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Question(s) / Instruction(s):

medium     “The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered.” This is an example of
     a.     unprofessional behavior.
     b.     an attitude of professional skepticism.
     c.     due diligence.
     d.     a rule in the AICPA’s Code of Professional Conduct.
medium     If the auditor were responsible for making certain that all the assertions of management in the statements were correct,
     a.     bankruptcies could no longer occur.
     b.     bankruptcies would be reduced to a very small number.
     c.     audits would be much easier to complete.
     d.     audits would not be economically feasible.
medium     The auditor’s best defense when existing material misstatements in the financial statements are not uncovered in the audit is that
     a.     the audit was conducted in accordance with generally accepted auditing standards.
     b.     the audit was conducted in accordance with generally accepted accounting principles.
     c.     client is guilty of contributory negligence.
     d.     the financial statements are client’s responsibility.
24.     Fraudulent financial reporting is often called
medium     a.     management fraud.
     b.     theft of assets.
     c.     defalcation.
     d.     employee fraud.

25.     Which of the following statements is true?
medium     a.     It is usually easier for the auditor to uncover fraud than errors.
     b.     It is usually easier for the auditor to uncover errors than fraud.
     c.     It is usually equally difficult for the auditor to uncover errors or fraud.
     d.     Usually, none of the above statements is true.
medium     In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is
     a.     greater for management fraud because managers are inherently smarter than employees.
     b.     greater for management fraud because of management’s ability to override existing internal controls.
     c.     greater for employee fraud because of the higher crime rate among blue collar workers.
     d.     greater for employee fraud because of the larger number of employees in the organization.
medium     Which of the following statements is correct with respect to the auditor’s responsibilities relative to the detection of indirect-effect illegal acts?
     a.     The auditor has no responsibility for searching for indirect-effect illegal acts.
     b.     The auditor has the same responsibility for searching for indirect-effect illegal acts as any other potential misstatement that may occur.
     c.     Auditors have responsibility for searching for any illegal act, whether direct-effect or indirect-effect.
     d.     None of the above is correct.
medium     When comparing the auditor’s responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility
     a.     more on discovering errors than employee fraud.
     b.     more on discovering employee fraud than errors.
     c.     equally on discovering either one.
     d.     on the senior auditor for detecting errors and on the manager for detecting employee fraud.
medium     If there is fraud involving the collusion of several employees that includes the falsification of documents, the chance that such a fraud would be uncovered in a normal audit is
     a.     zero.
     b.     unlikely.
     c.     50/50.
     d.     very high.
medium     When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor should
     a.     include audit procedures which have a strong probability of detecting illegal acts.
     b.     still include some audit procedures designed specifically to uncover illegalities.
     c.     ignore the topic.
     d.     make inquiries of management regarding their policies for detecting and preventing illegal acts and regarding their knowledge of violations, and then rely on normal audit procedures to detect errors, irregularities, and illegalities.
31.     When the auditor believes an illegal act may have occurred, it is necessary to
medium     a.     inquire of management, at a level above those likely to be involved with the illegality.
     b.     consult with the client’s legal counsel.
     c.     consider accumulating additional evidence to determine if there is actually an illegal act.
     d.     do all three of the above.

32.     When the auditor knows that an illegal act has occurred, the auditor must
medium     a.     report it to the proper governmental authorities.
     b.     consider the effects on the financial statements, including the adequacy of disclosure.
     c.     withdraw from the engagement.
     d.     issue an adverse opinion.
33.     Why does the auditor divide the financial statements into smaller segments?
medium     a.     Using the cycle approach makes the audit more manageable.
     b.     Most accounts have few relationships with others and so it is more efficient to break the financial statements into smaller pieces.
     c.     The cycle approach is used because auditing standards require it.
     d.     All of the above are correct.
34.     The most important general ledger account included in and affecting several cycles is the
medium     a.     cash account.
     b.     inventory account.
     c.     income tax expense and liability accounts.
     d.     retained earnings account.
35.     Management assertions are
medium     a.     implied or expressed representations about classes of transactions and the related accounts in the financial statements.
     b.     stated in the footnotes to the financial statements.
     c.     explicitly expressed representations about the financial statements.
     d.     provided to the auditor in the assertions letter, but are not disclosed on the financial statements.
36.     Which of the following statements is not true?
     a.     An example of a completeness assertion would be that the notes payable account in the balance sheet includes all such obligations of the entity.
     b.     An example of an existence/occurrence assertion would be that sales in the income statement represent exchanges of goods or services that actually took place.
     c.     An example of a rights/obligations assertion would be that amounts capitalized for leases in the balance sheet represent the cost of the entity’s rights to leased property.
     d.     An example of a valuation/allocation assertion would be that property, plant, and equipment are recorded at current market value.
37.     Which of the following statements is true?
medium     a.     The auditor’s objectives follow and are closely related to management assertions.
     b.     Management’s assertions follow and are closely related to the auditor’s objectives.
     c.     The auditor’s primary responsibility is to find and disclose fraudulent management assertions.
     d.     Assertions about presentation and disclosure deal with whether the accounts have been included in the financial statements at appropriate amounts.
medium     Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each account balance? (select all that apply)
     a.     The specific audit objectives are applicable to every account balance on the financial statements.
     b.     The general audit objectives are applicable to every account balance on the financial statements.
     c.     The general audit objectives are stated in terms tailored to the engagement.
     d.     The specific audit objectives are stated in terms tailored to the engagement.

39.     Which of the following statements about the existence and completeness objectives is not true?
medium     a.     The existence and completeness objectives emphasize opposite audit concerns.
     b.     Existence deals with overstatements and completeness deals with understatements.
     c.     Existence deals with understatements and completeness deals with overstatements.
     d.     The completeness objective deals with unrecorded transactions.
40.     Why are there more balance-related audit objectives than transaction-related audit objectives?
     a.     The auditor should accumulate more balance-related evidence than transaction-related evidence.
     b.     The auditor requires additional guidance in the accumulation of evidence regarding the financial statement balances.
     c.     Most of the management assertions relate to account balances, rather than transaction integrity.
     d.     None of the above.

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