Sample Undergraduate Auditing Exam I

Problem 1 Multiple Choice (30 questions 2 points each)

1. In connection with the element of inspection, a CPA firm's system of quality control should ordinarily provide for the maintenance of

a. A file of minutes of staff meetings.
b. Updated personnel files.
c. Documentation to demonstrate compliance with its policies and procedures.
d. Documentation to demonstrate compliance with peer review directives.


2. The independent auditor should acquire an understanding of a client's internal audit function to determine whether the work of internal auditors will be a factor in determining the nature, timing, and extent of the independent auditor's procedures. The work performed by internal auditors might be such a factor when the internal auditor's work includes


a. Verification of the mathematical accuracy of invoices.
b. Review of administrative practices to improve efficiency and achieve

management objectives.

c. Evaluation of internal control.
d. Preparation of internal financial reports for management purposes.


3. If an auditor was engaged to discover errors or irregularities and the auditor performed extensive detail work, which of the following could the auditor be expected to detect?


a. Mispostings of recorded transactions.
b. Unrecorded transactions.
c. Counterfeit signatures on paid checks.
d. Collusive fraud.


4. Which one of the following statements is correct concerning the concept of materiality?


a. Materiality depends on the nature of an item rather than the dollar amount.
b. Materiality depends on both the dollar amount and the nature of an item.
c. Materiality depends on the dollar amount of an item relative to other items in the F/S.
d. Materiality is determined by reference to guidelines established by the AICPA.
e. None of these are correct.


5. A CPA is most likely to refer to one or more of the three GAAS in determining


a. Whether the CPA should undertake an audit engagement.
b. The nature of the CPA's report qualification.
c. The scope of the CPA's auditing procedures.
d. None of the above.


6. The Generally Accepted Auditing Standards were developed in 1947 by


a. The Auditing Standards Executive Committee.
b. The Auditing Standards Board.
c. The SEC.
d. The American Institute of Certified Public Accountants.


7. The SEC has strengthened auditor independence by requiring that management


a. Engage auditors to report in accordance with the Foreign Corrupt Practices Act.
b. Acknowledge their responsibility for the fairness of the financial statements.
c. Report the nature of disagreements with former auditors.
d. Select auditors through audit committees.


8. At interim dates an auditor evaluates a client's internal control procedures and finds them to be effective. The auditor then performs a substantial part of the audit engagement on a continuous basis through the year. At a minimum, the auditor's year-end audit procedures must include


a. Comparison of the responses to the auditor's internal control questionnaire

with a detailed flowchart at year-end.

b. Test of controls with internal control in the same manner as those tests made

at the interim dates.

c. Confirmation of those year-end accounts that were examined at interim dates.
d. Determination that the client's internal control procedures are still effective

at year end.


9. Planning the audit requires which of the following


a. Developing an understanding of audit risk and materiality.
b. Anticipating financial statement items likely to need adjustment.
c. Determining the type of report to be issued.
d. A and B only.
e. All of the above.


10. The auditor's report on reportable conditions is documented in order to substantiate


a. Problems identified to management.
b. The fairness of the financial statement presentation.
c. Compliance with generally accepted auditing standards.
d. Conformity of the accounting records with GAAP.


11. Which of the following would you expect a successor auditor to inquire about from a predecessor auditor?


a. Communication to audit committee regarding internal controls, fraud, or illegal acts.
b. Facts that might bear on the integrity of management.
c. Reason for change in auditor.
d. Disagreements over GAAP or other significant matter.
e. All of the above.


12. An operational audit is most often conducted by


a. An internal auditor of a company.
b. A governmental auditor in the course of examining an entity subject to

governmental regulations.

c. An independent auditor, but not in the ordinary course of conducting an

examination of the financial statements.

d. None of these.


13. The following four audit steps in the appropriate order would be:

1. Perform tests of controls.
2. Plan the audit.
3. Perform substantive sampling.
4. Perform preliminary analytical procedures.
   
a. II, IV, III, I.
b. II, IV, I, III.
c. IV, I, II, III.
d. IV, II, I, III.


