QUIZ 1/2/3

1. An important corporate governance mechanism is the internal audit function. For good corporate
governance, the chief internal audit executive should have direct communication to the audit committee
and report to

The correct answer is: The chief executive officer

2. In a broad sense, society benefits from internal auditing because the internal auditor

The correct answer is: Promotes the efficient and effective use of resources.

3. Which of the following would be the most appropriate role for the internal auditor in the cash
budgeting process?

The correct answer is: Reviewing budget policies and the design and functioning of the budget process.

4. The coordination of activities between internal and external auditors

The correct answer is: Includes the exchange of audit reports and management letters

5. Which of the following actions would be a violation of auditor independence?

The correct answer is: Continuing on an audit assignment at a division for which the auditor will soon be
responsible as the result of a promotion.

6. Which of the following circumstances would least likely create self interest threat?

The correct answer is: Having a close personal relationship between a member of the assurance team
and the assurance client, its directors, officers or employees.

7. An auditor who accepts an audit engagement and does not possess the industry expertise of the
business entity should

The correct answer is: Obtain knowledge of matters that relate to the nature of the entity’s business

8. The IIA’s definition of internal auditing emphasizes the effectiveness of which of the following?

The correct answer is: Risk management, control, and governance processes

9. Which one of the following options violates the objectivity principle of the Code of Ethics?

The correct answer is: Since everyone in the organization is aware of the IT department‘s inability to
arrange suitable back-up facilities for the financial systems of the organization, the internal auditor
makes no mention of the fact in his report following an audit of the general IT controls
10. Internal auditing has been a dynamic profession. Which of the following best describes the scope of
internal auditing as it has developed to date?

The correct answer is: Internal auditing has evolved to more of an operational orientation from a strictly
financial orientation.

11. Which of the following is correct with respect to the rights of stockholders in a corporation?

The correct answer is: Stockholders have no right to manage their corporation unless they are also
directors or officers.

12. This occurs as a result of the financial or other interests of a professional accountant or of an
immediate or close family member

The correct answer is: Familiarity threat

13. Which one of the following options violates the objectivity principle of the Code of Ethics?

The correct answer is: Since everyone in the organization is aware of the IT department‘s inability to
arrange suitable back-up facilities for the financial systems of the organization, the internal auditor
makes no mention of the fact in his report following an audit of the general IT controls

14. The IIA’s Code of Ethics includes which of the following two essential components?

The correct answer is: Principles and Rules of Conduct.

15. Which of the following is least required in attaining professional competence

The correct answer is: Specific education, training and examination in professionally relevant subjects

16. According to the IIA Standards which of the following is not included in the scope of the internal
audit function?

The correct answer is: Reviewing the strategic management process assessing the quality of
management decision making bot quantitatively and qualitatively and reporting the results to the audit
committee.

17. Which of the following statements concerning the management’s expert’s competence, capabilities
and objectivity is correct?

The correct answer is: The management’s expert’s competence, capabilities and objectivity are
important factors in relation to the reliability of any information prepared by the management’s expert.

18. Which of the following conduct violates the integrity principles of the Code of Ethics?

The correct answer is: The internal auditor uses an unrevised audit programme, used three years ago, to
conduct an organization-wide audit on credit sales.
19. In which of the following situations does the auditor potentially lack objectivity?

The correct answer is: A former purchasing assistant performs a review of internal controls over
purchasing four months after being transferred to the internal auditing department.

20. Which of the following is an internal audit objective?

The correct answer is: Evaluate whether cash receipts are adequately safeguarded

21. Which of the following is a misunderstanding created by the use of the word "independence"

The correct answer is: A person exercising professional and other relationships

22. The following statements relate to communication of audit matters of governance interest

S1: Audit matters of governance interest include only those matters that have come to the attention of
the auditor as a result of the performance of the audit

S2:The auditor should design audit procedures for the specific purpose of identifying matters of
governance interest

S3:The auditor should identify relevant persons who are charged with governance and with whom audit
matters of governance interest are to be communicated

S4:The auditor's communications with those charged with governance may be made orally or in writing.

Question 22Answer

a. All statements are true

b. 2 statements are true

c. Only 1 statement is true

d. 3 statements are true

Feedback
The correct answer is: 3 statements are true

23. Which of the following circumstances may create self-interest threat for a professional accountant in
public practice?

The correct answer is: A member of the assurance team having a direct financial interest in the
assurance client

24. Which of the following is not an assurance that the auditors give to the parties who rely on the
financial statements?

The correct answer is: Auditors know how the amounts and disclosures in the financial statements were
produced.

25. Which one of the following alternatives violates the integrity principle of the Code of Ethics?

The correct answer is: In loyalty to her organization which is experiencing financial difficulty, a chief
audit executive (CAE) ignores the scheduled audit of the final tax return for the current tax year,
knowing that management is understating taxable income.

