Auditing Practice Exam 2 MCQS

The primary objective of tests of controls is to determine whether

A. Financial statements follow GAAP

B. Internal controls operate as designed

C. Audit quality standards are met

D. Transactions are properly valued

Internal controls operate as designed

 If assessed control risk is increased, maintaining the same overall audit risk requires the auditor to

A. Increase inherent risk

B. Reduce detection risk

C. Reduce substantive testing

D. Increase materiality

Reduce detection risk

A system of internal control is best described as

A. Applicable only to public companies

B. A guarantee of regulatory compliance

C. Policies and procedures providing reasonable assurance of objectives

D. Designed and implemented by auditors

Policies and procedures providing reasonable assurance of objectives

 Auditing standards require auditors to presume fraud risk exists in

A. Disclosures

B. Revenue recognition

C. Payroll accruals

D. Liability estimates

Revenue recognition

 Communication of material weaknesses to governance must be

A. Oral only

B. Written only

C. Either oral or written

D. Informal

Written only

The combination of audit procedures used to gather sufficient evidence in a cycle is called the

A. Testing mix

B. Evidence mix

C. Audit strategy

D. Procedure plan

Evidence mix

 When control testing supports expected operation, the auditor should use

A. Lower assessed control risk

B. Higher assessed control risk

C. Unchanged assessed control risk

D. Either higher or lower risk

Lower assessed control risk

Low performance materiality combined with high inherent and control risk will cause tests of details to

A. Decrease

B. Remain unchanged

C. Increase

D. Be eliminated

Increase

Understanding internal control requires evaluating its

A. Design and operating effectiveness

B. Design and efficiency

C. Implementation and frequency

D. Operating effectiveness only

Design and operating effectiveness

 Risk assessment procedures do NOT

A. Identify risk of misstatement

B. Support audit planning

C. Provide sufficient evidence for an opinion

D. Aid understanding of the entity

Provide sufficient evidence for an opinion

Results of control tests primarily influence the auditor’s

A. Use of analytical procedures

B. Extent of tests of details

C. Audit report wording

D. Staffing decisions

Extent of tests of details

 Before finalizing internal control assessment, the auditor must

A. Test controls only

B. Perform substantive testing only

C. Test controls and perform substantive tests

D. Rely solely on risk assessment

Test controls and perform substantive tests

Two common indicators of revenue fraud include

A. Analytical anomalies and documentation issues

B. Asset theft and analytics

C. Missing evidence and vague responses

D. Analytical procedures and confirmations

Analytical anomalies and documentation issues

Auditing automated controls electronically is known as

A. Auditing around the computer

B. Auditing through the computer

C. Parallel simulation

D. Embedded audit modules

Auditing through the computer

 Which is NOT an advantage of generalized audit software?

A. Speed of testing

B. Minimal customization

C. Client-specific customization

D. Ease of learning

Client-specific customization

Responsibility for internal control effectiveness under PCAOB standards rests with

A. The audit committee

B. The board of directors

C. Management

D. External auditors

Management

 Implementing a new system in one area while others continue using the old system is called

A. Online testing

B. Parallel testing

C. Pilot testing

D. Control testing

Pilot testing

When fraud risk indicators arise, auditors should

A. Withdraw immediately

B. Gather additional evidence and consult

C. Report directly to regulators

D. Ignore immaterial issues

Gather additional evidence and consult

 Primary responsibility for preventing fraud through internal controls lies with

A. Auditors

B. Audit committees

C. Management

D. Regulators

Management

Which situation most increases fraud risk?

A. Job rotation emphasis

B. Performance-based evaluations

C. Pressure to meet earnings expectations

D. Budget variance explanations

Pressure to meet earnings expectations

Smaller organizations are more susceptible to fraud due to limited

A. Financial reporting standards

B. Compensation systems

C. Segregation of duties

D. Technology

Segregation of duties

. Fingerprint access controls are an example of

A. Physical controls

B. IT controls

C. Preventive controls

D. Detective controls

Preventive controls

 Which test yields the broadest range of audit evidence?

A. Tests of controls

B. Substantive tests of transactions

C. Risk assessment procedures

D. Tests of details of balances

Substantive tests of transactions

 If control risk was underestimated, the auditor should

A. Lower inherent risk

B. Increase control risk

C. Lower acceptable audit risk

D. Increase inherent risk

Increase control risk

 Effective analytical procedures may allow the auditor to

A. Eliminate balance testing

B. Reduce other substantive procedures

C. Avoid transaction testing

D. Increase sample sizes

Reduce other substantive procedures

Which represents a material weakness in internal control?

A. Monthly bank reconciliations

B. Audit committee turnover

C. CEO retirement

D. CFO embezzlement indictment

CFO embezzlement indictment

Control deficiencies are evaluated based on the

A. Amount and classification only

B. Likelihood only

C. Amount, likelihood, and classification

D. Classification only

Amount, likelihood, and classification

Presentation and disclosure objectives are addressed during

A. Planning

B. Substantive testing

C. Completion and reporting

D. Control testing

Completion and reporting

Firewalls primarily protect against

A. Internal data errors

B. Unauthorized external access

C. Programming mistakes

D. Poor documentation

Unauthorized external access

The biggest internal control challenge for small entities is often

A. Lack of documentation

B. Inadequate segregation of duties

C. Unclear authority lines

D. Insufficient compensation

Inadequate segregation of duties

 Most occupational frauds are uncovered through

A. Internal audits

B. Tips

C. Law enforcement

D. Confessions

Tips

Ongoing evaluation of internal control effectiveness is called

A. Oversight

B. Monitoring

C. Verification

D. Risk assessment

Monitoring

Which statement about assets and fraud risk is correct?

A. Fixed assets are rarely stolen

B. Repairs are sometimes capitalized improperly

C. Intangibles pose no fraud risk

D. Assets need not be inventoried

Repairs are sometimes capitalized improperly

Risk that affects the auditor after the engagement concludes is

A. Audit risk

B. Control risk

C. Engagement risk

D. Inherent risk

Engagement risk

 Encryption is used to

A. Restrict internal access

B. Secure transmitted and stored data

C. Prevent hacking

D. Replace firewalls

Secure transmitted and stored data

 Risk of misstatement before considering controls is

A. Control risk

B. Inherent risk

C. Material risk

D. Detection risk

Inherent risk

Tests of details of balances focus primarily on

A. Expense accounts

B. Balance sheet accounts

C. Revenue accounts

D. Cash flow items

Balance sheet accounts

 When inherent risk is low, the auditor should generally

A. Increase evidence

B. Expand planning

C. Assign senior staff

D. Do none of the above

Do none of the above

Understanding controls helps auditors primarily to

A. Detect fraud

B. Assess inherent risk

C. Assess risk of material misstatement

D. Perform analytics

Assess risk of material misstatement

 Identified fraud risks must be treated as

A. Immaterial

B. Significant risks

C. Ignored unless proven

D. Reasons to withdraw

Significant risks

Fraud categories include

A. Financial reporting only

B. Asset misappropriation only

C. Both financial reporting and asset misappropriation

D. Neither

Both financial reporting and asset misappropriation