Pamantasan ng Cabuyao

Katapatan Subd., Banay Banay, Cabuyao, Laguna

PRELIM Examination
Name __________________________________ Score: ____________
Auditing Theory W.E. PERALTA
Encircle the best answer.

1. The single feature that most clearly distinguishes auditing, attestation, and assurance is
A. Type of service.
B. Training required to perform the service.
C. Scope of services.
D. CPA’s approach to the service.

2. The primary goal of the CPA in performing the attest function is to

A. Detect fraud.
B. Examine individual transactions so that the auditor may certify as to their validity.
C. Determine whether the client's assertions are fairly stated.
D. Assure the consistent application of correct accounting procedures.

3. Internal auditing often extends beyond examinations leading to the expression of an opinion on the fairness of
financial presentation and includes audits of efficiency, effectiveness, and
A. Internal control. C. Accuracy
B. Evaluation. D. Compliance

4. Which of the following best describes the operational audit?

A. It requires the constant review by internal auditors of the administrative controls as they relate to
operations of the company.
B. It concentrates on implementing financial and accounting control in a newly organized company.
C. It attempts and is designed to verify the fair presentation of a company's results of operations.
D. It concentrates on seeking out aspects of operations in which waste would be reduced by the introduction
of controls.

5. The auditor's judgment concerning the overall fairness of the presentation of financial position, results of
operations, and changes in financial position is applied within the framework of
A. Generally accepted accounting principles. C. Internal control.
B. Generally accepted auditing standards. D. Information systems control

6. Which of the following is not a distinguishing feature of risk-based auditing?

A. Identifying areas posing the highest risk of financial statement errors.
B. Analysis of internal control.
C. Collecting and evaluating evidence.
D. Concentrating audit resources in those areas presenting the highest risk of financial statement errors.

7. To maximize independence, the director of internal auditing should report to the

A. Audit committee. C. Chief financial officer
B. Controller. D. Director of information system

8. The auditor communicates the results of his or her work through the medium of the
A. Engagement letter. C. Financial statements.
B. Management letter. D. Audit report

9. The best description of the scope of internal auditing is that it encompasses

A. Primarily operational auditing.
B. Both financial and operational auditing.
C. Primarily the safeguarding of assets and verifying the existence of such assets.
D. Primarily financial auditing.

10. A typical objective of an operational audit is to determine whether an entity's

A. Financial statements fairly present financial position and cash flows.
B. Financial statements present fairly the results of operations.
C. Financial statements fairly present financial position, results of operations, and cash flows.
D. Specific operating units are functioning efficiently and effectively.

11. The scope and nature of an auditor's contractual obligation to a client is ordinarily set forth in the
A. Scope paragraph of the auditor’s report.
B. Opinion paragraph of the auditor’s report.
C. Management letter.
D. Engagement letter.

12. As used in auditing, which of the following statements best describes "assertions"?
A. Assertions are the representations of management as to the reliability of the information system.
B. Assertions are the auditor's findings to be communicated in the audit report.
 C. Assertions are the representations of management as to the fairness of the financial statements.
D. Assertions are found only in the footnotes to the financial statements.

11. A summary of findings rather than assurance is most likely to be included in a(n):
A. Agreed-upon procedures report.
B. Compilation report.
C. Examination report.
D. Review report.

12. The Statements on Auditing Standards have been issued by the:

A. Auditing Standards Board.
B. Financial Accounting Standards Board.
C. Securities and Exchange Commission.
D. Federal Bureau of Investigation.

13. The risk associated with a company's survival and profitability is referred to as:
A. Business Risk.
B. Information Risk.
C. Detection Risk.
D. Control Risk.
14. Historically, which of the following has the AICPA been most concerned with providing?
A. Professional standards for CPAs.
B. Professional guidance for regulating financial markets.
C. Standards guiding the conduct of internal auditors.
D. Staff support to Congress.

15. The organization charged with protecting investors and the public by requiring full disclosure of
financial information by companies offering securities to the public is the:
A. Auditing Standards Board.
B. Financial Accounting Standards Board.
C. Government Accounting Standards Boards.
D. Securities and Exchange Commission.

16. An engagement in which a CPA firm arranges for a critical review of its practices by another CPA
firm is referred to as a(n):
A. Peer Review Engagement.
B. Quality Control Engagement.
C. Quality Assurance Engagement.
D. Attestation Engagement.

17. The serially-numbered pronouncements issued by the Auditing Standards Board over a period of
years are known as:
A. Auditing Statements of Position (ASPs).
B. Accounting Series Releases (ASRs).
C. Statements on Auditing Standards (SASs).
D. Statements on Auditing Principles (SAPs).

18. The Government Accountability Office (GAO):

A. Is primarily concerned with rapid processing of all accounts payable incurred by the federal
government.
B. Conducts operational audits and reports the results to Congress.
C. Is a multinational organization of professional accountants.
D. Is primarily concerned with budgets and forecasts approved by the SEC.
19. The risk that information is misstated is referred to as:
A. Information risk.
B. Inherent risk.
C. Relative risk.
D. Business risk.

20. The risk that a company will not be able to meet its obligations when they become due is referred
to as:
A. Information risk.
B. Inherent risk.
C. Relative risk.
D. Business risk.

21. Which of the following attributes most clearly differentiates a CPA who audits management's
financial statements as contrasted to management?
A. Integrity.
B. Competence.
C. Independence.
D. Keeping informed on current professional developments.

22. The attest function:

A. Is an essential part of every engagement by the CPA, whether performing auditing, tax work, or
other services.
B. Includes the preparation of a report of the CPA's findings.
C. Requires a consideration of internal control.
D. Requires a complete review of all transactions during the period under examination.