26. Which of the following circumstances would least likely create self interest threat?

The correct answer is: Having a close personal relationship between a member of the assurance team
and the assurance client, its directors, officers or employees.

27. Which of the following is not generally a power of the board of directors of a corporation?

The correct answer is: Amending the Articles of Incorporation.

28. If an auditee’s operating standards are vague and thus subject to interpretation, the auditor should

The correct answer is: Seek agreement with the auditee as to the standards to be used to measure
operating performance.

29. Which of the following would be the most appropriate audit procedure, If the auditor decides to test
the effectiveness and efficiency of the short-term strategy being employed to market product S.

The correct answer is: Evaluate performance goals incorporated into the short-term strategy, and
whether those goals are being met.

30. Which of the following statements concerning a CPA's disclosure of confidential client information is
ordinarily correct?

The correct answer is: Disclosure may be made to any party on consent of the client
31. It is the task of defining risk, identifying risks, assessing this risk for impact
and materiality and then devising suitable ways for dealing with more significant
risks.

The correct answer is: Risk Management

32. Which of the following best describe the interrelated components of internal
control?

The correct answer is: Control environment, risk assessment, control activities,
information and communication systems, and monitoring.

33. Proper segregation of functional responsibilities calls for separation of the

functions of

The correct answer is: Authorization, execution, and recording.

34. The ultimate purpose of assessing control risk is to contribute to the

auditor’s evaluation of the risk that?

The correct answer is: Material misstatements may exist in the financial
statements.

35. Which of the following statements is an example of an inherent limitation of

internal control.

The correct answer is: Errors may arise from mistakes in judgments.

36. Which of the following statements about internal control is incorrect?

The correct answer is: Internal control is expected to provide absolute assurance

37. Act as a vehicle for capturing all the assessment and decisions made in
respect of identified risks.

The correct answer is: Risk register

38. Is a process of assessing the quality of internal control performance over

time. It involves assessing the design and operation of controls on a timely basis
and taking necessary corrective actions.

The correct answer is: Monitoring

39. It benefits an entity’s internal control by enabling an entity to

The correct answer is: Reduce the risk that controls will be circumvented

40. Which of the following activities would be least likely to strengthen a

company’s internal control?
The correct answer is: Maintaining insurance for fire and theft.

41. In performing a walk-through test, the

The correct answer is: Auditor traces one or several transactions within each
major class through that transaction trail to confirm his or her understanding of
the information system and control procedures.

42. Tests of controls are performed to obtain audit evidence about the
effectiveness of the

The correct answer is: Design of the accounting and internal controls systems.

43. Audit evidence concerning segregation of duties ordinarily is best obtained

by?

The correct answer is: Observing the employees as they apply specific controls.

44. This internal control component is the foundation for all other components. It
sets the tone of the organization, provides discipline and structure, and
influences the control consciousness of employees.

The correct answer is: Control environment

45. A classification of risk that deals with Information Technology

The correct answer is: Operational

46. Which of the following is correct about internal control?

The correct answer is: One of the inherent limitations of accounting and internal
control systems is the possibility that the procedures may become inadequate
due to changes in conditions, and compliance with procedures may deteriorate.

47. Internal control should provide reasonable (but not necessarily absolute)
assurance which means that:

The correct answer is: The cost of control activities should not exceed the
benefits.

48. Which of the following statements concerning physical controls is incorrect?

The correct answer is: Access to computer hardware should not be limited to
authorized personnel.

49. The auditor should consider whether the assessment of control risk is
confirmed
The correct answer is: Upon the conclusion of the audit, based on the results of
substantive procedures and other audit evidence obtained.

50. Internal control should provide reasonable (but not necessarily absolute)
assurance which means that:

The correct answer is: The cost of control activities should not exceed the
benefits.

51. The following are components of internal control, except

The correct answer is: Business Risk

52. Internal control procedures are not designed to provide reasonable

assurance that

The correct answer is: Irregularities will be eliminated.

53. Control activities include those that relate to physical controls over access to
and use of assets and records. A departure from the purpose of physical controls
is that

The correct answer is: Only warehouse personnel and production supervisors
have access to raw materials storeroom

54. It is the process designed, implemented and maintained by those charged

with governance, management, and other personnel to provide reasonable
assurance about the achievement of the entity’s objectives.

The correct answer is: Internal Control

55. Which of the following controls would be the most appropriate means to
ensure that terminated employees had been removed from the payroll?

The correct answer is: Reconciling payroll and time-keeping records.

56. After obtaining an understanding of internal control and assessing control

risk, an auditor decided not to perform additional tests of controls. The auditor
most likely concluded that the?

The correct answer is: Additional evidence to support a further reduction in

control risk was not cost-beneficial to obtain.

