1. F: Under direct control should be independently.
2. F: Domestic companies should be companies under its jurisdiction
3. F: Senate should be Congress
4. T
5. F: GAAS should be GAAP.
6. F: Overstatements should be understatements
7. T.
8. T
9. F: Relevance should be competence and competence should be relevance
10. F: Second should be third.
11. F: Internal should be independent
12. T
13. F: Immediately after should be Before
14. F: Delete not.
15. T.
16. F: Cannot should be may.
17. T.
18. T.
19. T
20. F: Do not allow should be allow

Multiple Choice:
Required: Indicate the best answer choice for each of the following.
1. Within the generally accepted auditing standards, the general standards relate primarily to:
a) qualifications of the auditor and the quality of the auditor’s work.
b) qualifications of the auditor.
c) the relationship between GAAS and generally accepted accounting principles.
d) the fairness of the financial statements.
e) the general distribution of audit reports.

2. The essence of the due care standards is that the auditor should not be quilty of:
a) bias.
b) objectivity.
c) errors in judgment.
d) fraud.
e) negligence.

3) Gross negligence can best be defined as:
a) fauilure to exercise due care.
b) misrepresentation.
c) failure to exercise even slight care.
d) criminal fraud.
e) collusion.

4) Section 18 liability is relatively narrow in scope because it relates only to a false or misleading
statement in documents “filed” with the:
a) FASB
b) IRS
c) SEC
d) AICPA
e) IMA

5) For a particular assertion, contril risk is the risk that:
a) a material misstatement will occur in the accounting process.
b) controls will not detect a material misstatement that occurs.
c) audit procedures will fail to detect a weak control system.
d) the prescribed control procedures will not be applied uniformily.
e) an immaterial misstatement will occur in the accounting process.

6) Which of the following would not be an important factor in the understanding an entity’s industry,
regulatory environment and other external factors?
a) the competitive environment.
b) the political environment.
c) relevant accounting pronouncements.
d) technological developments
e) the nature of the entity.

7) Which of the following would not be considered underlying accounting data?
a) sales invoices.
b) the general ledger
c) books of original entry
d) accounting manuals
e) accounts recievable ledger

8) Which of the following would not be considered corroborating information?
a) canceled checks held by the client
b) confirmations from vendors
c) oral evidence obtained from client personnel
d) the accountant’s work sheet
e) other information obtained by the auditor

9) The importance of the accept/reject decision for a particular client si reflected in the inclusion of
“acceptance and continuation of clients” as:
a) the subject of Statement of Financial Accounting Standards 96.
b) the subject of Statement of Auditing Standards 7.
c) a separate rule in the AICPA Code of Conduct.
d) an explicit part of the General Standards
e) one fo the quality control elements for CPA firms.

10) In the communication with the predecessor auditor, the potential successor should make specific and reasonable inquiries regarding matters that may affect the decision to accept the engagement. Which of
the following items are likely to be included in the inquires?
a) the integrity of management
b) disagreements with management about accounting matters
c) specific areas of audit difficulty and cost
d) the predecessor’s understanding of the reasons for a change in auditors
e) disagreements with management about auditing matters

11) The quality control element(s) most directly related to the auditor’s assessment of her competence to
perform the audit is (are):
a) assigning personnel to the engagement and consulation
b) assigning personnel to the engagement
c) consulation
d) independence
e) supervision

12) In making judgments about materiality at the account balance level, the auditor must consider the
relationship between it and financial statement materiality. This should lead the auditor to plan the audit
to detect misstatements that:
a) are individually material to the statements taken as a whole
b) are individually immaterial to the statements taken as a whole
c) may be immaterial individually, but may aggregate with misstatements in other accounts to a material
level.
d) bring the cumulative total of known misstatements to the level of materiality established by
management
e) are individually material to the account balance

13) The auditor has choosen the preliminary strategy of lower assessed control risk. Which of the
following is not a validly specified component of this strategy?
a) use planned assessed level of control risk or moderate or low
b) plan tests of controls, probably testing computer controls embedded in the client’s system
c) plan restrictive substantive tests
d) plan few, if any, tests of controls
e) use a planned assessed level of analytical procedures risk at a high level

14) For which of the following accounts is the primarily substantive testing strategy least likely?
a) bonds payable
b) trade accounts payable
c) equipment
d) capital stock
e) machinery

15) Which of the following risk factors is an example of an assertion specific inherent risk factor?
a) Management override of internal controls
b) The impact of technological developments
c) Inadequate accounting skills
d) Management turnover
e) Contentious accounting issues.

16) Which of the following would be considered the most conservative settings for inherent risk and
control risk?
Inherent Risk Control Risk
a) 1.01.0
b) 1.00.0
c) 0.00.0
d) 0.01.0
e) 0.50.5

17) Which of the following factors are included in a firm’s control environment?
Board of Director Integrity and EthicalCommitment
Valuesto Competence
a) NoYesYes
b) YesYesYes
c) YesNoNo
d) YesYesNo
e)YesNoYes

18) “A significant deficiency, or combination of significant deficiencies, that results is more than a
remote likelihood that a material misstatement of the annual or interim financial statements will not be
prevented or detected” is the definition of:
a) a material weakness
b) a significant deficiency
c) a control defiency
d) a material misstatement
e) an internal control deficiency

19) In PPS sampling plans, the risk of incorrect rejection is:
a) stated explicity in the mode.
b) not controlled at all
c) directly related to sample size
d) controlled indirectly by specifying anticipated misstatement
e) always quantified

20) In the audit risk model, audit sampling apllies to:
a) detection risk
b) inherent risk and control risk
c) control risk and detection risk
d) inherent risk and detection risk
e) control risk