23. Attestation risk is limited to a low level in which of the following engagement(s)?
A. Both examinations and reviews.
B. Examinations, but not reviews.
C. Reviews, but not examinations.
D. Neither examinations nor reviews.
24. When compared to an audit performed prior to 1900, an audit today:
A. Is more likely to include tests of compliance with laws and regulations.
B. Is less likely to include consideration of the effectiveness of internal control.
C. Has bank loan officers as the primary financial statement user group.
D. Includes a more detailed examination of all individual transactions.

25. Which of the following are issued by the Securities and Exchange Commission?
A. Accounting Research Studies.
B. Accounting Trends and Techniques.
C. Industry Audit Guides.
D. Financial Reporting Releases.

26. Which of the following is not correct relating to the Sarbanes-Oxley Act?
A. It toughens penalties for corporate fraud.
B. It restricts the types of consulting CPAs may perform for audit clients.
C. It created the Public Company Accounting Oversight Board (PCAOB) as a replacement for the
Financial Accounting Standards Board.
D. It eliminates a significant portion of the accounting profession's system of self-regulation.

27. An operational audit differs in many ways from an audit of financial statements. Which of the
following is the best example of one of these differences?
A. The usual audit of financial statements covers the four basic statements, whereas the operational
audit is usually limited to either the balance sheet or the income statement.
B. The boundaries of an operational audit are often drawn from an organization chart and are not
limited to a single accounting period.
C. Operational audits do not ordinarily result in the preparation of a report.
D. The operational audit deals with pre-tax income.

28. The review of a company's financial statements by a CPA firm:

A. Is substantially less in scope of procedures than an audit.
B. Requires detailed analysis of the major accounts.
C. Is of similar scope as an audit and adds similar credibility to the statements.
D. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements.
29. Which statement is correct with respect to continuing professional education (CPE) requirements
of members of the AICPA?
A. Only members employed by the AICPA are required to take such courses.
B. Only members in public practice are required to take such courses.
C. Members, regardless of whether they are in public practice, are required to meet such requirements.
D. There is no requirement for members to participate in CPE.

30. The FDIC Improvement Act requires that management of large financial institutions engage
auditors to attest to assertions by management about the effectiveness of the institution's internal
controls over
A. Compliance with laws and regulations.
B. Financial reporting.
C. Effectiveness of operations.
D. Efficiency of operations.

31. Passage of the Sarbanes-Oxley Act led to the establishment of the:

A. Auditing Standards Board.
B. Accounting Enforcement Releases Board.
C. Public Company Accounting Oversight Board.
D. Securities and Exchange Commission.

32. Which of the following professionals has primary responsibility for the performance of an audit?
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.

33. Which of the following types of services is generally provided only by CPA firms?
A. Tax audits.
B. Financial statement audits.
C. Compliance audits.
D. Operational audits.
34. The right to practice as a CPA is given by which of the following organizations?
A. State Boards of Accountancy.
B. The AICPA.
C. The SEC.
D. The General Accounting Office.

35. Which of the following terms best describes the audit of a taxpayer's tax return by an IRS auditor?
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.

36. Inquiries and analytical procedures ordinarily form the basis for which type of engagement?
A. Agreed-upon procedures.
B. Audit.
C. Examination.
D. Review.

37. Which of the following best describes the reason why independent auditors report on financial
statements?
A. A management fraud may exist and it is more likely to be detected by independent auditors.
B. Different interests may exist between the company preparing the statements and the persons using
the statements.
C. A misstatement of account balances may exist and is generally corrected as the result of the
independent auditors' work.
D. Poorly designed internal control may be in existence.
38. Governmental auditing often extends beyond examinations leading to the expression of opinion on
the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and
also:
A. Accuracy.
B. Evaluation.
C. Compliance.
D. Internal control.

39. Operational auditing is primarily oriented toward:

A. Future improvements to accomplish the goals of management.
B. The accuracy of data reflected in management's financial records.
C. The verification that a company's financial statements are fairly presented.
D. Past protection provided by existing internal control.

40. A typical objective of an operational audit is for the auditor 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.

12. Which of the following has the highest level of accounting authority within the "GAAP
Hierarchy"?
A. Authoritative body pronouncements.
B. Pronouncements of bodies composed of expert accountants exposed for public comment.
C. Pronouncements of bodies composed of expert accountants, not exposed for public comment.
D. Pronouncements of the Federal Accounting Reserve Board.
13. An attestation engagement:
A. Has as its primary source of standards the assurance standards.
B. Includes a report on subject matter, or on an assertion about subject matter.
C. Includes search and verification procedures for all major accounts.
D. Is ordinarily an examination, review or compilation engagement.

14. An audit provides reasonable assurance of detecting which of the following types of important
illegal acts?

A. Option A
B. Option B
C. Option C
D. Option D

15. Which of the following is not a type of auditors' opinion?

A. Adverse.
B. Ordinary.
C. Qualified.
D. Unqualified.

16. Which of the following is one of the elements of AICPA quality control?
A. Assurance of proper levels of association.
B. Due professional care.
C. Engagement performance.
D. Supervision.
17. A procedure in which a quality control partner periodically tests the application of quality control
procedures is most directly related to which quality control element?
A. Engagement performance.
B. Human resources.
C. Leadership responsibilities for quality with the firm.
D. Monitoring

18. Requirements for training, independence and due professional care are included in which group of
the generally accepted auditing standards?
A. Fieldwork.
B. General.
C. Reporting.
D. Quality control.

19. Which of the following is considered an interpretive publication in the GAAS Hierarchy?
A. Appendices to Statements on Auditing Standards.
B. Statements on Auditing Standards.
C. Interpretations of FASB Standards.
D. Auditing articles explaining Statements on Auditing Standards in the Journal of Accountancy.

20. In which paragraph of an audit report are auditing standards generally accepted in the United
States explicitly mentioned in an audit report of a nonpublic

company?
A. Option A
B. Option B
C. Option C
D. Option D
21. An audit should be designed to achieve reasonable assurance of detecting material misstatements
due to:
A. Errors.
B. Errors and fraud.
C. Errors, fraud, and those illegal acts with a direct effect on financial statement amounts.
D. Errors, fraud and illegal acts.