57. Which of the following is a responsibility that should not be assigned to only
one employee?
The correct answer is: Access to securities in the company’s safe deposit box.

58. Effective internal control?

The correct answer is: Reduces the need for management to review exception
reports on a day-to-day basis.

59. In an auditor’s consideration of internal control, the completion of a

questionnaire is most closely associated with which of the following?

The correct answer is: Understanding the system

60. When considering internal control, the auditor’s primary concern is to

determine

The correct answer is: The reliability of the accounting information system.

61. The responsibility for adopting sound accounting policies, maintaining

adequate internal control, and making fair presentation in the financial
statement rests

The correct answer is: With the management

62. Which of the following observations, made during the preliminary survey of
a local department store's disbursement cycle, reflects a control strength?

The correct answer is: The treasurer's office prepares checks for suppliers based
on vouchers prepared by the accounts payable department.

63. What form of analytical review might uncover the existence of obsolete
merchandise?
The correct answer is: Inventory turnover rates.

Which of the following errors is most likely to be detected by examining

unrecorded expenditure invoices on randomly selected dates during the month
after fiscal year-end?

The correct answer is: Accounts payable are understated at fiscal year end.

The level of assurance provided by an audit of detecting a material

misstatement is referred to as

The correct answer is: Reasonable assurance

When auditing inventories of raw materials, purchased parts, and/or

merchandise inventory, the auditor's most effective means for evaluating the
valuation assertion is to
The correct answer is: Examine recent invoices from vendors, along with freight
bills and compare with client's unit costs, as adjusted for freight and discount.

This waste also includes using components that are more precise, complex,
higher quality, or expensive than required.

The correct answer is: Unnecessary processing or paperwork

ACTI have an accounts payable system, in which a voucher is prepared after the
invoice, purchase order, requisition, and receiving report are verified. The next
step in the system is to

The correct answer is: Enter the check amount in the check register.

Which of the following is an example of fraudulent financial reporting?

The correct answer is: Company management changes inventory count tags and
overstates ending inventory, while understating cost of goods sold.

Auditor confirmation of accounts payable balances at the balance sheet date

may be unnecessary because

The correct answer is: There is likely to be other reliable external evidence to
support the balances.

When an Internal Auditor observed physical inventories at the main plant at

year-end, it would provide direct evidence to support which of the following
objectives?

The correct answer is: Identification of obsolete or damaged merchandise to

evaluate allowance for obsolescence.

Which of the following is not one of the independent auditor's objectives

regarding the audit of inventories?

The correct answer is: Verifying that all inventory owned by the client is on hand
at the time of the count.

The management responsibility to detect and prevent fraud and error is

accomplished by

The correct answer is: Implementing adequate accounting and internal control
system
Which of the following characteristics most likely would heighten an auditor’s
concern about the risk of intentional manipulation of financial statements?

The correct answer is: Management places substantial emphasis on meeting

earnings projections

Which of the following is not an assurance that the auditors give to the parties
who rely on the financial statements?

The correct answer is: Auditors know how the amounts and disclosures in the
financial statements were produced.

When auditing merchandise inventory at year end, the auditor performs a

purchase cutoff test to obtain evidence that

The correct answer is: All goods owned at year end are included in the inventory
balance.

Which of the following would be the best procedure to determine whether

purchases were properly authorized?

The correct answer is: Determine whether a sample of entries in the purchase
journal is supported by properly executed purchase orders.

Which of the following is an example of an error?

The correct answer is: Misapplication of accounting policies

In the context of financial statement presentation, fraud occurs when

The correct answer is: A misstatement is made and there is both knowledge of
its falsity and the intent to deceive

Instead of taking a physical inventory count on the balance sheet date, the
client may take physical counts prior to the year end if internal controls are
adequate and

The correct answer is: Computerized records of perpetual inventory are

maintained.

Material misstatements may emanate from all of the following except?

The correct answer is: Inadequacy of accounting records

The most effective control for ensuring that customers are billed only for goods
shipped is to
The correct answer is: Implement a policy that prevents the mailing of sales
invoices to customers in the absence of a properly approved shipping order and
a bill of lading signed by the carrier.

Which of the following accounts would most likely be reviewed by the auditor to
gain reasonable assurance that additions to the equipment account are not
understated?

The correct answer is: Repairs and maintenance expense.

Which of the following is an indicator of possible fraudulent financial reporting

for the purpose of inflating earnings?

The correct answer is: A trend analysis discloses: (1) sales increases of 50
percent and (2) cost of goods sold increases of 25 percent.

This waste can double the cost of one single product. If this cost is passed on to
the consumer, it will inflate production costs and could make the organization
less competitive overall.

The correct answer is: Defects

The internal audit staff has been asked to conduct an audit of the purchasing
department. Top management feels that there have been some production
bottlenecks recently because of out-of-stock situations. What is the primary
objective of the auditors in this assignment?

