substantive
tests.

510. Management’s assertions for sales and collection activities are _____ when sales are
generated via e-commerce activities.
a. unchanged
b. expanded
c. mitigated
d. decreased

511. To prevent fraud, management should deny cash access to anyone responsible for:
a. entering sales transactions.
b. entering cash receipts transactions.
c. both a and b.
d. neither a nor b.

512. One key internal control to prevent fictitious transactions in the sales and collection cycle is:
a. to include a list of customer numbers in the computer files.
b. to account for the integrity of the numerical sequence of sales orders.
c. to include the sales price list of all products in the computer files.
d. having bank reconciliations prepared by one who is independent of the treasury function.

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513. The credit-granting function should be separated from which of the following?
a. Purchasing function
b. Manufacturing function
c. Sales function
d. None of the above

514. Which one of the following statements is true? In deciding on substantive tests of transactions:
a. some procedures are commonly employed on every audit regardless of the
circumstances.
b. all procedures are dependent on the adequacy of the controls and the results of the tests
of controls.
c. results obtained in the prior year’s audit will not affect the procedures used this year.
d. the materiality of the item will not influence the choice of procedures used.

515. To test for recorded sales for which there were no actual shipments, the auditor traces from
the:
a. bill of lading to the sales journal.
b. sales journal to the bill of lading.
c. sales journal to the trade receivable subsidiary ledger.
d. bill of lading to the supporting customer order and sales order.

516. An effective procedure to test for unbilled shipments is to trace from the:
a. sales journal to the shipping documents.
b. shipping documents to the sales journal.
c. sales journal to the trade receivable ledger.
d. sales journal to the general ledger sales account.

517. The auditor traces items from the source documents to the journals to satisfy the:
a. existence objective.
b. completeness objective.
c. ownership objective.
d. valuation objective.

518. In many audits of sales transactions, no substantive tests of transactions are performed for the
completeness objective because:
a. understatements of assets and income are a greater concern than overstatements.
b. overstatements of assets and income are a greater concern than understatements.
c. it doesn’t matter if income is understated because the savings on income tax offsets the
reduced revenue and net income is correct.
d. the unrecorded sales cause a reduction of trade receivable; therefore, the ratios of the two
financial statements will not be misleading.

519. To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices
are normally compared with:
a. the original invoices.
b. an approved price list.
c. the amounts recorded in the sales journal for that transaction.
d. the amounts posted to the customer’s account in the trade receivable master file.

520. Which of the following is not a point at which the auditor deems authorisation to be critical?
a. Authorisation of credit.
b. Price authorisation.
c. Shipment of goods.
d. Each of the above is an important point for authorisation.

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521. With respect to sales, prenumbered documents are intended to:
a. prevent the failure to bill or record sales.
b. prevent duplicate billings or recordings of sales.
c. both a and b.
d. neither a nor b.

522. Prenumbered documents will only be useful for control purposes if:
a. a different numerical sequence is used for each company.
b. the sequence is accounted for periodically.
c. employees do not have access to the complete sequence.
d. all of the above are true.

523. It is important that sales be billed and recorded in the journal as soon as possible after:
a. the order is received.
b. the order is received and credit is approved.
c. credit is approved and it is verified that there is enough inventory to fill the order.
d. the shipment takes place.

524. _______ tests for omitted transactions, while _____ tests for nonexistent transactions.
a. Tracing, vouching
b. Vouching, tracing
c. Verifying, tracking
d. Tracking, verifying

525. The audit procedure referred to as proof of cash receipts is useful to test:
a. time lags in making deposits.
b. whether all recorded cash receipts have been deposited in the bank.
c. whether there are cash receipts that have not been recorded in the journals.
d. all three of the above.

526. Which of the following procedures would ordinarily be best expected to find unrecorded
sales?
a. Compare shipping documents with sales records.
b. Apply gross profit rates to inventory disposed of during the period.
c. Trace payments received subsequent to the statement of financial position date.
d. Send trade receivable confirmation requests.

527. At which point in an ordinary sales transaction would a lack of specific authorisation be of
least concern to the auditor?
a. Granting of credit.
b. Shipment of goods.
c. Determination of discounts.
d. Selling of goods for cash.

528. Smith Manufacturing Company’s trade receivable clerk has a friend who is also a Smith’s
customer. The trade receivable clerk has issued fictitious credit memos to his friend for goods
supposedly returned. The most effective procedure for preventing this activity is to:
a. prenumber and account for all credit memorandums.
b. require receiving reports to support all credit memorandums before they are approved.
c. have independent sales and trade receivable departments.
d. mail monthly statements to customers.

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529. Generally, audit evidence gathered from the sales and collection cycle is combined with
evidence from other parts of the audit:
a. as the evidence accumulation process proceeds.
b. only when all fieldwork processes of the engagement are completed.
c. only after the audit of the sales and collection cycle is concluded.
d. after the conclusion of both the cash cycle and the sales and collection cycle.

530. Proper segregation of duties is useful to prevent various types of misstatements. Which of the
following is not an essential segregation of duties?
a. Persons having access to cash should not have access to marketable securities.
b. Separate the credit-granting function from the sales function.
c. Personnel doing internal comparisons should be independent of those entering the
original data.
d. Anyone responsible for inputting sales and cash receipts transactions information into the
computer should be denied access to cash.

531. Which one of the following is not an auditor’s concern about a key authorisation point in the
sales/collection cycle?
a. The receiving room must have authorisation before releasing items to inventory control.
b. Credit must be authorized before the sale.
c. Goods must be shipped after the authorisation.
d. Prices must be authorized.

532. Transaction-related audit objectives are essentially the same for processing credit memos as
for sales with certain differences. Which of the following are two key differences?
a. Risk and emphasis on the completeness objective.
b. Materiality and emphasis on the accuracy objective.
c. Risk and emphasis on the classification objective.
d. Materiality and emphasis on the occurrence objective.

533. Cash receipts from sales on account have been misappropriated. Which of the following acts
would conceal this defalcation and be least likely to be detected by an auditor?
a. Understating the sales journal.
b. Overstating the trade receivable control account.
c. Overstating the trade receivable subsidiary ledger.
d. Understating the cash receipts journal.

534. Which of the following would be the best protection for a company that wishes to prevent the
“lapping” of trade trade receivable?
a. Segregate duties so that the bookkeeper in charge of the general ledger has no access to
incoming mail.
b. Segregate duties so that no employee has access to both checks from customers and
currency from daily cash receipts.
c. Have customers send payments directly to the company’s depository bank.
d. Request that customer’s payment checks be made payable to the company and addressed
to the treasurer.

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535. A proof of cash is not useful in discovering differences in the actual and reported cash
balances due to:
a. deposits in transit.
b. collections on the company’s behalf by the bank which are deposited directly to the
company’s account.
c. cash receipts that were not recorded in the relevant journals.
d. any of the above reasons.

536. When designing substantive tests of transactions for sales, the auditor is concerned with the
possibility of several types of misstatements. Which of the following is not one of the types of
these misstatements?
a. Sales being included in the journal for which no shipment was made.
b. Sales to related parties, such as officers and subsidiaries.
c. Sales recorded more than once.
d. Shipments being made to nonexistent customers and recorded as sales.

537. An auditor needs to determine whether all customers of an electric utility company are being
billed. The auditor should test from the:
a. sales register to the trade receivable ledger.
b. sales register to the meter department records.
c. trade receivable ledger to the sales register.
d. meter department records to the sales register.

538. Which one of the following would the auditor consider to be an incompatible operation if the
cashier receives remittances from the mailroom?
a. The cashier prepares the daily deposit.
b. The cashier makes the daily deposit at a local bank.
c. The cashier posts the receipts to the trade receivable subsidiary ledger cards.
d. The cashier endorses the checks.

539. A sample in which the characteristics of the sample are the same as those of the population is
a(n):
a. variables sample.
b. representative sample.
c. attributes sample.
d. random sample.

540. When the auditor decides to select less than 100 percent of the population for testing, the
auditor is said to use:
a. audit sampling.
b. representative sampling.
c. poor judgment.
d. none of the above.

541. In practice, auditors _________ know if a sample is truly a representative one.

a. sometimes
b. often
c. routinely
d. never

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542. To determine if a sample is truly representative, an auditor must:

a. conduct multiple samples of the same population.
b. never use sampling because of the expense involved.
c. audit the entire population.
d. perform none of the above.

543. One of the ways to eliminate nonsampling risk is through:

a. proper supervision and instruction of the client’s employees.
b. proper supervision and instruction of the audit team.
c. the use of attributes sampling rather than variables sampling.
d. controls which ensure that the sample drawn is random and representative.

544. One cause of non sampling risk is:

a. ineffective use of audit procedures.
b. testing less than the entire population.
c. use of extensive tests of controls.
d. any of the above.

545. An auditor can increase the likelihood that a sample is representative by using care in:
a. designing the sampling process.
b. designing the sample selection.
c. evaluating the sample results.
d. performing all of the above.

546. 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 sample selection.
b. haphazard selection.
c. systematic sample selection.
d. statistical selection.

547. When auditors wish to evaluate a sample statistically, the only acceptable selection method is:
a. probabilistic selection.
b. judgmental selection.
c. haphazard selection.
d. block sample selection.

548. A sample in which every possible combination of items in the population has an equal chance
of constituting the sample is a:
a. random sample.
b. statistical sample.
c. judgment sample.
d. representative sample.

549. The process which requires the calculation of an interval and then selects the items based on
the size of the interval is:
a. statistical sampling.
b. random sample selection.
c. systematic sample selection.
d. computerized sample selection.

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550. ________ is the risk that audit tests will not uncover existing exceptions in a sample.
a. Sampling risk.
b. Non sampling risk.
c. Audit risk.
d. Detection risk.

551. ________ is the risk that an auditor will reach an incorrect conclusion because a sample is not
representative of the population.
a. Sampling risk
b. Nonsampling risk
c. Audit risk
d. Detection risk

552. In systematic sample selection, the population size is divided by the number of sample items
desired in order to determine the:
a. sampling interval.
b. tolerable exception rate.
c. computed upper exceptions rate.
d. mean.

553. Sampling risk may be controlled by:

a. adjusting the sample size.
b. always using random sampling .
c. using whatever sample selection technique is appropriate for the population.
d. both a and c.

554. Which of the following occurrences would be least likely to attract the auditor’s attention?
a. Deviations from client’s established control procedures.
b. Deviations from client’s budgeted values.
c. Monetary errors in populations of transaction data.
d. Monetary errors in populations of account balance details.

555. Which of the following statements is correct?

a. A sample of all items of a population will eliminate sampling risk, but increase non
sampling risk.
b. The use of an appropriate sample selection technique ensures a representative sample.
c. The auditor’s failure to recognize an exception is a significant cause of sampling risk.
d. The use of inappropriate audit procedures is a significant cause of nonsampling risk.

556. The risk which the auditor is willing to take in accepting a control as being effective when the
true population exception rate is greater than a tolerable rate is the:
a. finite correction factor.
b. tolerable exception rate.
c. acceptable risk of assessing control risk too low.
d. estimated population exception rate.

557. The exception rate the auditor will permit in the population and still be willing to reduce the
assessed level of control risk is called the:
a. tolerable exception rate.
b. estimated population exception rate.
c. acceptable risk of overreliance.
d. sample exception rate.

558. If the auditor decides to assess control risk at the maximum level in a private company audit,

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tests of controls are:
a. increased in number.
b. reduced in number.
c. not performed.
d. unchanged from prior planned settings.

559. Which of the following is not one of the basic phases in audit sampling?
a. Planning the sample
b. Evaluating the results of the sample
c. Selecting the sample and performing the tests
d. Each of the above is a phase in audit sampling.

560. Attributes sampling would be an appropriate method to use on which one of the following
procedures in an audit program?
a. Review sales transactions for large and unreasonable amounts.
b. Observe whether the duties of the trade receivable clerk are separate from handling cash.
c. Examine a sample of duplicate sales invoices for credit approval by the credit manager.
d. Review the aged schedule of trade receivable to determine if receivables from officers
are included.

561. When the computed upper exception rate is greater than the tolerable exception rate, it is
necessary for the auditor to take specific action. Which of the following courses of action
would be most difficult to defend if the auditor is ever subject to review by a court?
a. Reduce the tolerable exception rate so as to accept the sample results.
b. Expand the sample size and perform more tests.
c. Revise the assessed control risk.
d. Write a letter to management which outlines the control deficiencies.

562. Which of the following is not generally considered in determining sample size for tests of
controls?
a. Expected population exception rate.
b. Risk of assessing control risk too low.
c. Tolerable exception rate.
d. Population size.

563. Which of the following statement is correct with respect to the quantification of sampling
risk?
a. Sampling risk cannot be quantified.
b. Sampling risk can be quantified only when non-probabilistic selection techniques are
used to select the sample.
c. Sampling risk can be quantified only when probabilistic selection techniques are used to
select the sample.
d. None of the above.

564. The auditor may use which of the following criteria when using the directed sample selection
technique?
a. Items most likely to contain misstatements.
b. Items containing selected population characteristics.
c. Large Ringgit coverage.
d. Any of the above.

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565. Non-sampling errors occur when audit tests do not uncover existing exceptions in the:
a. population.
b. sample.
c. planning stage.
d. financial statements.

566. Which of the following statements is correct with respect to the evaluation of sample results?
a. It is acceptable to make non-probabilistic evaluations only when probabilistic sample
selection is used.
b. It is acceptable to make non-probabilistic evaluations only if the auditor cannot quantify
sampling risk.
c. It is never acceptable to evaluate a non-probabilistic sample as if it were a statistical one.
d. All of the above are correct.

567. Which of the following statements is a valid criticism of non-statistical sampling?

a. Many audit tests, such as footing of journals, must be performed outside a statistical
sampling context.
b. The cost of performing random selection or testing often exceeds the benefits.
c. Non-statistical sampling does not differ substantially from statistical sampling methods.
d. Conclusions may be drawn in more precise ways when using statistical sampling
methods.

568. Which of the following methods of sample selection is appropriately used when selecting a
random sample?
a. Use of random number tables.
b. Use of computer generated random numbers.
c. Auditor’s random selection of items.
d. Both a and b, but not c.

