VSA CPA Review

Auditing Audit Overview MCQs

1. 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.
b. Generally accepted auditing standards.
c. Internal control.
d. Information systems control.

2. The must conduct his audit work in accordance with

a. Generally accepted accounting principles.
b. Generally accepted auditing standards.
c. Internal control.
d. Information systems control.

3. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter.
b. Management letter.
c. Audit report.
d. Financial statements.

3. The document containing the understanding of the auditor and the client
a. Engagement letter.
b. Management letter.
c. Audit report.
d. Financial statements.

4. Which of the following is false?

a. The external auditor is concerned with the effectiveness of the internal control system of the audited
client.
b. The internal auditor is concerned with both effectiveness and efficiency of the internal control system of
the company.
c. Test of controls are mandatory at all times in an audit of financial statements.
d. Substantive procedures are the basis of the auditor’s opinion. Hence, they are mandatory.
6. When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the
predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the
successor with information that will assist the successor in determining
a. Whether the predecessor's work should be utilized.
b. Whether the company follows the policy of rotating its auditors.
c. Whether, in the predecessor's opinion, internal
control of the company has been satisfactory.
d. Whether the engagement should be accepted.

7. Having evaluated inherent risk and control risk, the auditor determines detection risk
a. As the complement of overall audit risk.
b. By performing substantive audit tests.
c. As a product of further study of the business and industry and application of analytical procedures.
d. At a level that equates the joint probability of inherent risk, control risk, and detection risk with overall
audit risk.

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

9. Which of the following risks is in the hands of the auditor?

a. Control risk
b. Detection risk
c. Inherent risk
d. Risk of material misstatement

10. What is the relationship of detection risk with the extent of substantive procedures?
a. Direct
b. Inverse
c. No relationship
d. Indirect relationship

15. An auditor evaluates the existing internal control and the rest of risk of material misstatement in order to
a. Determine the extent of substantive tests which must be performed.
b. Determine the extent of control tests which must be performed.
c. Ascertain whether irregularities are probable.
d. Ascertain whether any employees have incompatible functions.

16. An auditor's purpose for further testing of internal control procedures is to

a. Provide a basis for reducing the assessed level of control risk below that which resulted from the auditor's
initial understanding of internal control.
b. Reduce the risk that errors or fraud which are not prevented or detected by internal control are not
detected by the independent audit.
c. Provide assurance that transactions are executed in accordance with management's authorization and
accessed to assets is limited by a segregation of functions.
d. Provide assurance that transactions are recorded as necessary to permit the preparation of the financial
statements in conformity with GAAP.

17. Control testing is performed in order to determine whether or not

a. The assessed level of control risk can be justifiably reduced to below maximum.
b. Necessary controls are absent.
c. Incompatible functions exist.
d. Material dollar errors exist.

19. Which of the following is the correct order of performing the auditing procedures A through C below?
A= Tests of internal control procedures.
B= Planning.
C= Substantive tests.

a. ABC.
b. ACB.
c. BAC.
d. BCA.

20. Which of the following are components of the risk of material misstatement?
a. Control risk only
b. Inherent risk only
c. Inherent risk and control risk
d. Inherent risk, control risk and detection risk.

21. To best test existence, an auditor would sample from the:

a. General Ledger to source documents.
b. General Ledger to the financial statements.
c. Source documents to the general ledger.
d. Source documents to journals.

22. Tests of controls do not ordinarily address:

a. By whom a control was applied.
b. How a control was applied.
c. The consistency with which a control was applied.
d. The cost effectiveness of the way a control was applied.

23. What is the opinion of the auditor if the financial statements contain a material misstatement that is not pervasive
to the entire financial statements taken as a whole?
a. Unqualified
b. Qualified
c. Adverse
d. Disclaimer

24. What is the opinion of the auditor if the financial statements are contain a departure from GAAP that is pervasive
to the entire financial statements taken as a whole?
a. Unqualified
b. Qualified
c. Adverse
d. Disclaimer

25. What is the opinion of the auditor if the audit of financial statements resulted into scope limitation that prevents the
auditor from having a basis for opinion?
a. Unqualified
b. Qualified
c. Adverse
d. Disclaimer
PRACTICE SET

1. Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
A. The prospective client has fired its prior auditor.
B. The CPA lacks a thorough understanding of the prospective client's operations and industry.
C. The CPA is unable to review the predecessor auditor's working papers.
D. The prospective client is unwilling to make financial records available to the CPA.