22. In an audit opinion on financial statements, the expression "accounting principles generally
accepted in the United States of America":
A. Appears in both the scope paragraph and the opinion paragraph of the auditors' report.
B. Appears in the introductory paragraph of the auditors' report.
C. Appears in the opinion paragraph of the auditors' report.
D. Does not appear in the auditors' report.

23. To qualify as "generally accepted," an accounting principle must:

A. Have substantial authoritative support.
B. Be covered in one or more of the SASs issued by the AICPA.
C. Be set forth in a Financial Reporting Release issued by the SEC.
D. Have received the approval of the FASB.

24. The generally accepted auditing standards adopted by the AICPA include a requirement that the
CPAs:
A. Assume responsibility for any losses to the client from fraud which existed during the audit but was
not detected by the auditors.
B. Follow accounting principles adopted by the SEC.
C. Not accept as audit clients companies which compete directly with one another.
D. Exercise due professional care in the performance of the examination and the preparation of the
report.
25. When a Statement Auditing Standards uses the word "should" relating to a requirement, it means
that the auditor:
A. Must fulfill the responsibilities under all circumstances.
B. Must comply with requirements unless the auditor demonstrates and documents that alternative
actions were sufficient to achieve the objectives of the standards.
C. Should consider whether to follow the advice based on the exercise of professional judgment in the
circumstances.
D. May choose to change responsibilities relating to various professional standards that remain under
consideration.

26. An unconditional responsibility to follow an AICPA professional standard exists when the
professional standard uses the term(s)

A. Option A
B. Option B
C. Option C
D. Option D

27. Which of the following best describes a portion of the auditors' responsibility regarding illegal acts
by clients?
A. The auditors have a responsibility to discover all material illegal acts.
B. If audit procedures reveal illegal acts, the auditors should take appropriate actions.
C. If the auditors suspect illegal acts have been performed, they should conduct a legal audit of the
company.
D. The auditors' responsibility for the detection of all illegal acts is the same as their responsibility
regarding material misstatements due to errors and fraud.

28. The auditors who find that the client has committed an illegal act would be most likely to withdraw
from the engagement when the:
A. Management fails to take appropriate corrective action.
B. Illegal act has material financial statement implications.
C. Illegal act has received widespread publicity.
D. Auditors cannot reasonably estimate the effect of the illegal act on the financial statements.
29. The first paragraph of the standard unqualified audit report is referred to as the:
A. Introductory paragraph.
B. Opening paragraph.
C. Opinion paragraph.
D. Scope paragraph.

30. Primary responsibility for the financial statements lies

with:
A. Option A
B. Option B
C. Option C
D. Option D

31. When a conflict exists between an accounting principle supported by a pronouncement of an

authoritative body and an accounting principle supported by widely recognized practice, which
standard prevails?
A. The authoritative body pronouncement.
B. The widely recognized pronouncement.
C. Both are of equal authority and the form of the transaction prevails over its substance.
D. Neither, other accounting literature must be consulted to determine the appropriate accounting
treatment.

32. The auditors' report for a nonpublic company should indicate:

A. That the audit was made in accordance with auditing standards generally accepted in the United
States of America.
B. Any weakness in internal control observed by the auditors.
C. That accounting principles have been consistently applied.
D. That no illegal acts have been identified.
33. Which of the following is not one of the six elements of AICPA quality control?
A. Engagement performance.
B. Monitoring.
C. Relevant ethical requirements.
D. Review.

34. A requirement that working papers be reviewed by the supervisor, and any deficiencies be
discussed with the preparer is an example of a quality control procedure in the area of:
A. Acceptance and continuance of client relationships and specific engagements.
B. Engagement performance.
C. Human resources.
D. Relevant ethical requirements.

35. A requirement to design recruitment processes and procedures to help the firm select individuals
meeting minimum academic requirements established by the firm is an example of a quality control
procedure in the area of:
A. Acceptance and continuance of client relationships and specific engagements.
B. Engagement performance.
C. Human resources.
D. Relevant ethical requirements.

36. The body that issues international pronouncements providing auditing procedural and reporting
guidance is the:
A. International Federation of Auditors.
B. Multinational Reporting Commission.
C. International Auditing and Assurance Standards Board.
D. Auditing Standards Board.

37. To present fairly in conformity with generally accepted accounting principles the financial
statements must:
A. Be consistently applied.
B. Inform users of all matters that could materially affect a decision.
C. Reflect transactions and events within a range of reasonable limits.
D. Be considered preferable to the users of those financial statements.
38. What is the general character of the three generally accepted auditing standards classified as
general standards?
A. Criteria for competence, independence, and professional care of individuals performing the audit.
B. Criteria for the content of the financial statements and related footnote disclosures.
C. Criteria for the content of the auditors' report on financial statements and related footnote
disclosures.
D. The requirements for the planning of the audit and supervision of assistants, if any.

39. An audit performed in accordance with generally accepted auditing standards generally should:
A. Be expected to provide absolute assurance that illegal acts will be detected where internal control is
effective.
B. Be relied upon to disclose violations of truth in lending laws.
C. Encompass a plan to actively search for all illegalities which relate to operating aspects.
D. Not be relied upon to provide absolute assurance that all illegal acts will be detected.

40. When the auditors express an opinion on financial statements their responsibilities extend to:
A. The underlying wisdom of their client's management decisions.
B. Whether the results of their client's operating decisions are fairly presented in the financial
statements.
C. Active participation in the implementation of the advice given to their client.
D. An ongoing responsibility for their client's solvency.