569. Correspondence is established between the random number table and the population by:
a. identifying each item in the population with a unique number.
b. deciding the number of digits to use in the random number table and their association
with the population numbering system.
c. defining which digits the auditor uses in a column and the method of reading the table.
d. selecting a random starting point on the table.

570. The acceptable risk of assessing control risk to low will normally be assessed at a ____ level
when auditing a public company.
a. higher
b. compensating
c. lower
d. nominal

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571. Which of the following statements is not correct?

a. It is acceptable to pick a starting point on a random number table by using a “blind stab”
method.
b. It is impossible to draw a six-digit random number from a table that is separated into
columns of five digits.
c. The only reason for selecting a random starting point on a random number table is to
eliminate the predictability of the sample.
d. When selecting a three-digit number from a table that is separated into columns of five
digits, it is permissible to use the first three digits, the middle three digits, or the last
three digits.

572. Which of the following is not one of the types of computer tools used to generate random
samples?
a. Electronic spreadsheet programs.
b. Random number generators.
c. Generalized audit software.
d. Random application search software.

573. Auditors are concerned with which type of exceptions?

a. Deviations from a client’s established internal control processes.
b. Monetary misstatements in transaction data.
c. Monetary misstatements in account balance details.
d. Auditors are concerned with all of these exceptions.

574. In using audit sampling for exception rates, the auditor is primarily interested in determining
the _____ the exception rate might be.
a. lowest
b. most
c. average range in which
d. none of the above

578. The highest estimated exception rate in the population at a particular acceptable risk of
assessing control risk too low is:
a. the upper exception rate.
b. estimated population exception rate.
c. the computed upper exception rate.
d. the tolerable exception rate.

579. The advantage of systematic sample selection is that:

a. it is easy to use.
b. there is limited possibility of it being biased.
c. it is unnecessary to determine if the population is arranged randomly.
d. all three of the above.

580. A statistical method used to estimate the proportion of items in a population containing an
attribute of interest is:
a. attributes sampling.
b. variables sampling.
c. estimation sampling.
d. population-proportional-to-size sampling.

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581. The exception rate that the auditor will permit in the population and still be willing to use the
preliminary control risk assessment is called the:
a. acceptable exception rate.
b. estimated population exception rate.
c. sample exception rate.
d. tolerable exception rate.

582. The auditor’s best estimate of the population exception rate is the:
a. current year’s sample exception rate.
b. tolerable exception rate.
c. prior year’s sample exception rate.
d. computed upper exception rate.

583. Place the following steps in their proper order:

1. Analyze exceptions
2. Select the sample
3. Define attributes and exception conditions
4. State the objectives of the audit test
5. Specify the tolerable exception rate

a. 1,3,2,4,5.
b. 4,3,1,2,5.
c. 4,3,5,2,1.
d. 1,2,3,4,5.

584. If an auditor judgmentally selects a sample of one hundred items from a population and finds
two exceptions, the auditor:
a. can conclude that the sample exception rate is 2%.
b. can conclude that the population exception rate is 2%.
c. can calculate the highest exception rate expected in the population.
d. cannot make any conclusions about either the sample or the population.

585. For which of the following audit procedures is audit sampling not appropriate?
a. Review sales transactions for large and unusual amounts.
b. Examine a sample of duplicate sales invoices for credit approval.
c. Compare the quantity on duplicate sales invoices with the quantity on related shipping
documents.
d. Audit sampling is appropriate for each of the above procedures.

586. Which of the following statements about the process of defining the population is not correct?
a. The auditor can define the population to include the desired data.
b. The auditor may generalize only about that population that has been sampled.
c. The population represents the body of data about which the auditor wishes to generalize.
d. The auditor can randomly sample from any part of the population that she chooses.

587. Which of the following is the exception rate that the auditor expects to find before testing?
a. Sample exception rate.
b. Estimated population exception rate.
c. Computed exception rate.
d. Tolerable exception rate.

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588. Which of the following is not determined until after a sample is tested and evaluated?
a. Sample exception rate.
b. Estimated population exception rate.
c. Computed exception rate.
d. Tolerable exception rate.

589. The relationship of tolerable exception rate (TER) to sample size is:
a. direct (larger TER = larger sample).
b. inverse (larger TER = smaller sample).
c. variable (sometimes larger, sometimes smaller).
d. not determinable.

590. Which of the following must be set prior to testing a sample?

a. Sample exception rate.
b. Achieved upper precision limit.
c. Computed exception rate.
d. Tolerable exception rate.

591. The relationship of acceptable risk of accessing control risk too low (ARACR) to sample size
is:
a. variable (sometimes larger, sometimes smaller).
b. direct (larger ARACR = larger sample).
c. inverse (larger ARACR = smaller sample).
d. nonexistent.

592. In attributes sampling, an estimate of the expected population exception rate is necessary to
plan the sample size. The relationship of expected population exception rate (EPER) to
sample size is:
a. direct (small EPER = small sample).
b. inverse (small EPER = large sample).
c. a variable (sometimes small, sometimes large) dependent on other factors present.
d. indeterminate.

593. The initial sample size is so called because:

a. there is always another sample to be done.
b. an auditor must take several samples to ensure randomness.
c. an auditor must take several samples to ensure that the final sample is representative.
d. exceptions must be evaluated before deciding whether the sample is sufficiently large to
achieve the objectives.

594. The sample exception rate equals:

a. the number of exceptions in the population divided by the sample size.
b. the number of items in the population multiplied by the number of exceptions in the
sample.
c. the number of exceptions in the sample divided by the sample size.
d. the number of exceptions in the population divided by the population size.

595. Before the population can be considered acceptable based on the acceptable risk of assessing
control risk too low, the computed upper exception rate must be:
a. greater than or equal to the tolerable exception rate.
b. greater than the tolerable exception rate.
c. less than or equal to the tolerable exception rate.
d. less than the tolerable exception rate.

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596. Which of the following combinations of attributes and exception conditions is not
appropriate?
a. Existence of sales invoice number in the sales journal – No record of sales invoice
number in the sales journal.
b. Credit is approved – Lack of initials indicating credit approval.
c. Quantity on customer order agrees with duplicate sales invoice – Quantity on customer
order does not agree with quantity on duplicate sales invoice.
d. Evidence that pricing is checked – Lack of initials on duplicate sales invoice indicating
that extensions were checked.

597. Which of the following statements is not true?

a. Random selection is statistical measurement.
b. It is acceptable to use random selection procedures without drawing statistical
conclusions.
c. It would be inappropriate to draw a statistical conclusion unless the sample were
randomly selected.
d. Random selection is a part of statistical sampling.

598. An auditor selects a sample from the file of shipping documents to determine whether
invoices were prepared. This test is performed to satisfy the audit objective of:
a. accuracy.
b. existence.
c. control.
d. completeness.

599. The acceptable risk of assessing control risk too low is:
a. the risk that the auditor is willing to take of accepting a control as ineffective when it is
effective.
b. the risk that the auditor is willing to take of accepting a control as effective when it is
ineffective.
c. the auditor’s measure of sampling risk.
d. both b and c, but not a.

600. When using statistical sampling, the auditor would probably require a smaller sample if the:
a. population increases.
b. desired reliability decreases.
c. desired precision interval narrows.
d. expected exception rate increases.

601. A principle advantage of statistical methods of attributes sampling over non statistical
methods is that they provide a scientific basis for establishing the:
a. risk of assessing control risk too low.
b. tolerable exception rate.
c. expected population exception rate.
d. sample size.

602. In performing a review of a client’s cash disbursements, an auditor uses systematic sample
selection with a random start. The primary disadvantage of this technique is population items:
a. may occur twice in the sample.
b. must be reordered in a systematic pattern before the sample can be drawn.
c. may occur in a systematic pattern, thus negating the randomness of the sample.
d. must be replaced in the population after sampling to permit valid statistical inference.

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603. In estimation sampling for attributes, which one of the following must be known to evaluate
the sample results?
a. Estimated Ringgit value of the population.
b. Standard exception of the values in the population.
c. Actual exception rate of the attribute in the population.
d. Sample size.

604. Which of the following statements is not correct regarding probabilistic and non-probabilistic
sample selection?
a. In probabilistic selection, every population item has a known chance of being selected.
b. It is not acceptable to make non-probabilistic evaluations using probabilistic selection.
c. Probabilistic selection is required for all statistical sampling methods.
d. Both methods are acceptable and commonly used.

605. Non-probabilistic selection methods are not based on mathematical probabilities; therefore:
a. the extent to which a sample is representative may be difficult to determine.
b. they are discouraged by the AICA.
c. they are forbidden by the Statements on Auditing Standards.
d. they are not as good as statistical sampling.

606. Which of the following statements regarding block sampling is not true?
a. Block sampling is the selection of several items in sequence.
b. It is acceptable to use block sampling for tests of transactions only if a reasonable
number of blocks is used.
c. A “reasonable number” for most situations is probably at least six blocks from six
different periods, locations, divisions, and so forth.
d. Once the first item in the block is selected, the remainder of the block is chosen
automatically.

607. A means of reducing the potential bias in systematic sample selection is to:
a. use multiple starts.
b. use a random number table.
c. include a large block of the population.
d. include only the high-Ringgit-value items.

608. When deciding on the acceptable risk of assessing control risk too low, the auditor should:
a. rely on his/her professional judgment.
b. err on the side of being conservative.
c. consult the professional standards.
d. do any of the above.

609. Which of the following statements is true?

a. The audit procedures will vary as a result of using either statistical or nonstatistical
sampling.
b. The audit procedures will be the same for either statistical or nonstatistical sampling but
they must be performed differently for each.
c. Statistical sampling requires quantitative audit procedures whereas nonstatistical
sampling requires judgmental audit procedures.
d. The same audit procedures are performed in the same manner for either statistical or
nonstatistical sampling.

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610. When audit procedures have been completed for an attributes sampling application, the
auditor must generalize from the sample to the population. Which of the following statements
would be incorrect regarding this process?
a. The auditor would use an attributes sampling table to determine the computed upper
exception rate.
b. The computed upper exception rate is the highest exception rate in the population that
the auditor is willing to accept.
c. It would be wrong for the auditor to conclude that the population exception rate is
exactly the same as the sample exception rate.
d. In selecting the table corresponding to the risk of overreliance, it should be the same as
the ARACR used for determining the initial sample size.

611. When performing tests of controls and tests of transactions for sales, the auditor generally
defines the population as:
a. all trade receivable transactions for the year.
b. all sales invoices for the year.
c. all cash receipts transactions for the year.
d. all of the above.

612. The difference between the tolerable exception rate and the estimated population exception
rate is called:
a. accuracy of the initial sample estimate.
b. inflation factor of the initial sample estimate.
c. precision of the initial sample estimate.
d. none of the above.

613. If an auditor, planning to use statistical sampling, is concerned with the number of a client’s
sales invoices that contain mathematical errors, the auditor would most likely utilize:
a. random sampling with replacement.
b. sampling for attributes.
c. sampling for variables.
d. stratified random sampling.

614. If the result obtained from a particular sample is critical to the formation of an audit opinion,
which of the following is the most important to the auditor?
a. Acceptable risk of assessing control risk too low.
b. Estimated population exception rate.
c. Tolerable exception rate.
d. Size of the population.

615. The tolerable rate of exceptions for tests of controls is generally:

a. lower than the expected rate of errors in the related accounting records.
b. higher than the expected rate of errors in the related accounting records.
c. identical to the expected rate of errors in the related accounting records.
d. unrelated to the expected rate of errors in the related accounting records.

616. An advantage of using statistical sampling techniques is that such techniques:

a. mathematically measure risk.
b. eliminate the need for judgmental decisions.
c. define the values of precision and reliability required to provide audit satisfaction.
d. have been established in the courts to be superior to judgmental sampling.

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617. Auditors who prefer statistical to nonstatistical sampling believe that the principal advantage
of statistical sampling flows from its unique ability to:
a. provide a mathematical measurement of uncertainty.
b. promote a more legally defensible procedural approach.
c. define the precision required to provide audit satisfaction.
d. establish conclusive audit evidence with decreased audit effort.

618. Which of the following is an advantage of systematic sample selection over random number
sampling?
a. It provides a stronger basis for statistical conclusions.
b. It enables the auditor to use the more efficient “sampling with replacement” tables.
c. There may be correlation between the location of items in the population, the feature of
sampling interest, and the sampling interval.
d. It does not require establishment of correspondence between random numbers and items
in the population.

619. What is an auditor’s evaluation of a statistical sample for attributes when a test of 100
documents results in four exceptions if the tolerable exception rate is 5%, the expected
population exception rate is 3%, and the allowance for sampling risk is 2%?
a. Accept the sample results as support for planned reliance on the control because the
tolerable rate less the allowance for sampling risk equals the expected population
exception rate.
b. Modify planned reliance on the control because the sample exception rate plus the
allowance for sampling risk exceeds the tolerable rate.
c. Modify planned reliance on the control because the tolerable rate plus the allowance for
sampling risk exceeds the expected population exception rate.
d. Accept the sample results as support for planned reliance on the control because the
sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

620. In the evaluation of the results of an attributes sample, the fact that the exception rate in the
sample was 2% rather than the estimated population exception rate of 4% would cause the
computed upper exception rate to:
a. be less than the tolerable exception rate.
b. equal the tolerable exception rate.
c. exceed the tolerable exception rate.
d. cannot be determined from the information given.

621. If the size of the sample to be used in a test of attributes is not determined by using statistical
concepts, but the sample is chosen in accordance with random selection procedures:
a. no inferences can be drawn from the sample.
b. the auditor has committed a nonsampling error.
c. the auditor may or may not achieve the tolerable exception rate at the acceptable risk of
assessing control risk too low.
d. the auditor will have to evaluate results using the principles of discovery sampling.

622. Which of the following is not a balance-related audit objective evaluated in the audit of trade
receivable?
a. Timing
b. Realizable value
c. Completeness
d. Accuracy

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623. The two primary classes of transactions in the sales and collection cycle are:
a. sales and sales discounts.
b. sales and cash receipts.
c. sales and sales returns.
d. sales and trade receivable.

624. The appropriate evidence to be obtained from tests of details must be decided on a(n):
a. efficiency basis.
b. effectiveness basis.
c. audit objectives basis.
d. none of the above.