14. Which of the following is not one of the matters auditors are expected to communicate about with the audit committee?


a. Auditor's view on matters management got a second opinion on.
b. The company's adoption of the new ethics guidelines issued by the Treadway

Commission.

c. Management's process of generating accounting estimates.
d. Auditor's responsibility for other information in documents containing

audited financial statements.


15. Which of the following would not be an example of a reportable condition?


a. Absence of a sufficient level of control consciousness within the organization.
b. Evidence of misrepresentation by client personnel to the auditor.
c. Evidence that employees or management lack the qualifications and training to fulfill

their assigned functions.

d. All of these are examples of reportable conditions.


16. While performing an audit, a CPA strives to achieve independence in appearance in order to


a. Reduce risk and liability.
b. Become independent in fact.
c. Comply with the generally accepted standards of field work.
d. All of the above.

17. Which of the following would not cause the auditor to significantly increase the assessment of the risk of material errors and irregularities?


a. Declining industry conditions.
b. Three controllers within the last two years.
c. A change in accounting principles.
d. An unduly aggressive management attitude toward financial reporting.

18. Which of the following would least relate to the Quality Control Standard on Acceptance and Continuance of clients?


a. Communication with predecessor auditor.
b. Obtain a client representation letter.
c. Tour of client's plant.
d. Obtain engagement letter.


19. When the regular audit leading to an opinion of financial statements discloses specific circumstances that create suspicion that fraud may exist, and the auditor concludes that the results of such fraud, if any, could not be so material as to affect the opinion, (s)he should


a. Make a note in the working papers of the possibility of fraud of an immaterial amount

so as to pursue the matter next year.

b. Reach an understanding with the client as to whether the auditor or the client,

subject to the auditor's review, is to make the investigation necessary to determine

whether fraud has occurred and, if so, the amount thereof.

c. Immediately extend audit procedures to determine if fraud has occurred and, if so,

the amount thereof.

d. Refer the matter to the appropriate representatives of the client with the

recommendation that it be pursued to a conclusion.


20. Before accepting an engagement to audit a new client, an auditor is required to:


a. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
b. Obtain the prospective client's signature to the engagement letter.
c. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.
d. Discuss the management representation letter with the prospective client's audit committee.


21. Control activities constitute an important part of internal control. Control activities do not encompass


a. Proper safeguards over access to assets.
b. Design and use of documents.
c. An internal audit function.
d. Comparison of assets with recorded accountability.


22. Planning the audit requires which of the following:


a. Determining the type of opinion likely to be issued.
b. Anticipating which internal controls will be relied on.
c. Developing an understanding of audit risk and materiality.
d. All of the above are required in audit planning.


23. Which of the following best describes a major disadvantage of using a questionnaire to document internal controls?


a. Questionnaires usually take more time to complete and are more cumbersome.
b. Responses do not make internal control weaknesses obvious.
c. It is difficult for auditors to develop or obtain questionnaires that are appropriate

for most internal control systems.

d. Questionnaires may be routinely completed without auditors really thinking about
and understanding the overall operations of the internal control structure.


24. The definition of internal control developed by the Committee of Sponsoring Organizations (COSO) includes the reliability of financial reporting, the effectiveness and efficiency of operations and


a. Safeguarding of entity assets.
b. Effectiveness of prevention of fraudulent occurrences.
c. Compliance with applicable laws and regulations.
d. Incorporation of ethical business practice standards.


25. Which of the following is not ordinarily considered a factor indicative of increased financial reporting risk when considering a company's risk assessment policies?


a. Corporate restructuring.
b. Implementation of a new information system.
c. Rapid growth organization.
d. Commissioned sales personnel.


26. Which of the following best describes an inherent limitation of an internal control structure?


a. The benefits expected to be derived from effective internal control usually

do not exceed the costs of such control.
b. The competence and integrity of client personnel provide an environment

conducive to control and provide assurance that effective control will be achieved.
c. Procedures designed to assure the execution and recording of transactions

in accordance with proper authorizations are effective against irregularities perpetrated by management.
d. Procedures whose effectiveness depends on segregation of duties can be
circumvented by collusion.