41. The standard auditors' report for the audit of a nonpublic company generally includes an
introductory paragraph, a scope paragraph, and an opinion paragraph. In the report the auditors refer to
both accounting principles generally accepted in the U.S. and auditing standards generally accepted in
the U.S. In which of the paragraphs are these terms used?
A. GAAP in the scope paragraph and GAAS in the opinion paragraph.
B. GAAS in the scope paragraph and GAAP in the opinion paragraph.
C. GAAS in all paragraphs and GAAP in the scope paragraph.
D. GAAP in all paragraphs and GAAS in the opinion paragraph.
42. An investor reading the financial statements of The Sundby Corporation observes that the
statements are accompanied by an unqualified auditors' report. From this the investor may conclude
that:
A. Any disputes over significant accounting issues have been settled to the auditors' satisfaction.
B. The auditors are satisfied that Sundby is operationally efficient.
C. The auditors have ascertained that Sundby's financial statements have been prepared accurately.
D. Informative disclosures in the financial statements but not necessarily in the footnotes are to be
regarded as reasonably adequate.

43. The auditors' report may be addressed to the company whose financial statements are being
examined or to that company's:
A. Chief operating officer.
B. President.
C. Board of Directors.
D. Chief financial officer.

44. Which of the following best describes what is meant by generally accepted auditing standards?
A. Acts to be performed by the auditors.
B. Measures of the quality of the auditors' performance.
C. Procedures to be used to gather evidence to support financial statements.
D. Audit objectives generally determined on audit engagements.

45. If an illegal act is discovered during the audit of a publicly held company, the auditors should
first:
A. Notify the regulatory authorities.
B. Determine who was responsible for the illegal act.
C. Intensify the examination to identify all illegal acts.
D. Report the act to high level personnel within the client's organization and to the audit committee.
46. Which of the following is not required by the generally accepted auditing standard that states that
due professional care is to be exercised in the performance of the audit?
A. Observance of the standards of field work and reporting.
B. Critical review of the audit work performed at every level of supervision.
C. Degree of skill commonly possessed by others in the profession.
D. Responsibility for losses because of errors of judgment.

47. 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 which are applicable to a variety of
situations.
B. They are procedural outlines which 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.
D. They are interpretations which may be useful guidance to auditors.

48. The primary responsibility for the adequacy of disclosure in the financial statements of a publicly
held company rests with the:
A. Partner assigned to the audit engagement.
B. Management of the company.
C. Auditor in charge of the fieldwork.
D. Securities and Exchange Commission.

49. Within the context of quality control, the primary purpose of continuing professional education
and training activities is to enable a CPA firm to provide personnel within the firm with:
A. Technical training that assures proficiency as an auditor.
B. Professional education that is required in order to perform with due professional care.
C. Knowledge required to fulfill assigned responsibilities and to progress within the firm.
D. Knowledge required in order to perform a peer review.
50. In pursuing a CPA firm's quality control objectives, a CPA firm may maintain records indicating
which partners or employees of the CPA firm were previously employed by the CPA firm's clients.
Which quality control objective would this be most likely to satisfy?
A. Acceptance and continuance of clients and engagements.
B. Engagement performance.
C. Personnel management.
D. Relevant ethical requirements.

51. A CPA firm establishes quality control policies and procedures for deciding whether to accept a
new client or continue to perform services for a current client. The primary purpose for establishing
such policies and procedures is:
A. To enable the auditor to attest to the integrity or reliability of a client.
B. To comply with the quality control standards established by regulatory bodies.
C. To minimize the likelihood of association with clients whose managements lack integrity.
D. To lessen the exposure to litigation resulting from failure to detect fraud in client financial
statements.

52. Which of the following is not an element of quality control?

A. Documentation.
B. Engagement performance.
C. Monitoring.
D. Relevant ethical requirements.

1. Which of the following did not result at least partially due to

the alleged audit failures of the 1980s and 1990s?

a. The Treadway Report.

b. An SAS further defining the auditor’s responsibility for
fraud detection.
c. Formation of the AICPA Fraud Commission.
d. Formation of the Independence Standards Board.

ANSWER: C

2. Competence as a certified public accountant includes all of

the following except
a. Having the technical qualifications to perform an
engagement.
b. Possessing the ability to supervise and evaluate the
quality of staff work.
c. Warranting the infallibility of the work performed.
d. Consulting others if additional technical information
is needed.
ANSWER: C

3. Which of the following is mandatory if the auditor is to

comply with generally accepted auditing standards?
a. Possession by the auditor of adequate technical
training.
b. Use of analytical review on audit engagements.
c. Use of statistical sampling whenever feasible on an
audit engagement.
d. Confirmation by the auditor of material accounts
receivable balances.

ANSWER: A

4. As a guidance for measuring the quality of the performance

of an auditor, the auditor should refer to
a. Statements of the Financial Accounting Standards Board.
 b. Generally Accepted Auditing Standards.
c. Interpretations of the Statements on Auditing Standards.
d. Statements on Quality Control Standards.

ANSWER: B

5. In addition to auditing, CPAs perform other services for their

clients. Standards governing the quality of these services are
covered in the attestation standards generally, and performance
requirements are more explicitly defined in sets of statements
relating to each type of service. Which of the following is
not such a set?
a. Statements on Standards for Consulting Services.
b. Statements on Responsibilities in University Audits.
c. Statements on Standards for Accounting and Review
Services.
d. Statements on Responsibilities in Tax Practice.

ANSWER: B

6. Which of the following is a violation of Rule 301 (Confidential

Client Information) of the Code of Professional Conduct?
a. The CPA, in response to a court subpoena, submits auditor-
prepared workpapers as evidence of possible illegal acts
perpetrated by the client.
b. The CPA discloses to the board of directors a scheme
concocted by top management to intentionally inflate
earnings.
c. The CPA warns Client B as to the inadvisability of
acquiring Client A. The CPA bases this warning on
knowledge of Client A's financial condition and a belief
that the management of Client A lacks integrity. This
knowledge was obtained by the CPA as a result of auditing
Client A during the past several years.
d. The CPA, when questioned in court, admits to knowledge of
certain illegal acts perpetrated by the client.