625. Which of the following is not a balance-related audit objective evaluated in the audit of trade
receivable?
a. Accuracy
b. Completeness
c. Rights
d. Each of the above is a balance-related audit objective

626. Tests of which balance-related audit objective are normally performed first in an audit of the
sales and collection?
a. Accuracy
b. Completeness
c. Rights
d. Detail tie-in

627. For most audits, inherent risk for trade receivable is moderate or low except for which
balance-related audit objectives?
a. Timing and realizable value.
b. Completeness and existence.
c. Existence and accuracy.
d. Realizable value and cutoff.

628. Which of the following types of receivables would not deserve the special attention of the
auditor?
a. Trade receivables with credit balances.
b. Accounts that have been outstanding for a long time.
c. Receivables from affiliated companies.
d. Each of the above would receive special attention.

629. A listing of the balances in the trade receivable master file at the statement of financial
position date, by total balance outstanding and by the amount of time the component parts
have been outstanding, is the:
a. customer list.
b. aged trial balance.
c. trade receivable ledger.
d. schedule of trade receivable.

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630. Testing the information on the aged trial balance for detail tie-in is a necessary audit
procedure, which would normally include:
a. test footing the total column and the columns depicting the aging.
b. comparing the total of the trial balance with the general ledger trade receivable account.
c. none of the above.
d. all of the above.

631. Auditors are often concerned with three aspects of internal controls related to the sales and
collection cycle. Which of the following is not one of those controls?
a. Controls that detect or prevent embezzlements.
b. Controls over cutoff.
c. Controls over acquisitions.
d. Controls related to the allowance for doubtful accounts.

632. Cutoff misstatements occur when:

a. the auditor mistakenly asks the bank for the end-of-year bank statement instead of the
statement which would include the two succeeding weeks.
b. subsequent period transactions are recorded in the current period.
c. current period transactions are recorded in the subsequent period.
d. both b and c above, but not a.

633. Cutoff misstatements occur:

a. either by error or fraud.
b. by error only.
c. by fraud only.
d. randomly without causes related to errors or fraud.

634. Generally accepted accounting principles require that material sales returns and allowances
be:
a. recorded in the period when the merchandise is returned.
b. recorded in the period when the credit memo is issued.
c. matched with related sales.
d. recorded as a debit to the sales account.

635. Communication addressed to the debtor requesting him or her to confirm whether the balance
as stated on the communication is correct or incorrect is a:
a. representation letter.
b. negative confirmation.
c. bank confirmation.
d. positive confirmation.

636. A type of positive confirmation known as a blank confirmation:

a. requests the recipient to fill in the amount of the balance.
b. is considered less reliable than the regular positive confirmation.
c. generates as high a response rate as the regular positive confirmation form.
d. has all of the attributes of a, b, and c above.

637. For sales, the occurrence transaction-related audit objective affects the ______ balance-related
audit objective.
a. existence
b. completeness
c. rights
d. detail tie-in

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638. For cash receipts, the occurrence transaction-related audit objective affects the ______
balance-related audit objective.
a. existence
b. completeness
c. rights
d. detail tie-in

639. Which of the following is likely to be performed first when doing tests of details for trade
receivable?
a. Recorded trade receivable exist.
b. Trade receivable in the aged trial balance agree with related master file amounts, and the
total is correctly added and agrees with the general ledger.
c. Trade receivable are owned.
d. Existing trade receivable are included.

640. Analytical procedures are substantive tests and, if the results of the analytical procedures are
favorable, the auditor will:
a. reduce the extent of tests of details of balances.
b. reduce the extent of tests of controls.
c. reduce the tests of transactions.
d. reduce all of the other tests.

641. The most important test of details of trade receivable is the:

a. detail tie-in of the records.
b. analysis of the allowance for doubtful accounts.
c. confirmation of trade receivable.
d. combination of the above.

642. The extent of the testing of detail tie-in of an aged trial balance depends on all but which of
the following?
a. The number of accounts involved.
b. The degree to which the master file has been tested as a part of tests of controls tests of
transactions.
c. The extent to which the schedule has been verified by an independent person before it is
given to the auditor.
d. The extent of testing depends on each of the above.

643. Tests of details of balances are directed to:

a. statement of financial position accounts for all cycles.
b. statement of profit or loss and comprehensive income accounts for all cycles.
c. statement of financial position accounts for some cycles and statement of profit or loss
and comprehensive income accounts for other cycles.
d. all general ledger accounts for all cycles.

644. The most important test of details of balances for trade receivable is:
a. confirmations.
b. recalculation of the aged receivables and uncollectible accounts.
c. tracing credit memos for returned merchandise to receiving room reports.
d. tracing from shipping documents to journals to the trade receivable ledger.

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645. Most tests of trade receivable and the allowance for uncollectible accounts are based on the:
a. general ledger balance of each account.
b. results of analytical procedures.
c. results of confirmations.
d. aged trial balance.

646. The most important test of details of balances to determine the existence of recorded trade
receivable is:
a. tracing details of sales invoices to shipping documents.
b. tracing the credits in trade receivable to bank deposits.
c. tracing sales returns entries to credit memos issued and receiving room reports.
d. the confirmation of customers’ balances.

657. When should auditors not perform alternative procedures in testing the trade receivable
balance?
a. When customers do not return confirmation requests.
b. When confirmations are deemed to be ineffective as an audit procedure.
c. When confirmations are too costly to use.
d. Alternative procedures should never be used.

658. Because of its central role in auditing of trade receivable, the ______________ is one of the
first items tested.
a. trade receivable master file
b. customer file
c. aged trial balance
d. sales register

659. If trade receivable accounts with credit balances are significant, they should be:
a. written off.
b. moved to the debit side.
c. reclassified as trade payable.
d. corrected by making adjusting entries.

670. Most tests of trade receivable are based on what schedule, file, or listing?
a. Sales master file.
b. Aged trade receivable trial balance.
c. Trade receivable master file.
d. None of the above.

671. An auditor discovers that the client records sales returns and allowances in the accounting
period in which they occur, under the assumption of approximately equal offsetting errors at
the beginning and end of each period.
a. This is acceptable.
b. This is not acceptable.
c. This is acceptable as long as the amounts are not significant.
d. This is not acceptable as long as the amounts are not significant.

672. If the client’s internal control for recording sales returns and allowances is evaluated as
ineffective:
a. a larger sample is needed to verify cutoff.
b. sampling is not appropriate.
c. all sales returns must be traced to supporting documentation.
d. all sales returns must be confirmed with the customer.

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673. A customer mails and records a check to a client for payment of an unpaid account on
December 30. The client receives and records the amount on January 2. The records of the
two organizations will be different on December 31.
a. This is a cutoff misstatement.
b. This is a timing difference.
c. Both a and b.
d. Neither a nor b.

674. Which of the following audit procedures would not likely detect a client’s decision to pledge
or factor trade receivable?
a. A review of the minutes of the board of directors’ meetings.
b. Discussions with the client.
c. Confirmation of receivables.
d. Examination of correspondence files.

675. When do most companies record sales returns and allowances?

a. During the month in which the sale occurs.
b. During the accounting period in which the return occurs.
c. Whenever the customer contacts the company regarding the credit.
d. Any of the above is correct.

676. Cutoff misstatements can occur for:

a. sales.
b. sales returns and allowances.
c. cash collections.
d. any of the above.

677. The most important aspect of evaluating the client’s method of obtaining a reliable cutoff is
to:
a. perform extensive detailed testing of cutoff.
b. evaluate the client’s control procedures around cutoff.
c. confirm a sample of transactions near period end with customers.
d. perform any of the above.

678. A positive confirmation is more reliable evidence than a negative confirmation because:
a. fewer confirmations can be sent out.
b. the auditor has a document which can be used in court.
c. the debtor’s lack of response indicates agreement with the stated balance.
d. follow-up procedures can be performed if a response is not received from the debtor.

679. The advantage of using the negative form of confirmations is that:

a. larger sample sizes can be used without increasing the costs above what would have been
required for positive confirmations.
b. customer’s silence proves that the balance is correct.
c. follow-up procedures are scheduled automatically.
d. it is appropriate in all circumstances.

680. Which of the following procedures do most auditors perform when auditing the allowance for
doubtful accounts?
a. Examine credit files for select customers.
b. Inquire of the client’s credit manager.
c. Review the client’s correspondence files related to select customers.
d. Auditors generally perform all of the above procedures.

681. When positive confirmations are used, auditing standards require follow-up procedures for

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confirmations not returned by the customer. In such a situation, which of the following would
not be classified as an alternative procedure?
a. Send a second confirmation request.
b. Examine subsequent cash receipts to determine if the receivable has been paid.
c. Examine shipping documents to verify that the merchandise was shipped.
d. Examine customer’s purchase order and the duplicate sales invoice to determine that the
merchandise was ordered.

682. Generally accepted accounting principles require that sales returns and allowances be matched
with related sales:
a. if practical.
b. if required by industry practice.
c. if the amounts are material.
d. any of the above.

683. For which of the following accounts is cutoff least important?

a. Sales
b. Sales returns and allowances
c. Cash collections
d. Cutoff is equally important for each of the above.

684. What are the possible disadvantages of evaluating the allowance for doubtful accounts by
reviewing individual non-current balances?
a. Current trade receivable may be ignored.
b. It is difficult to compare results of the current and prior years if such an unstructured
approach is used.
c. Both a and b.
d. None of the above.

685. Which of the following most likely would be detected by a review of a client’s sales cutoff?
a. Excessive sales discounts.
b. Unrecorded sales for the year.
c. Unauthorized goods returned for credit.
d. Lapping of year-end trade receivable.

686. The positive (as opposed to the negative) form of receivables confirmation is preferred when:
a. internal control surrounding trade receivable is considered to be effective.
b. there is reason to believe that a substantial number of accounts may be in dispute.
c. a large number of small balances are involved.
d. there is reason to believe a significant portion of the requests will be made.

687. An auditor should perform alternative procedures to substantiate the existence of trade
receivable when:
a. no reply to a positive confirmation request is received.
b. no reply to a negative confirmation request is received.
c. collectibility of the receivables is in doubt.
d. pledging of the receivables is probable.

688. How might the auditor determine whether a client has limited rights to trade receivable?
a. Review minutes from board of directors meetings.
b. Inquiries of the client.
c. Review bank confirmations.
d. Any of the above may be used for this purpose.

689. Confirmation of trade receivable balances normally provides evidence concerning the:

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a. valuation of the balances.
b. rights of the balances.
c. existence of the balances.
d. completeness of the balances.

690. If the auditor decides not to confirm trade receivable, the auditor should:
a. always use alternative procedures to audit the trade receivable.
b. do no more audit work.
c. document the reasons for such a decision in the audit files.
d. follow b and c, but not a.

691. The understatement of sales and trade receivable is best uncovered by:
a. confirming receivables.
b. reviewing the aged trial balance.
c. test of transactions for shipments made but not recorded.
d. reconciling the trade receivable general ledger account with the schedule of trade
receivable.

692. You are reviewing sales to discover cutoff problems. If the client’s policy is to record sales
when title to the merchandise passes to the buyer, then the books and records would contain
errors if the December 31 entries were for sales recorded:
a. before the merchandise was shipped.
b. at the time the merchandise was shipped.
c. several days subsequent to shipment.
d. at a time after the point at which title passed.

693. It is easy to test for a cash receipts cutoff error by:

a. reconciling the bank statement.
b. performing a four-column proof-of-cash.
c. observing the counting of cash at the statement of financial position date.
d. tracing recorded cash receipts to bank deposits on the bank statement of a different
period.

694. The most reliable evidence from confirmations is obtained when they are sent:
a. as close to the statement of financial position date as possible.
b. at various times throughout the year to different segments of the sample, so that the
entire sample is representative of account balances scattered throughout the year.
c. several months before the year-end, so the auditor will have adequate time to perform
alternate procedures if they are required.
d. at various times throughout the year to the same group in the sample, so that the sample
will not have a time bias.

695. Which of the following is not an important consideration in determining the sample size of
confirmations?
a. The types of confirmations being sent; that is, positive or negative.
b. The results of related analytical procedures.
c. Total annual credit sales.
d. Each of the above is an important factor.

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696. An auditor learns that collections of trade receivable during the first ten days of January were
debited to cash and credited to trade receivable as of December 31. The effect generally will
be to:
a. overstate the current ratio with no effect on working capital at December 31.
b. overstate both working capital and the current ratio at December 31.
c. overstate working capital with no effect on the current ratio at December 31.
d. leave both working capital and the current ratio unchanged at December 31.

697 For effective internal control, employees maintaining the trade receivable subsidiary ledger
should not also approve:
a. employee overtime wages.
b. credit granted to customers.
c. write-offs of customer accounts.
d. cash disbursements.

698. For most audits, a proper cash receipts cutoff is less important than the sales cutoff because
the improper cutoff of cash:
a. is detected and correct when cash is separately audited.
b. is unlikely to have a material impact on the statement of financial position or the
statement of profit or loss and comprehensive income.
c. affects on the cash and trade receivable balances on the statement of financial position
and does not affect net income.
d. rarely occurs given the control consciousness of most entities.

699. Both sampling and nonsampling risks are associated with:

a. tests of controls.
b. substantive tests of transactions.
c. tests of details of balances.
d. all of the above.

700. Tolerable misstatements for overstatements and understatements:

a. may be different amounts.
b. must be different amounts.
c. must be set at the same amount.
d. will be determined by the statistical tables.

701. Monetary-unit sampling is most commonly used when:

a. zero or few exceptions are expected.
b. a Ringgit result is desired.
c. the population data are maintained on computer files.
d. all of the above.

702. Monetary-unit sampling is not particularly effective at detecting:

a. overstatements.
b. understatements.
c. overstatements or understatements.
d. none of the above.

703. Tests for rates of occurrence are appropriately used in all but which of the following
situations?
a. Testing of internal controls.
b. Substantive testing of transactions.
c. Substantive testing of details of balances.
d. Tests for rates of occurrence are appropriate for all of the above.

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704. Which of the following is not a type of statistical method that provides results in Ringgit
terms?
a. Variables sampling.
b. Attributes sampling.
c. Monetary-unit sampling.
d. Sampling with probability proportional to size.

