Choose the most correct answer and write its letter in the answer sheet:
1. Which of the following host
describes the concept of audit risk?
A. The risk
of the auditor being sued because of association with an
audit client.
B. The overall risk
that a material misstatement exists in the financial statements.
C. The risk that
auditors use audit procedures that arc inappropriate.
D. The risk
that the auditor will provide an unqualified opinion on financial statements
that are in fact, materially misstated.
ans: [C]
2. An auditor
who accepts an audit engagement and does not possess
expertise with respect to the business entity's industry, should
A. Obtain
a knowledge of matters that relate to the nature of the entity's
business
B. Engage
financial experts familiar with the nature of the business entity.
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.
3. ISA 315 Identifying
and Assessing the Risks of Material Misstatement through understanding
the Knurs and Its Environment sets out the five components of
internal control.
Which of the following is NOT set out as a component of internal
control within ISA 315?
A.
Control environment
B.
The information system relevant to financial reporting
C.
Human resource policies and practices
D.
The risk assessment in Stores department
ans: [ ]
4. When obtaining an
understanding of the entity and its environment, the auditor should obtain an understanding
of internal controls primarily to
A. Identify
areas of relatively high risk of misstatement and plan the audit
accordingly.
B.
Provide suggestions for improvement to the client.
C.
Serve as a basis for setting audit risk and materiality.
D.
Decide whether to perform an audit for the client.
5. Before accepting an
engagement to audit a new client, an auditor is required to
A. Make inquiries
of the predecessor auditor.
B. Tell the client
whether or not the auditor is willing to issue a "clean" opinion.
C. Prepare a memorandum
setting forth the stalling requirements and documenting the
preliminary audit
plan
D. Become a member of the client’s
board of directors
ans: [ ]
6. Preliminary engagement
activities include
A. Evaluating
internal controls
B. Assessing audit
risk at the account balance level.
C. Setting
materiality.
D. Performing
background checks on top management.
ans: [ ]
7. Which of the
following is responsible for establishing a private company’s internal control?
A.
Auditors
B.
Management and auditors
C.
Management.
D.
Committee of Sponsoring Organizations
ans: [ ]
8. Which of the following
is not one of the three primary objectives of effective
internal control?
A.
Reliability of financial reporting
B.
Assurance of elimination of business risk
C.
Efficiency and effectiveness of operations
D.
Compliance with laws and regulations
ans: [ ]
9. The Public
Company Accounting Oversight Board states that reasonable assurance allows
a:
A. High likelihood
that material misstatements will not be prevented or detected by
internal control
B. Small
likelihood of ineffective internal controls.
C. Remote
likelihood that material misstatements will not be prevented or detected by
internal control
D. Likelihood that
material misstatements will not be prevented or detected by internal control.
ans: [C]
10. Two key concepts
that underlie management’s design and implementation of internal control arc
A.
Costs and materiality.
B.
Absolute assurance and costs.
C.
Collusion and materiality
D.
Inherent limitations and reasonable assurance.
ans: [ ]
11. Internal controls can
never be considered as absolutely effective because.
A. Not all
organizations have internal audit departments.
B. Controls
are designed to prevent and detect only material misstatements.
C. Their
effectiveness is limited by the competency and dependability of
employees.
D. Internal
controls prevent separation of duties.
ans: [ ]
12. A major control available in a
small company, which might not be feasible in a big company, is:
A. A wider segregation
of duties.
B The
owner-manager’s personal interest and close relationship with personnel.
C. A voucher
system.
D. Fewer
transactions to process
ans: [B]
13. An act of two or more
employees to steal assets or misstate records is frequently referred to as.
A. A material weakness.
B. A control deficiency.
C. A significant deficiency
D. Collusion.
ans: [ ]
14. Sarbanes-Oxley requires
management to issue an internal control report that includes two specific
items. Which of the following is one of these two requirements?
A. A statement that
management, the board of directors, and the external auditors are
jointly responsible for establishing and maintaining an adequate internal
control structure and procedures for financial reporting.
B. A statement that management
is responsible for establishing and maintaining an adequate internal
control structure and procedures for financial reporting.
C. A statement that management and
the board of directors are jointly responsible for establishing and maintaining an adequate
internal control structure and procedures for financial reporting.
D. A statement that the
external auditors are solely responsible.
ans: [B]
15. Which of management’s
concerns with respect to implementing internal controls is the auditor primarily
concerned?
A.
Compliance with applicable laws and regulations.
B.
Reliability of financial reporting.
C.
Effectiveness of operations.
D.
Efficiency of operations
ans: [ ]
16. To issue a report on
internal control over financial reporting for a public company, an
auditor must
A. Evaluate
management’s assessment process.
B. Independently
assess the design and operating effectiveness of internal control.
C. Evaluate
management’s assessment process and independently assess the design
and operating effectiveness of internal control
D. Test
controls over significant account balances
ans: [ ]
17. Which of
the following activities would be less likely to strengthen a company’s
internal control?
A.
Separating accounting from other financial operations.
B.
Maintaining insurance for fire and theft.
C.
Fixing responsibility for the performance of employee duties.
D.
Carefully selecting and training employees.
18. Management must disclose
material weaknesses in internal control
A. Whenever
the weakness is deemed significant to a single class of transactions.
B. Whenever
the weakness is significant to overall financial reporting
objectives.
C. If the
weakness exists at the end of the year.
D. Only if
the auditor identifies the weakness as significant.
ans: [ ]
19. Internal controls can never
he regarded as completely effective. Even if company personnel could
design an ideal system, its effectiveness depends on the
A. Adequacy
of the computer system.