ANSWER: C

7. Which of the following statements best describes why the

CPA profession has deemed it essential to promulgate
ethical standards and to establish means for ensuring their
observance?
a. A requirement for a profession is the establishment
of ethical standards that stress primarily a
responsibility to clients and colleagues.
b. A requirement of most state laws calls for the
profession to establish a code of ethics.
c. An essential means of self-protection for the
profession is the establishment of flexible ethical
standards by the profession.
d. A distinguishing mark of a profession is its
acceptance of responsibility to the public.

ANSWER: D

8. Which of the following best describes what is meant by

generally accepted auditing standards?
a. Audit objectives generally determined on audit
engagements.
b. Acts to be performed by the auditor.
c. Measures of the quality of the auditor's performance.
d. Procedures to be used to gather evidence to support
financial statements.
 ANSWER: C

9. Which of the following best describes what is meant by

generally accepted auditing standards?
a. Pronouncements issued by the Auditing Standards Board.
b. Procedures to be used to gather evidence to support
financial statements.
c. Rules acknowledged by the accounting profession because of
their universal compliance.
d. Measures of the quality of the auditor's performance.

ANSWER: D

10. Under which of the following circumstances may a CPA agree with
a departure from an accounting principle promulgated by that
body designated by AICPA Council to formulate such principles?
a. When the principle was one formulated by the Accounting
Principles Board inasmuch as the APB is no longer the body
so designated by Council.
b. When the CPA can demonstrate that application of the
principle in question would make the financial statements
materially misleading.
c. When the disputed principle is contrary to industry
practice.
d. When adoption of the principle would cause the financial
statements to be inconsistent with prior years.

ANSWER: B

11. Pursuant to the AICPA rules of conduct, the auditor's

responsibility to the profession is defined by
a. The AICPA Code of Professional Conduct.
b. Federal laws governing licensed professionals who are
involved in interstate commerce.
c. Statements on Auditing Standards.
d. The Bylaws of the AICPA.

ANSWER: A

12. 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 CPA
who will act as the principal auditor.
d. First inform management that an unqualified opinion
cannot be issued.

ANSWER: B

13. Which of the following factors is most important concerning

an auditor's responsibility to detect errors and fraud?
a. The susceptibility of the accounting records to
intentional manipulations, alterations, and the
misapplication of accounting principles.
b. The probability that unreasonable accounting
estimates result from unintentional bias or
intentional attempts to misstate the financial
statements.
c. The possibility that management fraud, defalcations,
and misappropriation of assets may indicate the
existence of illegal acts.
d. The risk that mistakes, falsifications, and omissions
 may cause the financial statements to contain
material misstatements.

ANSWER: D

14. The standard of due audit care requires the auditor to

a. Apply judgment in a conscientious manner, carefully
weighing the relevant factors before reaching a decision.
b. Ensure that the financial statements are free from error.
c. Make perfect judgment decisions in all cases.
d. Possess skills clearly above the average for the
profession.

ANSWER: A

15. The exercise of due professional care requires that an

auditor
a. Examine all available corroborating evidence.
b. Critically review the judgment exercised at every
level of supervision.
c. Reduce control risk below the maximum.
d. Attain the proper balance of professional experience
and formal education.

ANSWER: B

16. A CPA who has never audited a commercial bank

a. May not accept such an engagement.
b. May accept the engagement only if the accounting firm
specializes in the audit of commercial banks.
c. May accept the engagement after attaining a suitable level
of understanding of the transactions and accounting
practices unique to commercial banking.
d. May accept the engagement because training as a CPA
transcends unique industry characteristics.

ANSWER: C

17. The first general standard requires that a person or

persons have adequate technical training and proficiency as an
auditor. This standard is met by
a. An understanding of the field of business and finance.
b. Education and experience in the field of auditing.
c. Continuing professional education.
d. A thorough knowledge of the Statements on Auditing
Standards.

ANSWER: B

18. The first general standard recognizes that regardless of

how capable an individual may be in other fields, the
individual cannot meet the requirements of the auditing
standards without the proper
a. Business and finance courses.
b. Quality control and peer review.
c. Education and experience in auditing.
d. Supervision and review skills.

ANSWER: C

19. In determining estimates of fees, an auditor may take into

account each of the following, except the
a. Value of the service to the client.
b. Degree of responsibility assumed by undertaking the
engagement.
c. Skills required to perform the service.
 d. Attainment of specific findings.

ANSWER: D

20. A CPA, while performing an audit, strives to achieve

independence in appearance in order to
a. Reduce risk and liability.
b. Comply with the generally accepted standards of field
work.
c. Become independent in fact.
d. Maintain public confidence in the profession.

ANSWER: D

21. Which of the following best describes why publicly traded

corporations follow the practice of having the outside
auditor appointed by the board of directors or elected by
the stockholders?
a. To comply with the regulations of the Financial
Accounting Standards Board.
b. To emphasize auditor independence from the management
of the corporation.
c. To encourage a policy of rotation of the independent
auditors.
d. To provide the corporate owners with an opportunity to
voice their opinion concerning the quality of the
auditing firm selected by the directors.

ANSWER: B

22. Which of the following is not required by the generally

accepted auditing standard that states that due
professional care is to be exercised in the performance of the
examination?
a. Observance of the standards of field work and
reporting.
b. Critical review of the audit work performed at every
level of supervision.
c. Degree of skill commonly possessed by others in the
profession.
d. Responsibility for losses because of errors of
judgment.

ANSWER: D

23. The third general standard states that due care is to be

exercised in the performance of the examination. This
standard means that a CPA who undertakes an engagement
assumes a duty to perform each audit
a. As a professional possessing the degree of skill
commonly possessed by others in the field.
b. In conformity with generally accepted accounting
principles. c.
With reasonable diligence and without fault or error. d.
To the satisfaction of governmental agencies and
investors who rely upon the audit.