705. Which of the following is not a term relevant to sampling for tests of details?
a. Acceptable risk of incorrect rejection
b. Analysis of misstatements
c. Estimate misstatements in the population
d. Define the exception conditions

706. When auditors sample for tests of details of balances, the objective is to determine whether
the:
a. account balance being audited is fairly stated.
b. transactions being audited are free of misstatements.
c. controls being tested are operating effectively.
d. transactions and account balances being audited are fairly stated.

707. The auditor must consider the possibility that the true population misstatement is greater than
the amount of misstatement that is tolerable when the auditor is performing:
a. statistical sampling.
b. non statistical sampling.
c. monetary-unit sampling.
d. all of the above.

708. What is the purpose of applying stratified sampling to a population?

a. To avoid items that may contain misstatements.
b. To emphasize certain items and deemphasize others.
c. Either a or b.
d. Neither a nor b.

709. If an auditor desires a greater level of assurance in auditing a balance, the acceptable risk of
incorrect acceptance:
a. is reduced.
b. is increased.
c. is not changed.
d. may be reduced or increased depending upon other circumstances.

710. Which of the following is not a likely stratification technique?

a. Aging of trade receivable
b. Ringgit value of trade receivable
c. Customer name
d. Each of the above is a likely stratification technique.

711. In estimating the population misstatement, the first step in projecting from the sample to the
population is to:
a. make a point estimate.
b. revise the upper error bound.
c. calculate the precision interval.
d. determine the population mean.

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712. Tolerable misstatement is used to:

a. determine sample size.
b. evaluate results.
c. both a and b.
d. neither a nor b.

713. The relationship between required sample size and the acceptable risk of incorrect acceptance
is:
a. inverse.
b. direct.
c. proportional.
d. indeterminate.

714. The final step in the evaluation of the audit results is the decision to:
a. accept the population as fairly stated or to require further action.
b. determine sampling error and calculate the estimated total population error.
c. project the point estimate.
d. determine the error in each sample.

715. The most commonly used method of statistical sampling for tests of details of balances is:
a. attributes sampling.
b. variables sampling.
c. discovery sampling.
d. monetary-unit sampling.

716. Which of the following does not have to be considered in determining the initial sample size
of a test of details?
a. Tolerable misstatement
b. Acceptable risk of incorrect rejection
c. Estimate of misstatements in the population
d. Each of the above must be considered.

717. When using monetary-unit sampling, the recorded Ringgit population is a definition of all the
items in the:
a. population.
b. population which the auditor has included in the sample.
c. population which contain errors.
d. sample which contain errors.

718. If acceptable audit risk is increased, ARIA should be:

a. increased.
b. reduced.
c. unaffected.
d. modified.

719. As the acceptable risk of incorrect acceptance is reduced, the required sample size
_________.
a. increases
b. decreases
c. is unaffected
d. is affected in an unknown manner

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720. The acceptable risk of incorrect acceptance is most related to:

a. audit efficiency.
b. audit results.
c. audit effectiveness.
d. none of the above.

721. In monetary-unit sampling, the relationship between tolerable misstatement size and required
sample size is:
a. direct.
b. inverse.
c. varied.
d. indeterminable.

722. The risk the auditor is willing to take of accepting a balance as correct when the true
misstatement in the balance under audit is greater than the tolerable misstatement is:
a. the upper bound.
b. the tolerable risk.
c. the acceptable risk of incorrect acceptance.
d. the lower bound.

723. As the amount of misstatements expected in the population approaches tolerable

misstatement, the planned sample size will:
a. decrease.
b. increase.
c. vary based on characteristics of the population.
d. be unaffected.

724. Which of the following is the auditor least likely to consider when estimating misstatements
in the population?
a. Prior experience with the client.
b. Results of current year tests of controls.
c. Results of analytical procedures already performed.
d. Acceptable audit risk.

725. An auditor using nonstatistical sampling cannot formally measure sampling error and
therefore must subjectively consider the possibility that the true population misstatement
exceeds a tolerable amount. Which of the following factors should not be considered by the
auditor in making this assessment?
a. The Ringgit difference between the point estimate and tolerable misstatement.
b. The extent to which items in the population have been audited 100 percent.
c. The sample size.
d. All of the above should be considered.

726. When using systematic selection procedures with monetary-unit sampling of trade receivable,
the interval is determined by:
a. consulting a random number table.
b. dividing the population size by the desired sample size.
c. dividing the sample size by the account with the largest Ringgit value.
d. dividing the population size by the account receivable with the largest Ringgit value.

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727. In a probability proportional to size (PPS) sample, all population physical audit units with an
amount equal to or greater than the amount of the interval will automatically be included in
the sample if the auditor uses:
a. random selection.
b. systematic selection.
c. block selection.
d. stratified selection.

728. Monetary unit sampling is also referred to as all of the following except:
a. attribute sampling.
b. Ringgit unit sampling.
c. cumulative monetary amount sampling.
d. sampling with probability proportional to size.

729. The appropriate assumption to make regarding the overall percent of error in those population
items containing an error is:
a. determined using random number tables.
b. set after a quantitative analysis of client’s internal control system.
c. based on the auditor’s personal judgment in the circumstances.
d. based on statistical analysis using confidence limits.

730. When errors are found, a common assumption in practice is to assume:

a. a 100% assumption for all errors.
b. that the population errors are larger than the sample errors.
c. that the population errors are smaller than the sample errors.
d. that the actual sample errors are representative of the population errors.

731. Which of the following does not need to be considered when the auditor generalizes from the
sample to the population?
a. Sampling error
b. Acceptable risk of incorrect acceptance
c. Acceptable risk of incorrect rejection
d. None of the above should be considered.

732. Which balance-related audit objective cannot be assessed using monetary unit sampling?
a. Accuracy.
b. Completeness.
c. Existence.
d. All of the above can be assessed using monetary unit sampling.

733. The confidence limits in variables sampling are similar to the monetary-unit sampling’s:
a. point estimate.
b. misstatement bounds.
c. standard deviation.
d. standard error of the mean.

734. The method used to measure the estimated total error amount in a population when there is
both a recorded value and an audited value for each item in the sample is:
a. difference estimation.
b. mean-per-unit estimation.
c. ratio estimation.
d. monetary-unit sampling.

735. The variables sampling method which generally results in smaller sample sizes than any other

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method is:
a. ratio estimation.
b. difference estimation.
c. monetary-unit sampling.
d. mean-per-unit estimation.

736. The auditor is concerned with the audited value rather than the error amount of each item in
the sample when using:
a. difference estimation.
b. mean-per-unit estimation.
c. ratio estimation.
d. monetary-unit sampling.

737. PPS samples can be obtained in an efficient manner using all but which of the following?
a. Hand selection by the auditor.
b. Computer software.
c. Random number tables.
d. Systematic sampling techniques.

738. 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.

739. 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. Which of the following is not likely to be an acceptable reaction to this discovery?
a. Perform expanded audit tests in the relevant areas
b. Increase detection risk in the relevant areas
c. Increase the sample size
d. Take no action until tests of other audit areas are completed

740. When selecting a stratified sample, the sample size is:

a. determined for the unstratified population and then apportioned to each stratum.
b. determined for each stratum and selected from that stratum.
c. determined for each stratum and selected randomly from the entire unstratified
population.
d. always larger than if unstratified sampling had been used.

741. An auditor using nonstatistical sampling cannot:

a. draw a random sample.
b. determine a point estimate for the population.
c. mathematically measure the precision of the point estimate.
d. do any of the three above.

742. In monetary-unit sampling, the values of the estimated likely maximum misstatements are
referred to as the:
a. point estimates.
b. precision intervals.
c. confidence intervals.
d. misstatement bounds.

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743. When using monetary-unit sampling, evaluating the likelihood of unrecorded items in the
population is:
a. unnecessary.
b. impossible.
c. possible but difficult.
d. an automatic outcome of the process.

744. Acceptable risk of incorrect rejection affects auditors’ action only when they conclude that a
population is:
a. fairly stated.
b. acceptable.
c. not fairly stated.
d. acceptable after certain adjustments.

745. The statistical methods used to evaluate monetary-unit samples:

a. neither exclude nor include units twice.
b. permit the inclusion of a unit in the sample more than once.
c. do not permit a unit to be included in the sample more than once.
d. ignore the possibility that a unit may be included in a sample more than once.

746. Which of the following is not a problem with monetary-unit selection?

a. Population items with a zero recorded balance.
b. Population items that should have a zero balance but do not.
c. Accounts with negative balances.
d. Accounts with small recorded balances that are significantly understated.

747. There are many kinds of statistical estimates that an auditor may find useful, but basically
every accounting estimate is either of a quantity or of an error rate. The statistical terms that
roughly correspond to “quantities” and “error rate,” respectively, are:
a. attributes and variables.
b. variables and attributes.
c. constants and attributes.
d. constants and variables.

748. If the auditor believes that there will be more than just a few exceptions discovered, and
desires an accurate estimate of the Ringgit value of the exceptions, he or she will use:
a. attributes sampling.
b. monetary-unit sampling.
c. block sampling.
d. variables sampling.

749. While acceptable risk of incorrect acceptance is always important, the risk of incorrect
rejection is important only when there is a _______ cost to increasing the sample size.
a. high
b. low
c. moderate
d. marginal

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750. Which of the following is not a disadvantage of monetary-unit-sampling?

a. It may be difficult to select samples from large population without computer assistance.
b. The total misstatement bounds resulting when misstatements are found may be too low
to be useful to the auditor.
c. The total misstatement bounds resulting when misstatements are found may be too high
to be useful to the auditor.
d. Each of the above is a disadvantage.

751. Calculating the sample size using monetary-unit-sampling depends on all but which of the
following factors?
a. Materiality
b. Assumptions of the average percent of misstatement for population items that contain
misstatements
c. Recorded population value
d. Each of the above is a factor in calculating the sample size.

752. Stratified sampling is applicable to difference, mean-per-unit, and ratio estimation, but it is
most commonly used with:
a. ratio estimation.
b. discovery sampling.
c. difference estimation.
d. mean-per-unit estimation.

753. An important statistic to consider when using a statistical sampling audit plan is the
population variability. The population variability is measured by the:
a. sample mean.
b. standard deviation.
c. standard error of the sample mean.
d. estimated population total minus the actual population.

754. Which of the following sampling plans would be designed to estimate a numerical
measurement of a population, such as a Ringgit value?
a. Numerical sampling.
b. Discovery sampling.
c. Sampling for attributes.
d. Sampling for variables.

755. Use of the ratio estimation sampling technique to estimated Ringgit amounts is inappropriate
when:
a. the total book value is known and corresponds to the sum of all the individual book
values.
b. a book value for each sample item is unknown.
c. there are some observed differences between audited values and book values.
d. the audited values are nearly proportional to the book values.

756. The major reason that the difference and ratio estimation methods would be expected to
produce audit efficiency is that the:
a. beta risk may be completely ignored.
b. variability of the populations of differences or ratios is less than that of the populations
of book values or audited values.
c. number of members of the populations of differences or ratios is smaller than the number
of members of the population of book values.
d. calculations required in using difference or ratio estimation are less arduous and fewer
than those required when using direct estimation.

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The following information applies to the questions below:
An audit partner is developing an office-training program to familiarize his professional staff
with statistical decision models applicable to the audit of Ringgit-value balances. He wishes to
demonstrate the relationship of sample sizes to population size and variability and the
auditor’s specifications as to precision and confidence level. The partner prepared the
following table to show comparative population characteristics and audit specifications of two
populations.
Audit specifications of
Characteristics of a sample from population 1
population 1 relative relative to a sample
to population 2 from population 2
Specified
Specified confidence
Size Variability precision level
Case 1 Equal Equal Equal Higher
Case 2 Equal Larger Tighter Equal
Case 3 Larger Equal Tighter Lower
Case 4 Smaller Smaller Equal Lower
Case 5 Larger Equal Equal Higher

757. Based on the information presented above, you are to indicate for the specified case from the
table the required sample size to be selected from population 1 relative to the sample from
population 2. In case 1, the required sample from population 1 is:
a. larger than the required sample size from population 2.
b. equal to the required sample size from population 2.
c. smaller than the required sample size from population 2.
d. indeterminate relative to the required sample size from population 2.

758. Based on the information presented above, you are to indicate for the specified case from the
table the required sample size to be selected from population 1 relative to the sample from
population 2. In case 2, the required sample from population 1 is:
a. larger than the required sample size from population 2.
b. equal to the required sample size from population 2.
c. smaller than the required sample size from population 2.
d. indeterminate relative to the required sample size from population 2.

759. Based on the information presented above, you are to indicate for the specified case from the
table the required sample size to be selected from population 1 relative to the sample from
population 2. In case 3, the required sample from population 1 is:
a. larger than the required sample size from population 2.
b. equal to the required sample size from population 2.
c. smaller than the required sample size from population 2.
d. indeterminate relative to the required sample size from population 2.

760. Based on the information presented above, you are to indicate for the specified case from the
table the required sample size to be selected from population 1 relative to the sample from
population 2. In case 4, the required sample from population 1 is:
a. larger than the required sample size from population 2.
b. equal to the required sample size from population 2.
c. smaller than the required sample size from population 2.
d. indeterminate relative to the required sample size from population 2.

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761. Based on the information presented above, you are to indicate for the specified case from the
table the required sample size to be selected from population 1 relative to the sample from
population 2. In case 5, the required sample from population 1 is:
a. larger than the required sample size from population 2.
b. equal to the required sample size from population 2.
c. smaller than the required sample size from population 2.
d. indeterminate relative to the required sample size from population 2.

762. Why do auditors find MUS appealing?

a. MUS increases the likelihood of selecting high Ringgit items.
b. MUS is easy to use in the audit environment.
c. MUS provides a statistical, rather than a nonstatistical, conclusion.
d. All of the above.

763. What is the primary objective of using stratified sampling in auditing?

a. To increase the confidence level at which a decision will be reached from the results of
the sample selected.
b. To determine the occurrence rate for a given characteristic in the population being
studied.
c. To decrease the effect of variance in the total population.
d. To determine the precision range of the sample selected.

764. In the application of statistical techniques to the estimation of Ringgit amounts, a preliminary
sample is usually taken primarily for the purpose of estimating the population:
a. mode.
b. range.
c. median.
d. variability.