The correct answer is: To ascertain whether results are consistent with
established objectives and whether operations are being carried out as planned.

The probability of an auditor's procedures leading to the conclusion that a

material error does not exist in an account balance when, in fact, such error
does exist is referred to

The correct answer is: Detection risk

An intentional act by one or more individuals among management, employees,

or third parties which results in misrepresentation of financial statements refers
to

The correct answer is: Fraud

Which of the following statements best describes the auditor’s responsibility

regarding the detection of material errors and frauds

The correct answer is: The audit should be designed to provide reasonable
assurance that material errors and frauds will be detected.
For manufactured inventories, the valuation assertion is best tested by

The correct answer is: Tracing unit costs appearing on final inventory listings to
auditor's copy of audited finished goods unit costs.

QUIZLETS

[1-90]
c. The management's expert's competence, capabilities and objectivity are important factors in
relation to the reliability of any information prepared by the management's expert.

Which of the following statements concerning the management's expert's competence,

capabilities, and objectivity is correct?

b. 3 statements are true

The following statements relate to communication of audit matters of governance interest

S1: Audit matters of governance interest include only those matters that have come to the
attention of the auditor as a result of the performance of the audit

S2: The auditor should design audit procedures for the specific purpose of identifying matters of
governance interest

S3: The auditor should identify relevant persons who are charged with governance and with
whom audit matters of governance interest are to be communicated

S4: The auditor's communications with those charged with governance may be made orally or in
writing.

a. All statements are true

b. 3 statements are true
c. Only 1 statement is true
d. 2 statements are true

c. Having a close personal relationship between a member of the assurance team and the
assurance client, its directors, officers or employees.

Which of the following circumstances would least likely create self interest threat?

b. Auditors know how the amounts and disclosures in the financial statements were produced.

Which of the following is not an assurance that the auditors give to the parties who rely on the
financial statements?

d. Amending the Articles of Incorporation.

Which of the following is not generally a power of the board of directors of a corporation?
a. Selecting officers.
b. Declaring dividends.
c. Determining management compensation.
d. Amending the Articles of Incorporation.

d. The chief executive officer

An important corporate governance mechanism is the internal audit function. For good
corporate governance, the chief internal audit executive should have direct communication to
the audit committee and report to

b. Stockholders have no right to manage their corporation unless they are also directors or
officers.

Which of the following is correct with respect to the rights of stockholders in a corporation?

b. A person exercising professional and other relationships.

Which of the following is a misunderstanding created by the use of the word "independence"?

b. Disclosure may be made to any party on consent of the client.

Which of the following statements concerning a CPA's disclosure of confidential client

information is ordinarily correct?

a. A member of the assurance team having a direct financial interest in the assurance client.

Which of the following circumstances may create self-interest threat for a professional
accountant in public practice?

c. Includes the exchange of audit reports and management letters.

The coordination of activities between internal and external auditors

a. Evaluate whether cash receipts are adequately safeguarded.

Which of the following is an internal audit objective?

d. The internal auditor uses an unrevised audit programme, used three years ago, to conduct an
organization-wide audit on credit sales.

Which of the following conduct violates the integrity principles of the Code of Ethics?

c. Since everyone in the organization is aware of the IT department's inability to arrange

suitable back-up facilities for the financial systems of the organization, the internal auditor
makes no mention of the fact in his report following an audit of the general IT controls.

Which one of the following options violates the objectivity principle of the Code of Ethics?

c. In loyalty to her organization which is experiencing financial difficulty, a chief audit executive
(CAE) ignores the scheduled audit of the final tax return for the current tax year, knowing that
management is understating taxable income.

Which one of the following alternatives violates the integrity principle of the Code of Ethics?

c. Obtain knowledge of matters that relate to the nature of the entity's business.

An auditor who accepts an audit engagement and does not possess the industry expertise of
the business entity should

c. Specific education, training and examination in professionally relevant subjects.

Which of the following is least required in attaining professional competence?

b. Familiarity threat

This occurs as a result of the financial or other interests of a professional accountant or of an

immediate or close family member.

b. Having a close personal relationship between a member of the assurance team and the
assurance client, its directors, officers or employees.
Which of the following circumstances would least likely create self interest threat?

a. Risk management, control, and governance processes.

The IIA's definition of internal auditing emphasizes the effectiveness of which of the following?

a. Reviewing the strategic management process assessing the quality of management decision
making both quantitatively and qualitatively and reporting the results to the audit committee.

According to the IIA Standards, which of the following is not included in the scope of the internal
audit function?

a. Seek agreement with the auditee as to the standards to be used to measure operating
performance.

If an auditee's operating standards are vague and thus subject to interpretation, the auditor
should

a. A former purchasing assistant performs a review of internal controls over purchasing four
months after being transferred to the internal auditing department.