ANSWER: A

b 2. Which of the following statements is an example of an assertion made by management in an entity's

financial statements?
a. The financial statements were prepared in an unbiased manner.
b. Reported inventory balances reflect all related transactions for the period.
c. Reported accounts receivable does not include any uncollectible accounts.
d. The scope of the auditors' investigation was not limited in any way by management.
d 3. Statements on Auditing Standards
a. Relate to the filing requirements and enforcement activities of the SEC.
b. Describe procedures to be applied in specific areas of audit activity to eliminate inconsistencies in audit
practice.
c. Are intended to limit the degree of auditor judgment needed to fulfill the attest function.
d. Interpret standards that provide guidelines or measures of quality for an independent audit.

d 4. The primary purpose of an independent financial statement audit is to

a. Provide a basis for assessing management's performance.
b. Comply with state and federal regulatory requirements.
c. Assure management that the financial statements are unbiased and free from material error.
d. Provide users with an unbiased opinion about the fairness of information reported in the financial
statements.

b 5. Independent auditing can best be described as a

a. Branch of accounting.
b. Discipline that attests to the results of accounting and other operations and data.
c. Professional activity that measures and communicates financial and business data.
d. Regulatory function that prevents the issuance of improper financial information.
(AICPA ADAPTED)

b 6. An independent audit aids in the communication of economic data because the audit
a. Confirms the accuracy of management's financial representations.
b. Lends credibility to the financial statements.
c. Guarantees that financial data are fairly presented.
d. Assures the readers of financial statements that any fraudulent activity has been corrected.
(AICPA ADAPTED)
c 7. Which of the following types of audits are most similar?
a. Operational audits and compliance audits.
b. Independent financial statement audits and operational audits.
c. Compliance audits and independent financial statement audits.
d. Internal audits and independent financial statement audits.

c 8. The Auditing Standards Board

a. Sets rules and regulations that govern public accounting firms.
b. Is an arm of the Financial Accounting Standard Board.
c. Is a senior technical body of the AICPA designated to issue authoritative auditing pronouncements.
d. Reports directly to the Securities and Exchange Commission.

c 9. The essence of the attest function is to

a. Detect fraud.
b. Examine individual transactions so that the auditor can certify as to their validity.
c. Determine whether the client's financial statements are fairly stated.
d. Ensure the consistent application of correct accounting procedures.
(AICPA ADAPTED)

d 10. Which of the following criteria is unique to the independent auditor's attest function?
a. General competence.
b. Familiarity with the particular industry of each client.
c. Due professional care.
d. Independence. (AICPA ADAPTED)

c 11. The definition of auditing contained within A Statement of Basic Auditing Concepts recognizes that
auditing includes both a(an)
a. Documentation process and an evaluation process.
b. Evaluation process and a reporting process.
c. Investigative process and a reporting process.
d. Documentation process and a reporting process.

a 12. An operational audit is designed to

a. Assess the efficiency and effectiveness of management's operating procedures.
b. Assess the presentation of management's financial statements in accordance with generally accepted
accounting principles.
c. Determine whether management has complied with applicable laws and regulations.
d. Determine whether the audit committee of the board of directors is effectively discharging its
responsibility to oversee management's operations.

b 13. The market for auditing services is driven by

a. The regulatory authority of the Securities and Exchange Commission.
b. A demand by external users of financial statements.
c. Pronouncements issued by the Auditing Standards Board.
d. Congress at the federal level and elected legislative bodies at the state level.
a 14. The first contemporary audit related legislation was the
a. Securities Act of 1933.
b. Securities Exchange Act of 1934.
c. British Joint Stock Companies Act of 1844.
d. Companies Act of 1947.

a 15. The first authoritative auditing pronouncement in the U.S. was

a. Statement on Auditing Procedures No. 1, "Extensions of Auditing Procedures."
b. Statement on Auditing Standards No. 1, "Codification of SASs."
c. "Uniform Accounting: A Tentative Proposal Submitted by the Federal Reserve Board (1917)."
d. "Examination of Financial Statements by Independent Public Accountants (1936)."

a 16. The first authoritative audit standards-setting body empowered to issue auditing pronouncements in the
U.S. was the
a. The Committee on Auditing Procedure.
b. The Auditing Standards Executive Committee.
c. The Auditing Standards Board.
d. The Accounting and Review Services Committee.

c 17. Which of the following incorrectly matches the authoritative body with its authoritative
pronouncements?
a. Accounting and Review Services Committee: "Statements on Standards for Accounting and Review
Services"
b. Auditing Standards Board: "Statements on Auditing Standards"
c. Auditing Standards Executive Committee: "Statements on Auditing Procedure"
d. Securities and Exchange Commission: "Financial Reporting Releases"

a 18. A license to practice as a certified public accountant is granted by

a. State boards of accountancy.
b. The AICPA.
c. State societies of CPAs.
d. The SEC.

b 19. The purpose of a compliance audit for a governmental entity is to determine whether
a. Financial statements comply with GAAP and whether the entity is operating efficiently.
b. Financial statements comply with GAAP and the entity has complied with applicable laws and
regulations.
c. The entity has complied with applicable laws and regulations.
d. Financial statements comply with GAAP.

a 20. The audit process is

a. A special application of the scientific method of inquiry.
b. Regulated by the AICPA.
c. The only service a CPA is allowed to perform by law.
d. Performed only by CPAs.
d 21. Which of the following has historically had the least influence on the practice of public accounting?
a. The Governmental Accounting Standards Board.
b. The Institute of Internal Auditors.
c. The Securities and Exchange Commission.
d. The U.S. Congress.