765. The payroll cycle consists of how many classes of transactions?

a. One
b. Two
c. Three
d. It differs across entities.

766. Payroll policies should require a competent, independent person to:

a. recalculate actual hours worked.
b. review for the proper approval of all overtime.
c. examine time cards for erasures and alterations.
d. do all of the above.

767. Which of the following statements is false?

a. The payroll cycle consists of one class of transactions.
b. Statement of financial position accounts related to payroll are generally more significant
than related transactions.
c. Internal controls over payroll are effective for most companies.
d. Small companies usually have effective controls over payroll.

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768. Which of the following is not an important control consideration in the processing of payroll?
a. The person authorized to sign paychecks should not be otherwise involved in the
preparation of the payroll.
b. A check-signing machine should not be used to replace a manual signature.
c. Distribution of pay checks should be performed by someone who is not involved in the
other payroll functions.
d. Unclaimed paychecks should be immediately returned for redeposit.

769. Which of the following statements about the payroll and personnel cycle is correct?
a. There are three classes of transactions within the payroll cycle – salaried employees,
hourly employees, and commissioned employees.
b. Transactions are less significant than related statement of financial position accounts.
c. Internal controls over payroll are effective for almost all companies, even small ones.
d. All of the above are correct.

770. Which of the following types of audit procedures is ordinarily emphasized the least when
auditing payroll?
a. Tests of controls
b. Tests of transactions
c. Analytical procedures
d. Tests of details of balances

771. The payroll and personnel cycle begins with which of the following events?
a. Interviewing job candidates.
b. Hiring a new employee.
c. Existing employees submitting requests for payment for work performed.
d. Issuance of paychecks.

772. Most systems of internal control for payroll are:

a. loosely structured but well controlled.
b. loosely structured and loosely controlled.
c. highly structured and well controlled.
d. highly structured but loosely controlled.

773. The payroll and personnel cycle ends with which of the following events?
a. Interviewing job candidates.
b. Hiring a new employee.
c. Existing employees submitting requests for payment for work performed.
d. Issuance of paychecks.

774. The retirement savings deductions, number of exemptions for withholding allowances, union
dues deductions, and other deductions are found on what form?
a. Time cards
b. Deduction authorisation form
c. Rate authorisation form
d. None of the above

775. A ____________ includes all payroll transactions processed by the accounting system for a
given period of time.
a. payroll journal
b. payroll transaction file
c. time report
d. payroll summary

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776. An imprest payroll account ordinarily carries a ______ balance.
a. large
b. zero
c. small
d. negative

777. Records that include data such as employment date, performance ratings and pay rates are the:
a. personnel records.
b. employee screening forms.
c. summary payroll reports.
d. none of the above.

778. In audits of companies in which payroll is a significant portion of inventory, the improper
account classification of payroll can:
a. increase asset valuations.
b. decrease asset valuations.
c. either a or b.
d. not affect asset valuations.

779. To minimize the opportunity for fraud, unclaimed salary checks should be:
a. deposited in a special bank account.
b. kept in the payroll department.
c. left with the employee’s supervisor.
d. held for the employee in the personnel department.

780. Which of the following type of employee typically does not complete time cards?
a. Hourly employees.
b. Salaried employees.
c. All employees must complete time cards.
d. Time cards are typically completed by salaried employees, but may also be completed
by hourly employees.

781. When examining payroll transactions, an auditor is primarily concerned with the possibility
of:
a. incorrect summaries of employee time records.
b. overpayments and unauthorized payments.
c. under withholding of amounts required to be withheld.
d. posting of gross payroll amounts to incorrect salary expense accounts.

782. For which of the following functions is the use of prenumbered documents least important?
a. Use of prenumbered time cards in the payroll function.
b. Use of prenumbered sales invoices in the sales function.
c. Use of prenumbered receiving reports in the acquisitions function.
d. Use of prenumbered deposit slips in the cash receipts function.

783. Which of the following statements about payroll checks is correct?

a. After a payroll check is cashed and returned to the employee it is referred to as a
depository check.
b. As soon as a payroll check is signed by an authorized employee, it becomes an asset.
c. Payroll checks are written for the amount of gross pay due employees.
d. It is rare that payroll checks are direct-deposited into employees’ bank accounts.

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784. Which of the following is not an advantage of using an imprest payroll account?
a. It limits the company’s exposure to payroll fraud.
b. It allows the delegation of payroll check-signing duties.
c. Companies have fewer banking transactions.
d. It facilitates cash management.

785. No individual with access to time cards, payroll records, or checks should also be permitted
access to:
a. the computer.
b. job time tickets.
c. personnel records.
d. the canceled check file.

786. The file for recording each payroll transaction for each employee and maintaining total
employee wages paid for the year to date is the:
a. payroll master file.
b. summary payroll report.
c. payroll journal.
d. job time ticket.

787. Many companies use outside payroll services to process payroll. Auditors _____ rely on the
internal controls of these outside payroll services.
a. must
b. cannot
c. rarely
d. can often

788. The total of the individual employee earnings in the payroll master file equals the total:
a. balance of gross payroll in general ledger accounts.
b. of the checks drawn to employees for payroll.
c. gross payroll plus the total contributed by the employer for payroll taxes.
d. gross pay for the current week’s payroll.

789. Most companies use an imprest account to pay the payroll. Which of the following is not an
advantage of such an account?
a. It facilitates cash management.
b. It limits the company’s exposure to payroll fraud.
c. It allows the delegation of payroll check-signing duties.
d. It eliminates the requirement of keeping a minimum balance in a checking account.

790. The careful and timely preparation of all payroll tax returns is necessary to avoid penalties
and criminal charges. The most important control in the timely preparation of these returns is:
a. computerized preparation of tax returns.
b. a well-defined set of policies that indicate when each form must be filed.
c. independent verification of computer output by a competent individual.
d. a Gaant chart.

791. Which of the following types of audit tests is usually emphasized due to a lack of independent
third-party evidence related to payroll transactions?
a. Analytical procedures
b. Tests of details of balances
c. Tests of controls
d. Each of the above is emphasized.

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792. The most important means of verifying account balances in the payroll and personnel cycle
are:
a. tests of controls and tests of transactions.
b. analytical procedures and tests of controls.
c. analytical procedures and tests of transactions.
d. test of controls and tests of details of balances.

793. Tests of payroll are usually not extensive because:

a. employees will likely complain if underpaid.
b. payroll transactions are uniform and uncomplicated.
c. payroll transactions are subject to audit by federal and state governments.
d. all of the above.

794. If an auditor wishes to test the completeness transaction-related audit objective in the payroll
and personnel cycle, which of the following would be a reasonable test of control?
a. Account for a sequence of payroll checks.
b. Examine procedures manual and observe the recording of transactions.
c. Examine payroll records for indication of pay rate approval.
d. All of the above are acceptable.

795 Which of the following is a substantive test of transactions?

a. Review personnel policies.
b. Account for a sequence of payroll checks.
c. Reconcile the disbursements in the payroll journal with the disbursements on the payroll
bank statement.
d. Examine printouts of transactions rejected by the computer as having invalid employee
IDs.

796. As a part of the auditor’s responsibility for ____________, the auditor should review the
preparation of at least one of each type of payroll tax form the client is responsible for filing.
a. doing tests of controls.
b. doing tests of balances.
c. doing tests of transactions.
d. understanding the client’s internal controls.

797. Which of the following is not an assertion related to the classes of transactions underlying the
payroll cycle?
a. Classification
b. Accuracy
c. Existence
d. Occurrence

798. Which of the following circumstances would not cause an auditor to extend payroll
procedures considerably?
a. Payroll significantly affects inventory valuation.
b. There is a possibility of material fraudulent payroll transactions.
c. There is a weak internal control structure.
d. There is a lack of independent third-party evidence, such as confirmations.

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799. When labor is a material factor in inventory valuation, the auditor should place special
emphasis on testing the internal controls concerning:
a. fictitious employees.
b. authorisation of wage rates.
c. proper valuation and allocation of balances.
d. completeness of recorded transactions.

800. Which of the following is not a procedure that can be performed on canceled checks in an
effort to detect defalcations?
a. Compare the endorsements on checks with authorized signatures.
b. Scan endorsements for unusual or recurring second endorsements.
c. Examine voided checks to be sure they haven’t been used.
d. Examine the payroll records in subsequent periods to determine that terminated
employees are no longer being paid.

801. What potential problems may arise when an auditor considers the relationship between payroll
and inventory valuation?
a. Improper account classification.
b. Improper allocation to jobs or processes.
c. Non-manufacturing payroll expenses charged to inventory.
d. All of the above are potential problems.

802. The primary concern in testing payroll-related liabilities is to make sure that:
a. accruals are properly valued.
b. transactions are recorded in the proper period.
c. there are no understated or omitted accruals.
d. the accruals are not overstated.

803. Which department should be authorized to add and delete employees from the payroll or
change pay rates and deductions?
a. The supervising department
b. The accounting department
c. The human resources department
d. Any of the above

804. Which of the following is not a reasonable combination of analytical procedure and possible
misstatement?
a. Compare payroll expense with prior year – Misstatement of direct labor and inventory.
b. Compare payroll tax expense as a percent of salaries and wages with prior year –
Misstatement of payroll tax expense and liability.
c. Compare accrued payroll tax with prior year – Misstatement of accrued payroll taxes and
expense.
d. None of the above is reasonable.

805. Paychecks should be distributed by someone:

a. independent of the payroll function.
b. independent of the timekeeping function.
c. Both a and b.
d. Neither a nor b.

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806. Verification of the legitimacy of year-end unpaid bonuses to officers and employees can be
accomplished by comparing the recorded accrual to the amount:
a. in the expense account.
b. used in the prior period.
c. authorized in the minutes of the board.
d. paid in the subsequent period.

807. Which of the following errors gives the auditor the least concern in auditing payroll
transactions?
a. An error that indicates possible fraud.
b. Computational errors in formulas when a computerized system is used.
c. Classification errors in charging labor to inventory and job cost accounts.
d. Each of the above gives the auditor significant concern.

808. Auditors may extend their tests of payroll in which of the following circumstances?
a. Payroll materially affects the valuation of inventory.
b. The auditor is concerned there may be nonexistent employees on the payroll.
c. There is an increased risk of employees being paid for fraudulent hours.
d. All of the above.

809. To check the accuracy of hours worked, an auditor would ordinarily compare clock cards
with:
a. personnel records.
b. job time tickets.
c. labor variance reports.
d. time recorded in the payroll register.

810. A surprise payroll payoff in which employees must pick-up and sign for their pay check is one
means of:
a. identifying employees who do not have proper work credentials.
b. establishing a tightly controlled, fraud-free work environment .
c. testing for nonexistent employees.
d. achieving all of the above.

811. Which of the following is the best way for an auditor to determine that every name on a
company’s payroll is that of a bona fide employee presently on the job?
a. Examine personnel records for accuracy and completeness.
b. Examine employees’ names listed on payroll tax returns for agreement with payroll
accounting records.
c. Make a surprise observation of the company’s regular distribution of paychecks.
d. Visit the working areas and confirm with employees their badge or identification
numbers.

812. Inherent risk is typically _____ for balance-related audit objectives as they relate to payroll.
a. very nominal
b. low
c. moderate
d. high

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813. It would be appropriate for the payroll department to be responsible for which of the
following functions?
a. Approval of employee time records.
b. Maintain records of employment, firings, and raises.
c. Temporary retention of unclaimed employee paychecks.
d. Preparation of governmental reports as to employees’ earnings and withholding taxes.

814. What are the two major balance-related audit objectives in testing payroll liabilities?
a. Accuracy and detail tie-in
b. Completeness and valuation
c. Completeness and rights and obligations
d. Accuracy and cutoff

815. Which of the following best describes proper internal control over payroll?
a. The preparation of the payroll must be under the control of the personnel department.
b. The confidentiality of employee payroll data should be carefully protected to prevent
fraud.
c. The duties of hiring, payroll computation, and payment to employees should be
segregated.
d. The payment of cash to employees should be replaced with payment by checks.

816. The periodic payment from the general cash account to the payroll account for net payroll
should be tested for at least one payroll period. The primary audit procedure is a(n):
a. analytical review procedure that net pay is reasonable.
b. test of controls that an imprest account is being used for payroll.
c. substantive test that the correct amount was transferred for this test period.
d. test of transactions that the check is prepared for the proper amount and deposited before
payroll checks are handed out.

817. Once the auditor determines that the company’s policy for accruing wages is consistent with
prior years, the appropriate audit procedure to test for accuracy and cutoff is:
a. recalculating the client’s accrual.
b. performing extensive tests of controls.
c. performing extensive tests of details.
d. none of the above.

818. In auditing payroll, which of the following procedures will ordinarily require the least amount
of auditor time under normal circumstances?
a. Tests of controls.
b. Substantive tests of transactions.
c. Analytical procedures.
d. Tests of details of balances.

819. A weak internal control system allows a department supervisor to “clock in” for a fictitious
employee and then approve the employee’s time card at the end of the pay period. This fraud
would be detected if other controls were in place, such as having an independent party:
a. distribute paychecks.
b. recompute hours worked from time cards.
c. foot the payroll journal and trace postings to the general ledger and the payroll master
file.
d. compare the date of the recorded check in the payroll journal with the date on the
canceled checks and time cards.

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820. The most important consideration in evaluating the fairness of the amounts accrued for
vacation pay, sick pay, and other benefits is the:
a. consistent accrual of these liabilities relative to those of preceding periods.
b. actual expense incurred for the prior period.
c. amount expended to date in the current period.
d. profitability of the client which will enable these liabilities to be met.

821. Effective internal accounting control over unclaimed payroll checks that are kept by the
company would include accounting department procedures that require:
a. effective cancellation and stop payment orders for checks representing unclaimed wages.
b. preparation of a list of unclaimed wages on a periodic basis.
c. accounting for all unclaimed wages in a current liability account.
d. periodic accounting for the actual checks representing unclaimed wages.

822. Which of the following statements is correct?

a. The overhead charged to inventory at the statement of financial position date can be
understated if the salaries of administrative personnel are inadvertently or intentionally
charged to indirect manufacturing overhead.
b. When jobs are billed on a cost-plus basis, revenue and total expenses are both affected
by charging labor to incorrect jobs.
c. Payroll is a significant portion of inventory for retail and service industry companies.
d. The valuation of inventory is affected if the direct labor cost of individual employees is
improperly charged to the wrong job or process.