In which of the following situations does the auditor potentially lack objectivity?

a. Continuing on an audit assignment at a division for which the auditor will soon be responsible
as the result of a promotion.

Which of the following actions would be a violation of auditor independence?

b. Principles and Rules of Conduct.

The IIA's Code of Ethics includes which of the following two essential components?

d. All statements are true.

S1: Internal auditors are hired by the company, while external auditors are appointed by a
shareholder vote.
S2: Internal auditors are responsible to management, while external auditors are responsible to
the shareholders.
S3: Internal auditors can issue their findings in any type of report format, while external auditors
must use specific formats for their auditor opinions and management letters.

a. All statements are false.

b. 2 statements are true.
c. Only 1 statement is true.
d. All statements are true.

a. Promotes the efficient and effective use of resources.

In a broad sense, society benefits from internal auditing because the internal auditor

c. Reviewing budget policies and the design and functioning of the budget process.

Which of the following would be the most appropriate role for the internal auditor in the cash
budgeting process?

a. Evaluate performance goals incorporate into the short-term strategy, and whether those goals
are being met.

Which of the following would be the most appropriate audit procedure, if the auditor decides to
test the effectiveness and efficiency of the short-term strategy being employed to market
products.

a. Internal auditing has evolved to more of an operational orientation from a strictly financial
orientation.

Internal auditing has been a dynamic profession. Which of the following best describes the
scope of internal auditing as it has developed to date?

d. Risk register

Act as a vehicle for capturing all the assessment and decisions made in respect of identified
risks.

a. Material misstatements may exist in the financial statements.

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the
risk that
a. Access to securities in the company's safe deposit box.

Which of the following is a responsibility that should not be assigned to only one employee?

d. Design of the accounting and internal controls systems.

Tests of controls are performed to obtain audit evidence about the effectiveness of the

b. Understanding the system

In an auditor's consideration of internal control, the completion of a questionnaire is most closely

associated with which of the following?

c. Errors may arise from mistakes in judgments.

Which of the following statements is an example of an inherent limitation of internal control?

c. Internal Control

It is the process designed, implemented and maintained by those charged with governance,
management, and other personnel to provide reasonable assurance about the achievement of
the entity's objectives.

a. Risk Management

It is the task of defining risks, assessing this risks for impact and materiality and then devising
suitable ways for dealing with more significant risks.

c. Monitoring

Is a process of assessing the quality of internal control performance over time. It involves
assessing the design and operation of controls on a timely basis and taking necessary
corrective actions.

b. Authorization, execution, and recording.

Proper segregation of functional responsibilities calls for separation of the functions of

d. One of the inherent limitations of accounting and internal control systems is the possibility
that the procedures may become inadequate due to changes in conditions, and compliance with
procedures may deteriorate.

Which of the following is correct about internal control?

a. The cost of control activities should not exceed the benefits.

Internal control should provide reasonable (but not necessarily absolute) assurance which
means that

b. Operational

A classification of risk that deals with Information Technology

c. Additional evidence to support a further reduction in control risk was not cost-beneficial to
obtain.

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

b. Maintaining insurance for fire and theft.

Which of the following activities would be least likely to strengthen a company's internal control?

c. Control environment, risk assessment, control activities, information and communication

systems, and monitoring.

Which of the following best describe the interrelated components of internal control?

d. Reconciling payroll and time-keeping records.

Which of the following controls would be the most appropriate means to ensure that terminated
employees had been removed from the payroll?

d. Reduces the need for management to review exception reports on a day-to-day basis.
Effective internal control

d. Control environment

This internal control component is the foundation for all other components. It sets the tone of the
organization, provides discipline and structure, and influences the control consciousness of
employees.

d. Reduce the risk that controls will be circumvented.

It benefits an entity's internal control by enabling an entity to

a. Process large, unusual or non-recurring transactions

b. Rely on systems or programs that are inaccurately processing data.
c. Allow unauthorized changes to data in master files.
d. Reduce the risk that controls will be circumvented.

c. Internal control is expected to provide absolute assurance.

Which of the following statements about internal control is incorrect?

a. Internal control is effected by people.

b. Internal control is a process.
c. Internal control is expected to provide absolute assurance.
d. Internal control is geared to achieving objectives in the overlapping categories of financial
reporting, compliance and operations.

b. The cost-benefit relationship should be considered in designing internal control.

Which of the following statements about internal control is correct?

a. Properly maintained internal controls reasonably assure that collusion among employees
cannot occur.
b. The cost-benefit relationship should be considered in designing internal control.
c. Exceptionally strong control allows the auditor to eliminate substantive tests.
d. Establishing and maintaining internal control is the internal auditor's responsibility.

d. The reliability of the accounting information system.