b 22. Independent auditing can best be described as

a. A subset of accounting.
b. A professional activity that attests to the fair presentation of financial statements.
c. A professional activity that measures and communicates financial accounting data.
d. A regulatory activity that prevents the issuance of improper financial information.
(AICPA ADAPTED)

c 23. An independent audit is important to readers of financial statements because it

a. Provides a measure of management's stewardship function.
b. Measures and communicates the financial data included in financial statements.
c. Objectively examines and reports on management's financial statements.
d. Reports on the accuracy of information in the financial statements.
(AICPA ADAPTED)

a 24. The reason an independent auditor gathers evidence is to

a. Form an opinion on the financial statements.
b. Detect fraud.
c. Evaluate management.
d. Evaluate internal controls. (AICPA ADAPTED)

a. 1. Due professional care requires

a. A critical review of the work done at every level of supervision.
b. The examination of all corroborating evidence available.
c. The exercise of error-free judgment.
d. A consideration of internal control structure that includes tests of controls.
(AICPA ADAPTED)

c 2. The first general standard requires that the audit of financial statements be performed by a person or
persons having adequate technical training and
a. Independence with respect to the financial statements and supplementary disclosures.
b. Exercising professional care as judged by peer reviewers.
c. Proficiency as an auditor, which likely has been acquired from previous experience.
d. Objectivity as an auditor, as verified by proper supervision. (AICPA ADAPTED)

d 3. An auditor, while performing an audit, strives to achieve the appearance of

independence in order to
a. Reduce risk and liability.
b. Comply with the generally accepted standards of fieldwork.
c. Become independent in fact.
d. Maintain public confidence in the profession. (AICPA ADAPTED)

d 4. Adequate technical training and proficiency as an auditor encompasses an ability to understand a

computer system sufficiently to identify and evaluate
a. The processing and imparting of information.
b. Essential accounting control features.
c. All control procedures.
d. The degree to which programming conforms to the application of generally accepted accounting
principles. (AICPA ADAPTED)

c 5. Competence as a certified public accountant includes all of the following except

a. Having the technical qualifications to perform an engagement.
b. Possessing the ability to supervise and evaluate the quality of staff work.
c. Warranting the infallibility of the work performed.
d. Consulting others if additional technical information is needed. (AICPA ADAPTED)

a 6. Ultimately, the decision about whether or not an auditor is independent must be made by the
a. Auditor.
b. Client.
c. Audit committee.
d. Public. (AICPA ADAPTED)
c 7. Madison Corporation has a few large accounts receivable that total $1,000,000. Nassau Corporation has
a great number of small accounts receivable that also total $1,000,000. The importance of an error in any
one account is, therefore, greater for Madison than for Nassau. This is an example of the auditor's concept
of
a. Account bias.
b. Audit risk.
c. Materiality.
d. Reasonable assurance. (AICPA ADAPTED)

b 8. Which of the following best describes what is meant by generally accepted auditing standards?
a. Acts to be performed by the auditor.
b. Measures of the quality of an auditor's performance.
c. Procedures used to gather evidence to support financial statements.
d. Audit objectives generally determined on audit engagements. (AICPA ADAPTED)

b 9. There is an inverse relationship between the effectiveness of an entity's internal control structure and
the
a. Reliability of financial statements.
b. Extent of detailed audit tests required.
c. Degree of staff supervision required in the performance of an audit.
d. Fairness of management assertions in the financial statements.

a 10. Which of the following best describes the character of the three generally accepted auditing standards
classified as general standards?
a. Criteria for competence, independence, and professional care of individuals performing the audit.
b. Criteria for the content of the financial statements and related footnote disclosures.
c. Criteria for the content of the auditor's report.
d. The requirements for planning and supervision. (AICPA ADAPTED)

c 11. The generally accepted standards of fieldwork relate to

a. The competence, independence, and professional care of persons performing the audit.
b. Criteria for the content of the auditor's report on financial statements.
c. Audit planning and evidence gathering.
d. The need to maintain independence in mental attitude. (AICPA ADAPTED)

d 12. Which of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to AICPA guidelines.
b. Materiality depends only on the dollar amount involved.
c. Materiality depends on the nature of an item rather than on the dollar amount.
d. Materiality is a matter of professional judgment. (AICPA ADAPTED)

a 13. The generally accepted standards of reporting encompass all of the following except
a. Consideration of an entity's internal control structure.
b. Consistent application of accounting principles.
c. Informative disclosures.
d. Conformity of financial statements with GAAP.
c 14. An objective of the fourth generally accepted standard of reporting, relating to the expression of an
opinion, is to
d. Prohibit the auditor from issuing a report that does not include an opinion on the financial statements
taken as a whole.
e. Inform users that the financial statements and related notes are the joint responsibility of the auditor and
management.
f. Prevent users of financial statements from misinterpreting the degree of responsibility assumed by the
auditor.
g. Ensure adequate informative disclosures in the financial statements.

d 15. The least important evidence of a public accounting firm's evaluation of its system of quality controls
would concern the firm's policies and procedures with respect to
a. Employment (hiring).
b. Confidentiality of audit engagements.
c. Assigning personnel to audit engagements.
d. Determination of audit fees. (AICPA ADAPTED)

a 16. Which of the following is not an element of quality control?

a. Documentation.
b. Inspection.
c. Supervision.
d. Consultation. (AICPA ADAPTED)

d 17. Williams & Co., a large international public accounting firm, is due to have a peer review. The peer
review will most likely be performed by
a. Employees and partners of Williams & Co. who are not associated with the particular audit being
reviewed.
b. Audit review staff of the Securities and Exchange Commission.
c. Audit review staff of the AICPA.
d. Employees and partners of another firm. (AICPA ADAPTED)

b 18. In a financial statement audit, audit risk represents the probability that
a. Internal control fails and the failure is not detected by the auditor's procedures.
b. The auditor unknowingly fails to modify an opinion on materially misstated financial statements.
c. Inherent and control risk cause errors that could be material to the financial statements.
d. The auditor is not retained to conduct a financial statement audit in the succeeding year.