27. Which of the following is not a valid concept of proper internal control?


a. Control procedures integrated into the accounting system may appropriately

be applied on a test basis in some circumstances.
b. When one person is responsible for all phases of a transaction, there

should be a clear designation of that person's responsibility.
c. The recorded accountability for assets should be compared with the existing

assets at reasonable intervals and appropriate action should be taken if

there are differences.
d. Procedures designed to detect errors and irregularities should be performed
by persons other than those in a position to perpetuate irregularities.


28. Effective internal control in a small company that has an insufficient number of employees to permit proper division of responsibilities can best be enhanced by


a. Employment of temporary personnel to aid in the separation of duties.
b. Delegation of full, clear-cut responsibility to each employee for the

functions assigned to each.
c. Engaging a CPA to perform monthly write-up work.
d. Direct participation by the owner of the business in the record-keeping
activities of the business.


29. Which of the following is not an important aspect of good internal control?


a. Separation of authorization, recording and custody functions.
b. Rotation of controls.
c. A system of approvals and authorizations.
d. A system of comparisons and reconciliations.


30. The following five stages in the appropriate order would be:

1. Perform tests of controls
2. Obtain and document understanding of controls
3. Assess control risk
4. Perform concurrent tests of controls
5. Reassess control risk
   
a. I, II, III, V, IV
b. II, IV, III, I, V
c. III, IV, V, II, I
d. II, III, IV, I, V
e. I, III, II, IV, V

Problem 2 True/False (10 questions 1 points each)

True
False

32. In an auditor's communication of reportable conditions in a company's internal control structure, you would not expect to find the report dated before the end of the audit.

True
False

33. When deciding whether to rely upon the work of an internal auditor, the two factors an external auditor should consider are their competence and qualifications.

True
False

34. The order of the basic audit process would be assertions, procedures, objectives, evidence, opinion.

True
False

35. You would expect the auditor to communicate with the audit committee regarding any disagreements with management, serious difficulties encountered during the audit and the auditor's responsibilities under GAAS.

True
False

36. Part of the planning process of an audit is identifying risk factors that may require extension or modification of the audit tests. Such a risk factor would be the sensitivity of operating results to economic factors.

True
False

37. Developing an understanding of the client's business and industry is part of the quality control standards regarding personnel management--particularly assignment of staff to personnel.

True
False

38. When assessing the risk that errors and irregularities may cause a material misstatement in a particular account, the auditor would consider the competence and experience of personnel assigned to processing data that affect the account balance.

True
False

39. There is more risk involved with the audit of a privately-held business versus a publicly-held business.

True
False

40. Fair financial presentation means that no misstatements or illegal acts materially affect the organization's reports of its operating results, cash flows, or financial position.

True
False

Problem 3 Matching (10 questions 1 point each)

Problem 4 Short Answer (5 worth 2 points each)

1. Explain the difference between GAAS and Quality Control Standards (QCS).

2. Explain how the auditor manipulates NET to reduce the amount of detection risk.

3. What are the four limitations of an internal control system?

4. What are the four control activities and underline which one is most important?

5. What are the four methods of documenting an internal control structure? Include an advantage and disadvantage of each.

Problem 5 (10 questions 1 point each)

1. In Eventually, I CRAAM the M stands for __________ and the C stands for ________________________.
2. In I B Macho the A stands for __________ and the M stands for _______________________.
3. In I C NO GRAFT the R stands for __________ and the C stands for ________________________.
4. In I M APE the P stands for __________ and the A stands for _______________________.
5. In SIPP the I stands for __________ and the S stands for ________________________.
6. In C U IN R CAAMP the M stands for __________ and the U stands for ________________________.
7. In URTRAPD the first R stands for __________ and the P stands for ________________________.
8. In TIP SIE WACI the first I stands for ____________ and the W stands for __________.
9. In ROC the R stands for _________ and the C stands for ____________.
10. In RROL the first R stands for __________ and the O stands for ____________.

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