When considering internal control, the auditor's primary concern is to determine

a. Compliance with policies, plans, and procedures.

b. The type of an opinion he will issue.
c. The possibility of fraud occuring.
d. The reliability of the accounting information system.

d. Only warehouse personnel and production supervisors have access to raw materials
storeroom.

Control activities include those that relate to physical controls over access to and use of assets
and records. A departure from the purpose of physical controls is that

a. Access to safe-deposit box requires two officers.

b. The mail room clerk compiles a list of the checks received in the incoming mail.
c. Only sales personnel use sales department vehicles.
d. Only warehouse personnel and production supervisors have access to raw materials
storeroom.

b. Irregularities will be eliminated.

Internal control procedures are not designed to provide reasonable assurance that

a. Access to assets is permitted only in accordance with management's authorization.

b. Irregularities will be eliminated.
c. The recorded accountability for assets is compared with the existing assets at reasonable
intervals.
d. Transactions are executed in accordance with management's authorization.

a. Access to computer hardware should not be limited to authorized personnel.

Which of the following statements concerning physical controls is incorrect?

a. Access to computer hardware should not be limited to authorized personnel.

b. Access often extends beyond the entity's employees to customers and suppliers through
remote terminals.
c. Physical controls limit access to assets and important records.
d. In systems with online entry of data, many users may have access through remote input
devices.

c. Observing the employees as they apply specific controls.

Audit evidence concerning segregation of duties ordinarily is best obtained by

a. Developing audit objectives that reduce control risk.

b. Obtaining a flowchart of activities performed by available personnel.
c. Observing the employees as they apply specific controls.
d. Performing tests of transactions that corroborate management's financial statement
assertions.

c. Auditor traces one or several transactions within each major class through that transaction
trail to confirm his or her understanding of the information system and control procedures.

In performing a walk-through test, the

a. Auditor traces one or several transactions within each major class through the transaction
trail to confirm the cut off period.
b. The auditor performs a physical review of the entity's property, plant, and equipment to
confirm the physical location of major assets.
c. Auditor traces one or several transactions within each major class through that transaction
trail to confirm his or her understanding of the information system and control procedures.
d. Senior auditor "walks-through" the processing of the entity's transactions with other members
of the audit team focusing on the control processes which aim to prevent misstatements in the
financial statements.

c. Business Risk

The following are components of internal control, except

a. Control activities
b. Entity's risk assessment process
c. Business Risk
d. Control environment

b. Upon the conclusion of the audit, based on the results of substantive procedures and other
audit evidence obtained.

The auditor should consider whether the assessment of control risk is confirmed

a. Before the final audit program is completed.

b. Upon the conclusion of the audit, based on the results of substantive procedures and other
audit evidence obtained.
c. Upon completion of tests of controls.
d. Upon completion of understanding of internal control.
d. Company management changes inventory count tags and overstates ending inventory, while
understating cost of goods sold.

Which of the following is an example of fraudulent financial reporting?

a. An employee steals small tools from the company and neglects to return them, the cost is
reported as a miscellaneous operating expense.
b. An employee omitted an entry to record a bank transfer to cover cash shortage.
c. The treasurer diverts customer payments to his personal due, concealing his actions by
debiting an expense account, thus overstating expenses.
d. Company management changes inventory count tags and overstates ending inventory, while
understating cost of goods sold.

d. Defects

This waste can double the cost of one single product. If this cost is passed on to the consumer,
it will inflate production costs and could make the organization less competitive overall.

a. Excess motion
b. Unnecessary processing or paperwork
c. Waiting
d. Defects

a. Unnecessary processing or paperwork

This waste also includes using components that are more precise, complex, higher quality, or
expensive than required.

a. Unnecessary processing or paperwork

b. Defects
c. Waiting
d. Excess motion

a. Implement a policy that prevents the mailing of sales invoices to customers in the absence of
a properly approved shipping order and a bill of lading signed by the carrier.

The most effective control for ensuring that customers are billed only for goods shipped is to

a. Implement a policy that prevents the mailing of sales invoices to customers in the absence of
a properly approved shipping order and a bill of lading signed by the carrier.
b. Require that all shipments be approved by accounting.
c. Require that carriers sign properly completed bills of lading.
d. Prohibit goods from leaving the warehouse without being accompanied by a signed bill of
lading and a properly approved shipping order.

a. To ascertain whether results are consistent with established objectives and whether
operations are being carried out as planned.

The internal audit staff has been asked to conduct an audit of the purchasing department. Top
management feels that there have been some production bottlenecks recently because of out-
of-stock situations. What is the primary objective of the auditors in this assignment?

a. To ascertain whether results are consistent with established objectives and whether
operations are being carried out as planned.
b. To review the means of safeguarding assets and verifying the existence of such assets.
c. To appraise the economy with which resources are employed.
d. To review the reliability and integrity of financial and operating information.

c. Inadequacy of accounting records

Material misstatements may emanate from all of the following except?

a. Noncompliance with laws & regulations

b. Fraud
c. Inadequacy of accounting records
d. Error

d. There is likely to be other reliable external evidence to support the balances.