2. To best test existence, an auditor would sample from the:

A. General Ledger to source documents.
B. General Ledger to the financial statements.
C. Source documents to the general ledger.
D. Source documents to journals.

3. The risk that the auditors' procedures will lead them to conclude that a material misstatement does not exist in an
account balance when in fact such a misstatement does exist is referred to as:
A. Account risk.
B. Control risk.
C. Detection risk.
D. Inherent risk.

4. A client's internal control appears strong, but the CPA has elected not to perform any tests of controls. The planned
assessed level of control risk is at what level?
A. Zero.
B. Low.
C. Moderate.
D. Maximum.

5. Which of the following is not a primary procedure auditors use to obtain sufficient knowledge about the design of the
relevant controls and to determine whether they have been implemented (placed in operation)?
A. Previous experience with the entity.
B. Inquiries of appropriate management personnel.
C. Performance of substantive procedures.
D. Inspection of document and records.

6. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor
regarding the predecessor's:
A. Awareness of the consistency in the application of generally accepted accounting principles between accounting
periods.
B. Evaluation of all matters of continuing accounting significance.
C. Opinion of any subsequent events occurring since the predecessor's audit report was issued.
D. Understanding as to the reasons for the change of auditors.

7. An auditor's purpose for performing tests of controls is to provide reasonable assurance that:
A. Controls are operating effectively.
B. The risk that the auditor may unknowingly fail to modify the opinion on the financial statements is minimized.
C. Transactions are executed in accordance with management's authorization and access to assets is limited by a
segregation of functions.
D. Transactions are recorded as necessary to permit the preparation of the financial statements in conformity with
generally accepted accounting principles.

8. What is the opinion of the auditor if the financial statements contain a material misstatement that is not pervasive to
the entire financial statements taken as a whole?
A. Unqualified
B. Qualified
C. Adverse
D. Disclaimer

9. What is the opinion of the auditor if the financial statements are contain a material misstatement that is pervasive to
the entire financial statements taken as a whole?
A. Unqualified
B. Qualified
C. Adverse
D. Disclaimer

10. What is the opinion of the auditor if the financial statements contain a departure from GAAP that is not pervasive to
the entire financial statements taken as a whole?
A. Unqualified
B. Qualified
C. Adverse
D. Disclaimer

11. What is the opinion of the auditor if the financial statements are contain a departure from GAAP that is pervasive to
the entire financial statements taken as a whole?
A. Unqualified
B. Qualified
C. Adverse
D. Disclaimer

12. What is the opinion of the auditor if the audit of financial statements resulted into scope limitation that prevents the
auditor from having a basis for opinion?
A. Unqualified
B. Qualified
C. Adverse
D. Disclaimer

13. To test for unsupported entries in the journals, the direction of audit testing should be to the:
A. Ledger entries.
B. Journal entries.
C. Original source documents.
D. Financial statements.

14. Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The
best place to set forth these arrangements is in:
A. A memorandum to be placed in the permanent section of the auditing working papers.
B. An engagement letter.
C. A client representation letter.
D. A confirmation letter attached to the constructive services letter.
15. The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is:
A. The auditors' preliminary estimate of the largest amount of misstatement that would be material to any one of the
client's financial statements.
B. The auditors' preliminary estimate of the smallest amount of misstatement that would be material to any one of the
client's financial statements.
C. The auditors' preliminary estimate of the amount of misstatement that would be material to the client's balance
sheet.
D. An amount that cannot be quantitatively stated since it depends on the nature of the item.

16. Tracing from source documents forward to ledgers is most likely to address which assertion related to posted entries:
A. Completeness.
B. Existence.
C. Rights.
D. Valuation.

17. Which of the following is not used by auditors to establish the completeness of recorded assets?
A. Assessing control risk.
B. Tracing from source documents to entries in the accounting records.
C. Performing analytical procedures.
D. Vouching transactions.

18. Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the
predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins'
decision concerning the:
A. Adequacy of the preplanned audit program.
B. Ability to establish consistency in application of accounting principles between years.
C. Apparent scope limitation.
D. Integrity of management.

19. The auditor faces a risk that the audit will not detect material misstatements in the financial statements. In regard to
minimizing this risk, the auditor primarily relies on:
A. Substantive procedures.
B. Tests of controls.
C. Internal control.
D. Statistical analysis.

20. An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This
test is performed to satisfy the audit objective of:
A. Accuracy.
B. Completeness.
C. Control.
D. Existence.

END