B. Proper
implementation by management.
C. Ability of the
internal audit staff to maintain it.
D. Competency and
dependability of the people using it.
ans: [D]
20. The essence of an effectively controlled
organization lies in the:
A. Effectiveness
of its independent auditor,
B. effectiveness
of its internal auditor.
C. Attitude of
its employees.
D. Attitude of
its management.
ans: [ ]
21. Which of the following statements
is correct with respect to separation of duties?
A. It is
permissible to allow an employee to open cash receipts and record those
receipts
B. Employees who
authorize transactions should have recording responsibility for these transactions.
C. Employees should
not have temporary and permanent custody of assets
D. Employees
who authorize transactions should not have custody of related assets
ans: [D]
22. The most important type of protective
measure for safeguarding assets is
A. The
use of physical precautions
B. Adequate
documentation.
C. Adequate
separation of duties among personnel
D. Proper
authorization of transactions
ans: [ ]
23. Which of the
following is not one of the levels of an absence of internal controls? ‘
A. Material
weakness
B. Significant deficiency
C. Control deficiency
D. Major deficiency
ans: [ ]
24. Smaller public companies face challenges implementing
effective internal control due to.
A Reduced importance
B. Limited resources
:
C. A lack of
expertise
D. Limited
available guidance.
ans: [ ]
25.
26.
27. Which of the
following best describes the inherent imitations that should be recognized by
an auditor when considering the potential effectiveness of internal
control?
A. Procedures designed to assure
the execution and recording of transactions in accordance with proper
authorizations are effective against irregularities perpetrated by management.
B. The benefits expected to
be derived from effective internal accounting control usually do
not exceed the costs of such control.
C. Procedures that depend on
segregation of duties can be circumvented by collusion.
D. Competent and honest client
personnel provide an environment conducive to accounting control and
provide absolute assurance that effective control will be achieved.
ans: [ ]
28. Which of the following is not
one of the sub components of the control environment?
A. Management’s
philosophy and operating style
B. Organizational
structure
C.
Commitment to competence
D. Adequate
separation of duties
ans: [ ]
29 Proper segregation of
functional responsibilities calls for separation of
A.
Authorization, execution, and payment
B. Custody, execution, and reporting
C. Authorization,
recording, and custody
D. Authorization, payment, and
recording
ans: [C]
30. Internal controls are
not designed to provide reasonable assurance that
A. Access to assets is permitted
only in accordance w ith management's authorization
B. Company personnel comply with
applicable rules and regulations
C. All frauds will be
eliminated
D. Transactions are executed in accordance with management's
authorization
ans: [C]
31. Which of the following
statements is correct regarding an accountant’s working papers?
A. The accountant owns the
working papers but generally may not disclose them without the client’s consent
or a court order.
B. The accountant owns the
working papers and generally may disclose them as the accountant sees
fit.
C. The client owns the working papers hut
the accountant has custody of them until the accountant's bill is paid in
full.
D. The client owns the working
papers hut, in the absence of the accountant's consent, may
not disclose them without a court order
ans: [A]
32. What is the responsibility
of an incoming auditor with respect to communicating with
the outgoing auditor in connection with a prospective
new audit client?
A. The incoming auditor should
contact the outgoing auditor regardless of whether the prospective client
authorized contact
B. The incoming auditor has no
responsibility to contact the outgoing auditor
C. The incoming auditor should
obtain permission from the prospective client to contact the predecessor auditor
D. The incoming auditor need not
contact the outgoing auditor if the incoming auditor is aware of all available
relevant facts.
ans: [ ]
33. The first auditors
of a company are usually appointed by
A. Directors
of the Company
B.
Shareholders of the Company
C.
Members of the audit committee
D.
Corporate Affairs Commission
ans: [A]
34. Which one of the
following is NOT a duty of the auditor?
A. Duty to report to the members
B. Duty to
sign the audit report
C. Duty to report on any violation
of law
D. Duty to report to the
company’s bankers
ans: [ ]
35. Assuming that
it is not the first appointment of the auditor, who is responsible
for the appointment of the auditor?
A. The board of directors in a board meeting
B. The audit committee
C. The
shareholders in a general meeting
D. The
managing director
ans: [C]
36. The independent
auditor's primary responsibility is to
A. The directors
B The
shareholders
C.
The company's creditors (payables)
D.
The company's bank
ans: [B]
34. If the independent auditors
decide that the work performed by the internal auditor may have a bearing on
their own procedures, they should consider the internal auditor's
A.
Independence and review skills
B.
Competence and objectivity
C.
Efficiency and experience
D.
Training and supervisory skills
ans: [ ]
38. In
assessing the objectivity of internal auditors, an independent auditor should
A.
Evaluate the quality control program in effect for the
internal auditors.
B.
Examine documentary evidence of the work performed by the
internal auditors.
C.
Determine the organizational level to which the internal
auditors report.
D.
Test a sample of the transactions and balances that the
internal auditors examined
ans: [ ]
39. The purpose
of segregating the duties of hiring personnel and distributing payroll checks
is to separate the
A. Human
resources function from the controllership function
B. Operational
responsibility from the recordkeeping responsibility.
C.
Authorization of transactions from the custody of related assets
D.
Administrative controls from the internal accounting controls'
ans: [ ]
40. Internal
auditing is most appropriately described as if
A. A
management control
B.
An extension of the accounting process
C.
An evaluation methodology for the controller
D. A service to the board of directors
ans: [A]
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