Auditor confirmation of accounts payable balances at the balance sheet date may be
unnecessary because

a. This is a duplication of cutoff tests.

b. Accounts payable balances at the balance sheet date may not be paid before the audit is
completed.
c. Correspondence with the audit client's attorney will reveal all legal action by vendors for
nonpayment.
d. There is likely to be other reliable external evidence to support the balances.

c. The audit should be designed to provide reasonable assurance that material errors and
frauds will be detected.

Which of the following statements best describes the auditor's responsibility regarding the
detection of material errors and frauds?
a. The auditor is responsible for the failure to detect material error and frauds only when such
failure results from the misapplication of PSA
b. Extended auditing procedures are required to detect unrecorded transactions even if there is
no eveidence that material errors and frauds may exist.
c. The audit should be designed to provide reasonable assurance that material errors and
frauds will be detected.
d. The auditor is responsible for the failure to detect material errors and fraud only when the
auditor fails to confirm receivables or observe inventories.

c. Verifying that all inventory owned by the client is on hand at the time of the count.

Which of the following is not one of the independent auditor's objectives regarding the audit of
inventories?

a. Ascertaining the physical quantities of inventory on hand.

b. Verifying that the client has used proper inventory pricing.
c. Verifying that all inventory owned by the client is on hand at the time of the count.
d. Verifying that inventory counted is owned by the client.

b. Approve the voucher for payment.

SB has an accounts payable system, in which a voucher is prepared after the invoice, purchase
order, requisition, and receiving report are verified. The next step in the system is to

a. Post the voucher amount to the expense ledger.

b. Approve the voucher for payment.
c. Cancel the supporting documents.
d. Enter the check amount in the check register.

a. With the management

The responsibility for adopting sound accounting policies, maintaining adequate internal control,
and making fair presentation in the financial statement rests

a. With the management

b. Equally with management and the auditor
c. With the internal audit department
d. With the independent auditor

a. The treasurer's office prepares checks for suppliers based on vouchers prepared by the
accounts payable department.

Which of the following observations, made during the preliminary survey of a local department
store's disbursement cycle, reflects a control strength?
a. The treasurer's office prepares checks for suppliers based on vouchers prepared by the
accounts payable department.
b. The receiving department is given a copy of the purchase order complete with a description
of goods, quantity ordered, and extended price for all merchandise ordered.
c. Individual department managers use pre-numbered forms to order merchandise from
vendors.
d. Individual department managers are responsible for the movement of merchandise from the
receiving dock to storage or sales areas as appropriate.

d. Repairs and maintenance expense.

Which of the following accounts would most likely be reviewed by the auditor to gain reasonable
assurance that additions to the equipment account are not understated?

a. Depreciation expense.
b. Gain on disposal of equipment.
c. Accounts payable.
d. Repairs and maintenance expense.

d. Tracing unit costs appearing on final inventory listings to auditor's copy of audited finished
goods unit costs.

For manufactured inventories, the valuation assertion is best tested by

a. Comparing unit prices with recent vendors' invoices.

b. Inquiring as to inventory obsolescence.
c. Testing for purchases and sales cutoff.
d. Tracing unit costs appearing on final inventory listings to auditor's copy of audited finished
goods unit costs.

d. Detection risk

The probability of an auditor's procedures leading to the conclusion that a material error does
not exist in an account balance when, in fact, such error does exist is referred to

a. Control risk
b. Inherent risk
c. Prevention risk
d. Detection risk

b. Misapplication of accounting policies

Which of the following is an example of an error?

a. Defalcation
b. Misapplication of accounting policies
c. Recording of transactions without substance
d. Suppression or omission of the effects of transactions from the records or documents

c. Computerized records of perpetual inventory are maintained.

Instead of taking a physical inventory count on the balance sheet date, the client may take
physical counts prior to the year end if internal controls are adequate and

a. Obsolete inventory items are segregated and excluded.

b. Inventory is slow moving.
c. Computerized records of perpetual inventory are maintained.
d. Accounting System error reports are generated for missing pre-numbered inventory tickets.

a. Auditors know how the amounts and disclosures in the financial statements were produced.

Which of the following is not an assurance that the auditors give to the parties who rely on the
financial statements?

a. Auditors know how the amounts and disclosures in the financial statements were produced.
b. Auditors gathered enough evidence to provide a reasonable basis for forming an opinion.
c. If the evidence allows the auditors to do so, auditors give assurance in the form of opinion, as
to whether the financial statements taken as a whole are fairly presented in conformity with
PFRS.
d. Auditors give assurance that the financial statements are accurate.

c. Examine recent invoices from vendors, along with freight bills and compare with client's unit
costs, as adjusted for freight and discount.