823. Which of the following is an effective internal accounting control used to prove that
production department employees are properly validating payroll time cards at a time-
recording station?
a. Internal auditors should make observations of distribution of paychecks on a surprise
basis.
b. Time cards should be carefully inspected by those persons who distribute pay envelopes
to the employees.
c. One person should be responsible for maintaining records of employee time for which
salary payment is not to be made.
d. Daily reports showing time charged to jobs should be approved by the supervisor and
compared to the total hours worked on the employee time cards.

824. Once the auditor has determined the company’s policy for accruing wages and knows it is
consistent with that of previous years, the appropriate audit procedure to test for cutoff and
accuracy is to:
a. recalculate the client’s accruals.
b. compare the ledger balance with the journal and the tax form.
c. confirm the amount with employees.
d. compare the recorded accrued wages with the amount approved in the minutes of the
Board.

825. The classes of transactions in the acquisition and payment cycle include acquisition of:
a. goods.
b. goods and services.
c. goods and services, and cash disbursements.
d. goods and services, cash disbursements, and purchase returns and allowances.

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826. The overall objective in the audit of the acquisition and payment cycle is:
a. to ensure the reliability of the affected accounts.
b. to ensure the accuracy of the affected accounts.
c. to evaluate whether the affected accounts are fairly stated in accordance with IFRS.
d. all of the above.

827. The audit of the acquisition and payment cycle often takes ____ time to audit than other
cycles.
a. less
b. about the same
c. more
d. no less

828. What typically initiates the acquisitions and payment cycle?

a. Issuance of a purchase requisition or request for purchase of goods/services.
b. Issuance of payment to vendor.
c. Approval of a new vendor.
d. None of the above.

829. What typically ends the acquisitions and payment cycle?

a. Issuance of a purchase requisition or request for purchase of goods/services.
b. Issuance of a payment to a vendor.
c. Approval of a new vendor.
d. None of the above.

830. The receipt of goods and services in the normal course of business represents the date clients
normally recognize:
a. income.
b. the liability.
c. warranty assets.
d. expenses.

831. Which of the following accounts is not included in the acquisitions class of transactions?
a. Inventory.
b. Prepaid expenses.
c. Purchase discounts.
d. Trade payable.

832. A document indicating a reduction in the amount owed to a vendor because of returned goods
is:
a. a debit memo.
b. a credit memo.
c. a receiving room report.
d. a shipping room report.

833. A document used by organizations to establish a formal means of recording and controlling
acquisitions which usually contains a package of documents about the acquisition is the:
a. voucher.
b. purchase order.
c. receiving report.
d. purchase requisition.

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834. The trade payable account includes obligations for the acquisition of:
a. raw materials.
b. equipment.
c. utilities.
d. all three of the above.

835. Comparing expenses to prior years is an effective analytical procedure for trade payable
because expenses from year to year are:
a. erratic.
b. variable.
c. dynamic.
d. relatively stable.

836. The overall objective in the audit of trade payable is to determine whether trade payable:
a. is fairly stated and properly disclosed.
b. is overstated.
c. is understated.
d. is accurately stated.

837. At what point do most companies recognize liabilities in the acquisition and payment cycle?
a. The issuance of a purchase order.
b. Receipt of acknowledgement of order by vendor.
c. Receipt of goods or services.
d. Any of the above.

838. This computer-generated file records acquisitions, disbursements and allowances for each
vendor.
a. Trade payable master file
b. Cash disbursements file.
c. Acquisitions transaction file.
d. Any of the above.

839. This is a computer-generated file that includes all acquisition transactions during a given
period.
a. Trade payable file
b. Cash disbursements file.
c. Acquisitions transaction file.
d. Any of the above.

840. The major statement of financial position account in the acquisition and payment cycle is:
a. Notes payable.
b. Accruals payable.
c. Trade payable.
d. Accrued liabilities.

841. Which of the following business functions is not considered to be part of the acquisitions class
of transactions?
a. Processing purchase orders.
b. Recognizing liabilities.
c. Receiving goods and services.
d. Processing cash disbursements.

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842. It usually takes more time to audit the acquisition and payment cycle than other cycles
because:
a. there is a greater possibility of fraud in these transactions.
b. internal controls in this area are usually the weakest.
c. of the large number of accounts affected.
d. there is a greater likelihood of lawsuits against the CA relating to these accounts.

845. A written purchase order is a legal document that is:

a. an offer to buy.
b. not enforceable if it is not in writing.
c. a binding agreement between purchaser and vendor.
d. an acceptance of a vendor’s catalog offer to sell.

846. For good internal control, the purchasing department should not be responsible for:
a. finding the lowest cost vendor.
b. reviewing vendors’ catalog descriptions and prices for standardized items.
c. designing the purchase order form.
d. authorizing the acquisition of goods.

847. The trade payable department usually has responsibility for verifying the propriety of
acquisitions by comparing the details on the:
a. vendor’s invoice and the receiving report.
b. vendor’s invoice and the purchase requisition.
c. purchase order, receiving report, and vendor’s invoice.
d. purchase requisition, purchase order, and receiving report.

848. Tests of controls for the acquisition and payment cycle are usually divided into:
a. tests of acquisitions and classification.
b. tests of authorisation and acquisition.
c. tests of authorisation and disbursement.
d. tests of acquisitions and disbursements.

849. Many companies do not maintain an trade payable master file by vendor. These companies
pay on the basis of:
a. vendors’ monthly statements.
b. individual vendors’ invoices.
c. the trade payable account in the general ledger.
d. dunning letters.

850. An important control in the trade payable and IT departments is to ensure that those personnel
who record acquisitions do not have access to:
a. vendors’ price lists.
b. the trade payable master file.
c. lists of vendors’ names and addresses.
d. cash, marketable securities, and other easily convertible assets.

851. Which of the following is not a key control in the acquisition and payment cycle?
a. Authorisation of purchases.
b. Authorisation of credit.
c. Timely recording and independent review of transactions.
d. Authorisation of payments.

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852. Proper authorisation for acquisition is essential because it:

a. ensures that goods/services are used efficiently by company employees.
b. ensures that goods/services were purchased from approved vendors.
c. ensures that goods/services are for authorized company purposes.
d. none of the above is correct.

853. Which department should initiate a report when goods arrive from a vendor?
a. Manufacturing
b. Receiving
c. Accounting
d. Treasury

854. After a purchase requisition is approved, a _________ must be initiated to purchase the goods
or services.
a. purchase order
b. vendor order
c. call order
d. none of the above

855. When a client uses perpetual inventory records, the tests of details of balances for inventory
can be significantly reduced if the auditor believes the perpetuals are accurate. The controls
over the acquisitions included in the perpetuals are normally tested as a part of the:
a. tests of controls.
b. tests of controls and tests of transactions.
c. tests of details of balances.
d. analytical procedures and tests of controls.

856. Which of the following acquisition transactions is least likely to be covered by a general
authorisation by company policy?
a. Purchase of office supplies.
b. Purchase of office equipment maintenance services.
c. Neither of the above is likely to be covered by a general authorisation.
d. Both A and B are likely to be covered by a general authorisation.

857. The auditor’s internal control objective to determine that “recorded acquisitions are for goods
and services received” satisfies the audit objective of:
a. accuracy.
b. occurrence.
c. authorisation.
d. completeness.

858. Failure to record the acquisition of goods is a violation of which audit objective?
a. Accuracy
b. Occurrence
c. Authorisation
d. Completeness

859. Once the auditor has decided on the specific procedures, the acquisitions tests and the cash
disbursements tests are typically performed:
a. concurrently.
b. sequentially.
c. independently.
d. separately.

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860. The internal control that requires that “checks are prenumbered and accounted for” satisfies
the objective of:
a. accuracy.
b. existence.
c. completeness.
d. posting and summarization.

861. The most important controls over cash disbursements include all but which of the following?
a. Signing of checks by an authorized employee.
b. Random examination of the supporting documents by the authorized check signer before
signing checks.
c. Separation of responsibilities for signing the checks and performing the trade payable
function.
d. All of the above are important controls.

862. Because of the importance of tests of controls and substantive tests of transactions for
acquisitions and cash disbursements, it is common in this audit area to use:
a. block sampling.
b. variables sampling.
c. attributes sampling.
d. probability proportional to size sampling.

863. The main focus taken by the auditor in verifying liability balances is on the discovery of:
a. understated liabilities.
b. overstated liabilities.
c. understated or omitted liabilities.
d. overstated or extraneous liabilities.

864. Which of the following tests of controls is least useful in assessing the transaction-related
audit objective related to occurrence?
a. Examine documents in voucher package for occurrence.
b. Examine supporting documents for indication of approval.
c. Account for sequence of vouchers.
d. Attempt to input transactions with valid and invalid vendors.

865. The test of details of balances procedure to “trace from account payable list to vendors’
invoices and statements” satisfies the objective of:
a. occurrence.
b. completeness.
c. classification.
d. detail tie-in.

866. By tracing receiving reports issued at and before year-end to vendors’ invoices and making
sure they are included in trade payable, the auditor is testing for:
a. theft of merchandise by employees.
b. unrecorded obligations.
c. lapping.
d. kiting.

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867. The extent of a search for unrecorded liabilities largely depends on:
a. materiality and inherent risk.
b. materiality and control risk.
c. materiality only.
d. inherent risk only.

868. A failure to record acquisitions of goods most likely will affect all but which of the following?
a. Trade payable.
b. Net income.
c. Retained earnings.
d. Cash.

869. When the client’s physical inventory occurs before the last day of the year, it is still necessary
to perform an trade payable cutoff at the time of the count. In addition, the auditor must
verify whether all acquisitions taking place between the count and the end of the year were
added to:
a. the physical inventory.
b. Trade payable.
c. Trade payable and Cost of goods sold.
d. the physical inventory and Trade payable.

870. When the auditor uses sampling to examine transactions in the acquisition and payment cycle,
the tolerable exception rate is typically set at a(n) _______ level.
a. low.
b. medium.
c. high.
d. indeterminate.

871. Which of the following is most reliable for verifying the correct balance of trade payable?
a. Vendors’ invoices.
b. Vendors’ statements.
c. Confirmations.
d. Bills of lading.

872. Vendors’ statements and vendors’ invoices are both relatively reliable evidence because they:
a. come directly to the auditor without being in client’s possession.
b. originate from a third party.
c. validate the effectiveness of the control system.
d. all of the above.

873. For effective internal control, the trade payable department should compare the information
on each vendor’s invoice with the:
a. receiving report and the voucher.
b. vendor’s packing slip and the voucher.
c. receiving report and the purchase order.
d. vendor’s packing slip and the purchase order.

874. Cutoff information for acquisitions should be obtained during:

a. the interim period prior to year-end.
b. the interim period immediately following year-end.
c. the physical observation of inventory.
d. any of the above times.

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875. Assume that during cutoff testing you determined that the last receiving report number for
inventory was 24986. Which of the following receiving report numbers would you not expect
to be included in inventory and trade payable at year-end?
a. 24980
b. 19773
c. 23019
d. 24990

876. Auditor confirmation of trade payable balances at the statement of financial position date may
be unnecessary because:
a. this is a duplication of cutoff tests.
b. there is likely to be other reliable external evidence available to support the balances.
c. trade payable balances at the statement of financial position date may not be paid before
the audit is completed.
d. correspondence with the audit client’s attorney will reveal all legal action by vendors for
nonpayment.

877. Under which of the following circumstances would it be advisable for the auditor to confirm
trade payable with creditors?
a. Internal accounting control over trade payable is adequate, and there is sufficient
evidence on hand to minimize the risk of a material misstatement.
b. Confirmation response is expected to be favorable, and trade payable balances are of
immaterial amounts.
c. Creditor statements are not available and internal control over payables is unsatisfactory.
d. The majority of trade payable balances are with associated companies.

878. Internal control is strengthened when the quantity of merchandise ordered is omitted from the
medium copy of the purchase order sent to the:
B a. department that initiated the requisition.
b. receiving department.
c. purchasing agent.
d. trade payable department.

879. Which of the following should sign checks under conditions of effective internal control?
a. Treasurer.
b. Purchasing agent.
c. Trade payable clerk.
d. Person preparing the checks.

880. Which of the following is an effective internal accounting control over cash payments?
a. Signed checks should be mailed under the supervision of the check signer.
b. Spoiled checks that have been voided should be disposed of immediately.
c. Checks should be prepared only by persons responsible for cash receipts and
disbursements.
d. A check-signing machine with two signatures should be used.

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881. When assets are being verified, auditors focus much of their attention on making sure that the
accounts are not overstated. Alternatively, auditors focus their efforts on understatement when
auditing liabilities. What is the primary reason for this difference in focus?
a. Auditors’ legal liability.
b. IFRS.
c. ISA requirements.
d. All of the above.

881. Internal controls that are likely to prevent the client from including as a business expense
those transactions that primarily benefit management or other employees rather than the entity
being audited satisfy the control objective that:
a. acquisitions are correctly valued.
b. existing acquisitions are recorded.
c. acquisitions are correctly classified.
d. recorded acquisitions are for goods and services received.

882. A company failed to record an acquisition of merchandise and its related liability, but the
merchandise was included in ending inventory. The effect on the financial statements was to:
a. understate both assets and liabilities.
b. overstate net income and owners’ equity.
c. understate assets and owners’ equity.
d. understate liabilities, and overstate both net income and owners’ equity.

883. To test for overstatement cutoff errors in liabilities, the auditor should trace, to vendors’
invoices, the receiving reports issued:
a. after year-end.
b. before year-end.
c. the last day of the fiscal year.
d. both before and after year-end.

884. In determining that the trade payable cutoff is correct, it is essential that the cutoff tests be
coordinated with the:
a. confirmation of payables.
b. tests on long-term liabilities.
c. observation of inventory.
d. cash count.

885. An inventory acquisition is received late in the afternoon of December 31 after the physical
inventory is completed. If the acquisition is included in trade payable and purchases, but
excluded from inventory, the result:
a. is an understatement of net earnings.
b. is an overstatement of net earnings.
c. does not affect earnings.
d. is indeterminable from the information given.