a 19. In a financial statement audit, inherent risk represents

a. The susceptibility of an account balance to error that could be material.
b. The risk that error could occur and not be prevented or detected by the internal control structure.
c. The risk that error could occur and not be detected by the auditor's procedures.
d. The risk that the auditor fails to modify materially misstated financial statements.

d 20. What is the magnitude of audit risk if inherent risk is .50, control risk .40, and detection risk .10?
a. .20.
b. .10.
c. .04.
d. Not determinable from the facts given.
c 21. The "hallmark" of auditing is
a. Available audit technology.
b. Generally accepted auditing standards.
c. Professional judgment.
d. Materiality and audit risk.

d 22. An auditor is most likely to refer to one or more of the three general auditing standards in determining
a. The nature of a report qualification.
b. The scope of auditing procedures.
c. Requirements for the consideration of internal control.
d. Whether the auditor should undertake an audit engagement. (AICPA ADAPTED)

a 23. Which of the following is mandatory if the auditor is to comply with the general standards of the
AICPA’s generally accepted auditing standards?
a. Adequate technical training
b. Use analytical procedures.
c. Use statistical sampling when feasible on an audit engagement.
d. Confirmation of material accounts receivable balances. (AICPA ADAPTED)

b 24. The first general standard requires that a person or persons have adequate technical training and
proficiency as an auditor. This standard is met by
a. Understanding business and finance.
b. Education and experience in auditing.
c. Continuing professional education.
d. Knowledge of Statements of Auditing Standards. (AICPA ADAPTED)

a 25. What is the meaning of the generally accepted auditing standard that requires that the auditor be
independent?
a. The auditor must be without bias with respect to the client audited.
b. The auditor must adopt a critical attitude during the audit.
c. The auditor's sole obligation is to third parties.
d. The auditor may have a direct ownership interest in the client's business if it is not material.
(AICPA ADAPTED)

d 26. The third general standard states that due care is to be exercised in the performance of an audit, and should
be interpreted to mean that an auditor who undertakes an engagement assumes a duty to perform
a. With reasonable diligence and without fault or error.
b. As a professional who will assume responsibility for losses consequent upon error of judgment.
c. To the satisfaction of the client and third parties.
d. As a professional possessing the degree of skill commonly possessed by others in the field.
(AICPA ADAPTED)
a 27. The first standard of fieldwork, which states that the work is to be adequately planned, and assistants, if
any, are to be properly supervised, recognizes that
a. Early appointment of the auditor is advantageous both to the auditor and to 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 engagement is necessary at interim dates.
(AICPA ADAPTED)

b 28. In connection with the third generally accepted auditing standard of fieldwork, an auditor examines
corroborating evidential matter that includes all of the following except
a. Client accounting manuals.
b. Written client representations.
c. Vendor invoices.
d. Minutes of board meetings. (AICPA ADAPTED)

a 29. 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 risk.
b. The element of internal control.
c. The element of corroborating evidence.
d. The element of reasonable assurance. (AICPA ADAPTED)

c 30. The fourth generally accepted auditing standard of reporting requires an auditor to render a report
whenever an auditor's name is associated with financial statements. The overall purpose of the fourth
standard of reporting is to require that reports
a. Assure that the auditor is independent with respect to the financial statements audited.
b. State that the audit has been conducted in accordance with generally accepted auditing standards.
c. Indicate the character of the engagement and the degree of responsibility assumed by the auditor.
d. Express whether the accounting principles used in preparing the financial statements have been applied
consistently in the period audited. (AICPA ADAPTED)

d 31. The auditor's judgment concerning the overall fairness of the presentation of financial positions, results
of operations, and cash flows is applied within the framework of
a. Quality control.
b. Generally accepted auditing standards that include the concept of materiality.
c. The auditor's evaluation of the audited company's internal controls.
d. Generally accepted accounting principles. (AICPA ADAPTED)

d 32. The concept of materiality would be least important to an auditor in determining

a. Transactions that should be reviewed.
b. The need for disclosing a particular transaction or event.
c. The extent of audit work planned for particular accounts.
d. The effects of an auditor's direct financial interest in a client. (AICPA ADAPTED)
b 33. The objective of quality control mandates that a public accounting firm should establish policies and
procedures for professional development that provide reasonable assurance that all entry-level personnel
a. Prepare working papers that are standardized in form and content.
b. Have the knowledge required to enable them to fulfill responsibilities assigned.
c. Will advance within the organization.
d. Develop specialties in specific areas of public accounting. (AICPA ADAPTED)

b 34. In pursuing its quality control objectives with respect to assigning personnel to engagements, a public
accounting firm may use policies and procedures such as
a. Rotating employees from assignment to assignment on a random basis to aid in the staff training effort.
b. Requiring timely identification of the staffing requirements of specific engagements so that enough
qualified personnel can be made available.
c. Allowing staff to select the assignments of their choice to promote better client relationships.
d. Assigning a number of employees to each engagement in excess of the number required so as not to
overburden the staff and interfere with the quality of the audit work performed.
(AICPA ADAPTED)

d 35. A public accounting firm studies its personnel advancement experience to determine whether individuals
meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's
adherence to
a. Generally accepted auditing standards.
b. Attestation standards.
c. Supervision and review.
d. Quality control standards. (AICPA ADAPTED)

d 36. Which of the following statements best describes the primary purpose of Statements on Auditing
Standards?
a. Guides intended to set forth auditing procedures that are applicable to a variety of situations.
b. Outlines intended to narrow the areas of inconsistency and divergence of auditor opinion.
c. Authoritative statements, enforced through the code of professional conduct, and intended to limit the
degree of auditor judgment.
d. Interpretations intended to clarify the meaning of generally accepted auditing standards.

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wep/acctg17&18/prelimexam