When auditing inventories of raw materials, purchased parts, and/or merchandise inventory, the
auditor's most effective means for evaluating the valuation assertion is to

a. Scan inventory listings for large extended amounts, and trace related quantities to auditor's
copy of the inventory tag or listing.
b. Compare purchases with prior year and with industry averages and account for significant
fluctuations.
c. Examine recent invoices from vendors, along with freight bills and compare with client's unit
costs, as adjusted for freight and discount.
d. Trace quantities from tags or count sheets to final inventory listings.
d. All goods owned at year end are included in the inventory balance.

When auditing merchandise inventory at year end, the auditor performs a purchase cutoff test to
obtain evidence that

a. All goods purchased before year end are received before the physical inventory count.
b. No goods held on consignment for customers are included in the inventory balance.
c. No goods observed during the physical count are pledged or sold.
d. All goods owned at year end are included in the inventory balance.

d. Accounts payable are understated at fiscal year end.

Which of the following errors is most likely to be detected by examining unrecorded expenditure
invoices on randomly selected dates during the month after fiscal year-end?

a. Expenses are overstated for the fiscal year just ended.

b. Sales are overstated for the current month.
c. Accounts payable are overstated at fiscal year end.
d. Accounts payable are understated at fiscal year end.

c. A misstatement is made and there is both knowledge of its falsity and the intent to deceive.

In the context of financial statement presentation, fraud occurs when

a. A misstatement is made and there is knowledge of its falsity but no intent to deceive.
b. The auditor fails to comply with PSA.
c. A misstatement is made and there is both knowledge of its falsity and the intent to deceive.
d. The auditor has an absence of reasonable care in the performance of the audit.

b. Inventory turnover rates

What form of analytical review might uncover the existence of obsolete merchandise?

a. Ratio of inventory to accounts payable.

b. Inventory turnover rates.
c. Comparison of inventory values to purchase invoices.
d. Decrease in the ratio of gross profit to sales.

b. Fraud

An intentional act by one or more individuals among management, employees, or third parties
which results in misrepresentation of financial statements refers to
a. Noncompliance with laws & regulations
b. Fraud
c. Illegal acts
d. Error

d. Implementing adequate accounting and internal control system.

The management responsibility to detect and prevent fraud and error is accomplished by

a. Issuing representation letter to the auditor.

b. Implementing adequate quality control system.
c. Having an annual audit of financial statements.
d. Implementing adequate accounting and internal control system.

c. Identification of obsolete or damaged merchandise to evaluate allowance for obsolescence.

When an Internal Auditor observed physical inventories at the main plant at year-end, it would
provide direct evidence to support which of the following objectives?

a. Accuracy of the priced out inventory.

b. Evaluation of lower of cost or market test.
c. Identification of obsolete or damaged merchandise to evaluate allowance for obsolescence.
d. Determination of goods on consignment at another location.

a. Management places substantial emphasis on meeting earnings projections.

Which of the following characteristics most likely would heighten an auditor's concern about the
risk of intentional manipulation of financial statements?

a. Management places substantial emphasis on meeting earnings projections.

b. Insiders recently purchased additional shares of the entity's stock.
c. The arte of change in the entity's industry is low.
d. Turnover of senior accounting personnel is low.

d. Reasonable assurance

The level of assurance provided by an audit of detecting a material misstatement is referred to

as

a. Negative assurance
b. Moderate assurance
c. Absolute assurance
d. Reasonable assurance

a. Determine whether a sample of entries in the purchase journal is supported by properly

executed purchase orders.

Which of the following would be the best procedure to determine whether purchases were
properly authorized?

a. Determine whether a sample of entries in the purchase journal is supported by properly

executed purchase orders.
b. Review and evaluate a flowchart of purchasing procedures.
c. Vouch payments for selected purchases to supporting receiving reports.
d. Discuss authorization procedures with personnel in the controller's and purchasing functions.

d. A trend analysis discloses: (1) sales increases of 50 percent and (2) cost of goods sold
increases of 25 percent.

Which of the following is an indicator of possible fraudulent financial reporting for the purpose of
inflating earnings?

a. A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of
goods sold to sales is .5 and (2) the industry average ratio of cost of goods sold to sales is .4.
b. A cross-sectional analysis of common size statements discloses: (1) the firm's ratio of cost of
goods sold to sales is .4 and (2) the industry average ratio of cost of goods sold to sales is .5.
c. A ratio analysis discloses: (1) sales of Php 50 million and (2) cost of goods sold of Php 25
million.
d. A trend analysis discloses: (1) sales increases of 50 percent and (2) cost of goods sold
increases of 25 percent.