886. When an acquisition is on an FOB origin basis, the inventory and related trade payable must
be recorded in the current period if the goods were:
a. received prior to the statement of financial position date.
b. shipped prior to the statement of financial position date.
c. both shipped and received prior to the statement of financial position date.
d. paid for in advance.

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887. The auditor gets highly reliable evidence about individual transactions by examining:
a. vendors’ invoices.
b. vendors’ statements.
c. confirmations of trade payable balances.
d. all of the above.

888. Which of the following documents is best for verifying the correct balance in trade payable?
a. Bills of lading.
b. Confirmations.
c. Vendors’ invoices.
d. Vendors’ statements.

889. When goods are received, the receiving clerk should match the goods with the:
a. purchase order and the requisition form.
b. vendor’s invoice and the receiving report.
c. vendor’s shipping document and the purchase order.
d. receiving report and the vendor’s shipping document.

890. For effective internal control purposes, the vouchers payable department generally should:
a. obliterate the quantity ordered on the receiving department copy of the purchase order.
b. stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
c. establish the agreement of the vendor’s invoice with the receiving report and purchase
order.
d. ascertain that each requisition is approved as to price, quantity, and quality by an
authorized employee.

891. An auditor performs a test to determine whether all merchandise for which the client was
billed was received. The population for this test consists of all:
a. merchandise received.
b. vendors’ invoices.
c. canceled checks.
d. receiving reports.

892. Matching the supplier’s invoice, the purchase order, and the receiving report normally should
be the responsibility of the:
a. warehouse receiving function.
b. purchasing function.
c. general accounting function.
d. treasury function.

893. A CA learns that his client has paid a vendor twice for the same shipment, once based upon
the original invoice and once based upon the monthly statement. A control procedure that
should have prevented this duplicate payment is:
a. attachment of the receiving report to the disbursement report.
b. prenumbering of disbursement vouchers.
c. use of a limit or reasonableness test.
d. prenumbering of receiving reports.

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894. With respect to a small company’s system of purchasing supplies, an auditor’s primary
concern should be to obtain satisfaction that supplies ordered and paid for have been:
a. requested by and approved by authorized individuals who have no incompatible duties.
b. used in the course of business and solely for business purposes during the year under
audit.
c. received, counted, and checked to quantities and amounts on purchase orders and
invoices.
d. properly recorded as assets and systematically amortized over the estimated useful life of
the supplies.

895. Property, plant, and equipment are assets that:

a. have expected lives of more than one year.
b. are used in the business.
c. are not acquired for resale.
d. meet all of the requirements stated above.

896. Which of the following expenses is not typically evaluated as part of the audit of the
acquisition and payment cycle?
a. Depreciation expense.
b. Insurance expense.
c. Bad debts expense.
d. Property tax expense.

897. Debits to manufacturing equipment arise from which cycle?

a. Sales and collection
b. Payroll
c. Acquisition and disbursement
d. Inventory and warehousing

898. It should ordinarily be unnecessary to examine supporting documentation for each addition to
property, plant, and equipment, but it is customary to verify:
a. all large transactions.
b. all unusual transactions.
c. a representative sample of typical additions.
d. all three of the above.

899. The auditor must know the client’s capitalisation policies to determine whether acquisitions
are:
a. recorded in accordance with IFRS.
b. treated consistently with those of the preceding year.
c. both of the above.
d. none of the above.

900. To be capitalized as part of property, plant and equipment, assets must:

a. have expected useful lives of more than one year.
b. not be acquired for resale.
c. be useful in multiple productive capacities within the organization.
d. a and b, but not c.

901. The primary accounting record for manufacturing equipment and other non-current assets is
the:
a. non-current asset list.
b. non-current asset master file.

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c. asset inventory.
d. equipment roster.

902. Which of the following statements about the audit of non-current assets is not correct?
a. The primary accounting record for manufacturing equipment and other property, plant
and equipment is generally a non-current asset master file.
b. Manufacturing equipment and current assets are normally audited in the same fashion
regardless of the activity within a particular account.
c. The emphasis on auditing non-current assets is on verification of current-period
acquisitions.
d. Failure to record the acquisition of a non-current asset affects the statement of profit or
loss and comprehensive income until the assets is fully depreciated.

903. Which of the following is not a category of tests commonly associated with the audit of
manufacturing equipment?
a. Verification of depreciation expense.
b. Analytical procedures.
c. Verification of current-period disposals.
d. Verification of the beginning balance in accumulated depreciation.

904. The audit procedure that requires an auditor to “foot the acquisition schedule” relates to which
balance-related audit objective?
a. Classification.
b. Detail tie-in.
c. Existence.
d. Accuracy.

905. Which of the following audit objectives is not typically a major objective in the audit of
current year non-current asset additions?
a. Classification.
b. Completeness.
c. Existence.
d. Accuracy.

906. The extent to which auditors verify current period acquisitions of property, plant and
equipment normally depends upon:
a. assessed control risk for acquisitions.
b. tolerable misstatement.
c. Both a and b.
d. Neither a nor b.

907. Inadequate controls and misstatements discovered through tests of controls and substantive
tests of transactions are an indication of the likelihood of misstatements in:
a. the statement of financial position.
b. the statement of profit or loss and comprehensive income.
c. the cash flow statement.
d. both the statement of profit or loss and comprehensive income and the statement of
financial position.

908. Failure to capitalize a non-current asset at the correct amount affects __________ until the
company disposes of the asset.
a. the statement of financial position
b. the statement of profit or loss and comprehensive income
c. the cash flow statement
d. both the statement of profit or loss and comprehensive income and the statement of

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financial position

909. Which of the following tests are typically not necessary when auditing a client’s schedule of
recorded disposals?
a. Footing the schedule.
b. Tracing schedule totals to the general ledger.
c. Tracing cost and accumulated depreciation of the disposals to the property master file.
d. All of the above are necessary.

910. Which of the following is not likely to be a test related to the audit of manufacturing
equipment?
a. Verify current year additions.
b. Observe current year disposals.
c. Verify depreciation expense.
d. Perform analytical procedures.

911. A set of records for each piece of equipment that includes descriptive information, date of
acquisition, original cost, current year depreciation, and accumulated depreciation is the:
a. acquisitions journal.
b. depreciation schedule.
c. non-current asset master file.
d. file of purchase requisitions.

912. In the audit of property, plant, and equipment, it is helpful to separate the tests into all but
which one of the following categories?
a. Verification of the beginning balance.
b. Verification of current year acquisitions.
c. Verification of current year disposals.
d. Verification of the ending balance.

913. Methods used to determine if there are legal encumbrances related to non-current assets
include all but which of the following?
a. Reading terms of loan and credit agreements.
b. Reviewing loan confirmations received from banks.
c. Inquiring of the client regarding possible legal encumbrances.
d. All of the above may be used to identify legal encumbrances.

914. The test of details of balances procedure which requires a “recalculation of investment credit”
satisfies the audit objective of:
a. classification.
b. detail tie-in.
c. existence.
d. accuracy.

915. The test of details of balances procedure to “examine vendors’ invoices of closely related
accounts such as repairs to uncover items that should be property, plant, and equipment”
satisfies the audit objective of:
a. classification.
b. detail tie-in.
c. cutoff.
d. existence.

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916. The auditor’s starting point for verifying disposals of property, plant, and equipment is the:
a. equipment account in the general ledger.
b. file of shipping documents.
c. client’s schedule of recorded disposals.
d. equipment subsidiary ledger.

917. Failure to capitalize a non-current asset at the correct amount will affect ___________ until
the asset is fully depreciated.
a. the statement of financial position
b. the statement of profit or loss and comprehensive income
c. the cash flow statement
d. both the statement of profit or loss and comprehensive income and the statement of
financial position

918. Because the failure to record disposals of property, plant, and equipment can significantly
affect the financial statements, the search for unrecorded disposals is essential. Which of the
following is not a procedure used to verify disposals?
a. Make inquiries of management and production personnel about the possibility of the
disposal of assets.
b. Review whether newly acquired assets replace existing assets.
c. Test the valuation of non-current assets recorded in prior periods.
d. Review plant modifications and changes in product line, taxes, or insurance coverage.

919. In rare cases, the auditor may believe it is necessary that a complete physical inventory of
non-current assets be taken to make sure they actually exist. If an inventory is taken, the
auditor normally:
a. takes the inventory.
b. requires client to take the inventory and provide documentation to the auditor.
c. observes the count.
d. requires that it be done by an outside, independent third party.

920. A major consideration in verifying the ending balance in non-current assets is the possibility
of existing legal encumbrances. Tests to identify possible legal encumbrances would satisfy
the audit objective for:
a. existence.
b. presentation and disclosure.
c. detail tie-in.
d. classification.

921. When auditing depreciation expense, the two major concerns related to the accuracy audit
objective are:
a. consistent application of depreciation method and useful lives.
b. consistent application of depreciation method and classification of assets.
c. correctness of calculations and consistent application of depreciation method.
d. None of the above.

923. Which type of audit procedure is often sufficient for purposes of auditing prepaid expenses
and deferred charges?
a. Tests of controls.
b. Tests of transactions.
c. Tests of details of balances.
d. Analytical procedures.

924. Depreciation expense is one of the few expense accounts that is not verified as a part of:

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a. tests of controls.
b. tests of transactions.
c. test of details of balances.
d. a and b, but not c.

925. Changing circumstances may require a change in the useful life of an asset. When this occurs,
it involves a change in:
a. accounting estimate rather than a change in accounting principle.
b. accounting principle rather than a change in accounting estimate.
c. both accounting principle and accounting estimate.
d. neither accounting principle nor accounting estimate.

926. The auditor ___________ to test the accuracy or classification of non-current assets recorded
in prior periods.
a. normally needs
b. never needs
c. normally does not need
d. none of the above

927. The auditor normally does not need to test the accuracy or classification of non-current assets
recorded in prior periods because:
a. they are rarely material to the audit.
b. they rarely contain misstatements.
c. they are verified in previous audits.
d. none of the above

928. Internal controls for prepaid insurance are typically categorized into all but which of the
following?
a. Controls over the acquisition and recording of insurance.
b. Controls over the insurance register.
c. Controls over the charge-off of insurance expense.
d. All of the above.

929. A record of insurance policies in force and the due date of each policy is contained in the:
a. voucher register.
b. insurance register.
c. insurance expense account.
d. prepaid insurance account.

930. Insurance expense for the period is a function of which of the following?
a. The beginning prepaid balance, current premium payments and the ending prepaid
balance.
b. The beginning prepaid balance and the current period premium payments.
c. The current period premium payments.
d. The current period premium payments and the ending prepaid balance.

931. Expense accounts analysis is closely related to tests of controls and substantive tests of
transactions. The major difference is:
a. the difference in the types of underlying documentation which is examined.
b. the degree of concentration on an individual account.
c. the use or nonuse of cutoff tests.
d. that one emphasizes transactions and the other emphasizes amounts.

932. In connection with a review of the prepaid insurance account, auditors would typically not
perform which of the following procedures?

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a. Re-compute the portion of the premium that expired during the year.
b. Prepare excerpts of insurance policies for audit working papers.
c. Confirm premium rates with an independent insurance broker.
d. Examine support for premium payments.

933. Which of the following audit procedures would be least likely to lead the auditor to find an
unrecorded non-current asset disposal?
a. Examination of insurance policies.
b. Review of repairs and maintenance expense.
c. Review of property tax files.
d. Scanning of invoices for non-current asset additions.

934. To achieve effective internal accounting control over non-current asset additions, a company
should establish procedures that require:
a. authorisation and approval of major non-current asset additions.
b. capitalisation of the cost of non-current asset additions in excess of a specific Ringgit
amount.
c. classification, as investments, of those non-current asset additions that are not used in the
business.
d. performance of recurring non-current asset maintenance work solely by maintenance
department employees.

935. Which of the following is a customary audit procedure for the verification of the legal
ownership of real property?
a. Examination of correspondence with the corporate counsel concerning acquisition
matters.
b. Examination of ownership documents registered and on file at a public hall of records.
c. Examination of corporate minutes and resolutions concerning the approval to acquire
property, plant, and equipment.
d. Examination of deeds and title guaranty policies on hand.

936. Once the initial audit of a newly constructed industrial plant has been performed, with respect
to consistency, which of the following is of least concern to the continuing auditor in the
following year?
a. Prior years’ capitalisation policy.
b. Prior years’ capitalisation costs.
c. Prior years’ depreciation methods.
d. Prior years’ depreciable life.

937. Controls over the acquisition and recording of insurance are a part of the ________.
a. inventory and warehousing cycle
b. capitalisation cycle
c. treasury cycle
d. acquisition and payment cycle

938. The approach used to verify manufacturing equipment is different than the one used to verify:
a. current assets.
b. patents.
c. copyrights.
d. all other types of property, plant, and equipment.

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939. The failure to capitalize a permanent asset, or the recording of an asset acquisition at the
improper amount, affects the statement of financial position:
a. forever.
b. for the current period.
c. for the depreciable life of the asset.
d. until the firm disposes of the asset.

940. The failure to capitalize a permanent asset, or the recording of an asset acquisition at the
improper amount, affects the statement of profit or loss and comprehensive income:
a. for the current period.
b. for the depreciable life of the asset.
c. until the firm disposes of the asset.
d. forever.

941. ____________ both have the effect of simultaneously verifying statement of financial position
and statement of profit or loss and comprehensive income accounts.
a. Analytical procedures and substantive tests of transactions
b. Tests of controls and substantive tests of transactions
c. Tests of details of balances and substantive tests of transactions
d. None of the above

942. If the client fails to record disposals of property, plant, and equipment, both the original cost
of the asset account and the net book value will be incorrect.
a. Both will be overstated indefinitely.
b. The original cost will be overstated indefinitely, and the net book value will be
overstated until the asset is fully depreciated.
c. The original cost will be overstated indefinitely, and the net book value will be
understated indefinitely.
d. The original cost will be overstated indefinitely, and the net book value will be
understated until the asset is fully depreciated.

943. Statement of profit or loss and comprehensive income accounts resulting from allocations are
typically verified as a part of:
a. tests of controls.
b. substantive tests of transactions.
c. analytical procedures.
d. all of the above.

944. Which of the following explanations might satisfy an auditor who discovers significant debits
to an accumulated depreciation account?
a. Extraordinary repairs have lengthened the life of an asset.
b. Prior years’ depreciation charges were erroneously understated.
c. A reserve for possible loss on retirement has been recorded.
d. An asset has been recorded at its fair value.

945. An auditor would be least likely to use confirmations in connection with the examination of:
a. inventories.
b. long-term debt.
c. property, plant, and equipment.
d. stockholders’ equity.

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946. Which of the following is the most important internal control procedure over acquisitions of
property, plant, and equipment?
d. Requiring acquisitions to be made by user departments.
b. Using a budget to forecast and control acquisitions and retirements.
c. Analyzing monthly variances between authorized expenditures and actual costs.
a. Establishing a written company policy distinguishing between capital and revenue
expenditures.

947. The auditor interviews the plant manager. The auditor is most likely to rely upon this
interview as primary support for an audit conclusion on:
a. capitalisation vs. expensing policy.
b. allocation of fixed and variable cost.
c. the necessity to record a provision for deferred maintenance costs.
d. the adequacy of the depreciation expense.

948. The audit procedures used to verify accrued liabilities differ from those employed for the
verification of trade payable because:
a. accrued liability balances are less material than trade payable balances.
b. accrued liabilities at year end will become trade payable during the following year.
c. evidence supporting accrued liabilities is non-existent, whereas evidence supporting
trade payable is readily available.
d. accrued liabilities usually pertain to services of a continuing nature, whereas trade
payable are the result of completed transactions.

949. Receipt of ordered materials by the receiving department will generate the completion of a
form called the:
a. bill of lading.
b. receiving report.
c. materials requisition.
d. inventory acquisition summary.

950. The audit of ______ is often the most difficult and complex part of an audit.
a. property, plant and equipment
b. cash
c. inventory
d. prepaid insurance

951. Inventory is a complex area to audit for all but which of the following reasons?
a. Inventory is often in different locations.
b. There are several acceptable valuation methods and some entities use different methods
for different types of inventory.
c. Inventory is often the largest account in working capital.
d. Inventory valuation includes few estimates.

952. When labor is a significant part of inventory, verifying the proper accounting of these costs
should be tested in the:
a. inventory and warehousing cycle.
b. payroll and personnel cycle.
c. acquisitions and payments cycle.
d. cash cycle.

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953. For retail and wholesale businesses, the most important inventory is:
a. merchandise available for sale.
b. work-in-process.
c. raw materials.
d. all of the above.

954. In most manufacturing companies, the inventory and warehousing cycle begins with the:
a. receipt of a customer’s order.
b. completion of production of a customer’s order.
c. initiation of production of a customer’s order.
d. acquisition of raw materials for production of an order.

955. The audit tests to verify that the client is using an inventory method which is generally
accepted and to verify that physical counts were correctly summarized are performed during
the audit of the:
a. acquisition and payments cycle.
b. payroll and personnel cycle.
c. inventory and warehousing cycle.
d. sales and collection cycle.

956. Which of the following would not be an appropriate initiation of a purchase requisition?
a. One initiated by a computer system when raw materials reach a predetermined level.
b. One initiated based on a periodic count of raw materials.
c. One initiated by stockroom personnel as raw materials are needed.
d. Each of the above is an appropriate initiation.

957. Almost all companies need physical controls over their assets to prevent loss. Which of the
following is not an example of such a control?
a. Perpetual inventory master files.
b. Segregated, limited-access storage areas.
c. Custody of assets assigned to specific responsible individuals.
d. Approved prenumbered documents for authorizing movement of inventory.

958. Which department within a manufacturing company is often responsible for the review of
production and scrap reports?
a. Purchasing.
b. Trade payable.
c. Accounting.
d. Production.

959. Handling the receipt of ordered goods is a part of the ________ cycle.
a. purchasing
b. acquisition and payment
c. inventory
d. inventory and warehousing

960. _________ accumulate costs by individual jobs as material is issued into production and labor
costs are incurred.
a. Just-in-time production systems
b. Job order cost systems
c. Process cost systems
d. Manufacturing systems

961. There must be a periodic physical count by the client of the inventory items on hand:

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a. only if the client uses the LIFO method.
b. only if the client uses a lower-of-cost-or-market method.
c. regardless of the client’s inventory valuation method.
d. only if the client uses either the LIFO or FIFO method.

962. If the auditor concludes that physical controls over inventory are so inadequate that the
inventory will be difficult to count, the auditor should ordinarily:
a. withdraw from the engagement.
b. issue a qualified audit report.
c. conduct expanded observation tests of physical inventory.
d. any of the above.

967. From which of the following evidence-gathering audit procedures would an auditor obtain
most assurance concerning the existence of inventories?
a. Observation of physical inventory counts.
b. Written inventory representations from management.
c. Confirmation of inventories in a public warehouse.
d. Auditor’s recomputation of inventory extensions.

968. Johnson Co.’s physical count of inventories was lower than the inventory quantities shown in
its perpetual records. This situation could be the result of the failure to record:
a. sales.
b. sales returns.
c. purchases.
d. purchase discounts.

969. Which of the following is not a function within the inventory and warehousing cycle?
a. Process the goods.
b. Store raw materials.
c. Ship finished goods.
d. Process invoices for shipped goods.

970. If an auditor were concerned with obtaining evidence about the appropriateness of the value
of inventory, which of the following tests would be most appropriate?
a. Compilation tests.
b. Price tests.
c. Confirmation of inventory held by outside parties.
d. Physical examination of the inventory.

971. Which of the following is the best audit procedure for the discovery of damaged merchandise
in a client’s ending inventory?
a. Compare the physical quantities of slow-moving items with corresponding quantities of
the prior year.
b. Observe merchandise and raw materials during the client's physical inventory count.
c. Review the management’s inventory representation letter for accuracy.
d. Test overall fairness of inventory values by comparing the company’s turnover ratio with
the industry average.

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972. Which of the following controls would be appropriate regarding the release of materials from
a stockroom?
a. Production employees request materials be delivered to their work areas as they need
them.
b. Stockroom employees deliver materials to work areas throughout the day to maintain
acceptable levels of safety stock – no written records are maintained.
c. Production employees submit approved requisition forms to the stockroom for materials
needed.
d. None of the above is appropriate.

973. Who should maintain the perpetual inventory master files?

a. Production personnel.
b. Inventory storeroom personnel.
c. Inventory receiving personnel.
d. Accounting department personnel.

974. The inventory and warehousing cycle can be thought of as having two separate but closely
related systems, one involving the actual physical flow of goods, and the other the:
a. related costs.
b. storage of the goods.
c. internal control over those goods.
d. prevention of waste, obsolescence, and theft.

975. In any company involved in manufacturing, an adequate cost accounting internal control
system is necessary to indicate the relative profitability of the various products for
management planning and control and to:
a. determine variances from standards.
b. determine variances from budgets.
c. value inventories for financial statement purposes.
d. value inventories for audit verification.

976. Master files, worksheets, and reports that accumulate material, labor, and overhead as the
costs are incurred are:
a. accounting systems.
b. storeroom documents.
c. cost accounting records.
d. finished goods inventory records.

977. The main difference between job order and process costing systems is that:
a. one accumulates costs by materials issued and the other by labor incurred.
b. one accumulates costs by individual jobs and the other by particular processes.
c. one emphasizes costs accumulated in completed products and the other emphasizes costs
associated with work-in-process.
d. one emphasizes costs adding value to the product and the other emphasizes costs
incurred because of waste, scrap, and obsolescence.

978. A well-designed computerized system of perpetual inventory master files includes information
about the:
a. units of inventory purchased, sold, and on hand.
b. unit costs of inventory purchased, sold, and on hand.
c. units of raw materials, work-in-process, and finished goods.
d. units and unit costs of inventory purchased, sold, and on hand.

979. Which of the following controls would the auditor consider to be appropriate with respect to

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Self Practice (Discuss with tutors when appropriate)
physical controls over inventory?
a. All unused inventory is kept in a locked storeroom.
b. Competent personnel are assigned to a locked storeroom in which inventory is stored.
c. Both a and b are correct.
d. Neither a nor b is correct.

977. Which of the following is a significant audit concern related to the transfer of inventory from
one location to another?
a. Recorded transfers occurred.
b. Transfers were properly transported.
c. Transfers were properly planned.
d. Transfers represent efficient movement of assets.

978. When may auditors test the physical inventory?

a. At an interim date (e.g., 9/30/08 for a company with a year-end of 12/31/08).
b. At year-end (e.g., 12/31/08).
c. Both a and b.
d. Neither a nor b.

979. Which of the following is not an aspect of concern when auditing the cost accounting system?
a. Unit cost records.
b. Physical controls over inventory.
c. Documents and records for transferring inventory.
d. Safeguarding the raw materials from point of receipt to the storeroom.

980. It is frequently possible to test the physical inventory prior to the statement of financial
position date when:
a. there are accurate perpetual inventory master files.
b. year-end sales are small.
c. the internal control system is no better at year-end than at an earlier point in time.
d. the client counts inventory at interim dates.

981. Tests of the perpetual inventory master files for the purpose of reducing the tests of physical
inventory or changing their timing are done through the use of:
a. inquiry.
b. observation.
c. confirmation.
d. documentation.

982. A major difficulty in the verification of inventory cost records is determining reasonableness
of:
a. direct labor’s hourly rate.
b. raw materials per unit cost.
c. cost allocations.
d. all three of the above.

983. When auditing the inventory and warehousing cycle, the use of analytical procedures is:
a. not important for this cycle.
b. less important than for any other cycle.
c. more important than for any other cycle.
d. as important as their use in any other cycle.

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ABFA4155 – Audit & Assurance
Multiple-Choice Questions
Self Practice (Discuss with tutors when appropriate)

984. Which one of the following analytical procedures would be most helpful in alerting the
auditor to the possibility of obsolete inventory?
a. Compare gross margin percentage with previous years’.
b. Compare unit costs of inventory with previous years’.
c. Compare inventory turnover ratio with previous years’.
d. Compare current year manufacturing costs with previous years’.

985. Which of the following statements is correct regarding the auditor’s responsibility with
respect to the year-end inventory procedures of an audit client?
a. The auditor is responsible for observing the physical counting of inventory.
b. The auditor is responsible for taking and compiling the inventory.
c. Both a and b are correct.
d. Neither a nor b is correct.
986. What occurred at the McKesson & Robbins Company to change the way in which auditors
audit inventory?
a. The company recorded nonexistent inventory.
b. The auditor did not perform any audit tests of the inventory.
c. The auditor and company colluded to overstate inventory balances.
d. All of the above are correct.

987. When a physical count of inventory is performed at an interim date, the auditor observes it at
that time and tests the perpetual records for transactions:
a. throughout the year.
b. which are a representative sample of the period under audit.
c. from the date of the count to year-end.
d. from the date of the count to the end of the audit field work.

988. When there are no perpetual inventory files and inventory is material:
a. an audit cannot be performed, so the auditor must issue a disclaimer.
b. a physical inventory must be taken by the client near year-end.
c. the auditor will have to perform the inventory count and determine valuation.
d. the auditor need not observe inventory counts but must do test counts.

989. Auditor tests of physical controls over raw materials, work-in-process, and finished goods are
limited to:
a. examination.
b. observation.
c. inquiry.
d. b and c only.

990. The most important part of the observation of inventory is to determine whether:
a. the counts are accurate.
b. the inventory-takers are qualified.
c. obsolete inventory has been identified.
d. the physical count is being taken in accordance with the client’s instructions.

991. A useful starting point for becoming familiar with the client’s inventory is for the auditor to:
a. read the AICA’s Industry Audit Guide.
b. review accounting theory covering special problems, such as gas and oil accounting, or
lease-purchase agreements.
c. read the client’s Accounting Manual.
d. tour the client’s facility.

992. A common inventory observation procedure is to select a random sample of tag numbers and

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ABFA4155 – Audit & Assurance
Multiple-Choice Questions
Self Practice (Discuss with tutors when appropriate)
identify the tag with that number attached to the actual inventory item. The audit objective
being achieved by this procedure is:
a. inventory as recorded on tags actually exists (existence).
b. existing inventory is counted and tagged (completeness).
c. inventory is counted accurately (accuracy).
d. inventory is classified correctly (classification).

993. If a client intends to count inventory at an interim date, the auditor should expect there to be:
a. controls over the preparation and maintenance of perpetual inventory records.
b. competent personnel assigned to count the inventory.
c. an adequately designed plan to count the inventory.
d. all of the above.

994. A common inventory observation procedure is to be alert for items that are damaged, rust- or
dust-covered, or located in inappropriate places. The balance-related audit objective being
achieved by this procedure is:
a. classification.
b. cutoff.
c. realizable value.
d. rights.

995. The test of details of balance procedure which requires the auditor to account for unused
inventory tag numbers to make sure none have been deleted is associated with the audit
objective of:
a. accuracy.
b. existence.
c. detail tie-in.
d. completeness.

996. The test of details of balance procedure which requires the auditor to perform tests of lower-
of-cost-or-market, selling price, and obsolescence is an attempt to satisfy the objective of:
a. existence.
b. completeness.
c. accuracy.
d. realizable value.

997. Most of the audit testing of the storage of finished goods as well as the shipment of
merchandise takes place during the testing of the:
a. sales and collection cycle.
b. payroll and personnel cycle.
c. acquisitions and payments cycle.
d. inventory and warehousing cycle.

998. The auditor’s main concerns in verifying transfers of inventory do not include whether:
a. recorded transfers exist.
b. transfers represent appropriate uses of company resources.
c. all actual transfers are recorded.
d. the details of the transfer are accurately recorded.

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ABFA4155 – Audit & Assurance
Multiple-Choice Questions
Self Practice (Discuss with tutors when appropriate)

999. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the
physical inventory listing to obtain evidence that all items:
a. included in the listing have been counted.
b. represented by inventory tags actually exist.
c. represented by inventory tags are included in the listing.
d. included in the listing are represented by inventory tags.

1000. Auditors test the quantity of materials charged to work-in-process by tracing these quantities
to:
a. cost ledgers.
b. perpetual inventory records.
c. receiving reports.
d. material requisitions.

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