1. Question 4-1
Which of the following statements concerning noncompliance by clients is correct?   
A. 
An auditor's responsibility to detect noncompliance that has a direct and material effect on the financial statements is the same as that for errors and frauds.
B. 
An audit in accordance with generally accepted auditing standards normally includes audit procedures specifically designed to detect noncompliance that has an indirect but material effect on the financial statements.
C. 
An auditor considers noncompliance from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions.
D. 
An auditor has no responsibility for noncompliance that has an indirect effect on the financial statements.

2. Question 4-2
Which of the following statements best describes auditors' responsibility to detect errors and frauds?   
A. 
Auditors have no responsibility to detect errors and frauds because auditors are not insurers and an audit does not constitute a guarantee.
B. 
Auditors are responsible to detect material errors but have no responsibility to detect material frauds that are concealed through employee collusion or management override of the internal control structure.
C. 
Auditors have no responsibility to detect errors and frauds unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated.
D. 
Auditors should design an audit to provide reasonable assurance of detecting errors and frauds that are material to the financial statements.

3. Question 4-3
The probability that an audit team will give an inappropriate opinion on financial statements best describes   
A. 
Audit risk.
B. 
Inherent risk.
C. 
Control risk.
D. 
Detection risk.

4. Question 4-4
If control risk increases and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct? 
A. 
Audit risk will decrease.
B. 
Inherent risk will increase.
C. 
Detection risk will decrease.
D. 
Detection risk will increase.

5. Question 4-5
An audit team uses the assessed risk of material misstatement to   
A. 
Evaluate the effectiveness of the entity's internal control policies and activities.
B. 
Identify transactions and account balances where inherent risk is at the maximum.
C. 
Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.
D. 
Determine the acceptable level of detection risk for financial statement assertions.

6. Question 4-6
Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would   
A. 
Decrease substantive testing.
B. 
Decrease detection risk.
C. 
Increase inherent risk.
D. 
Increase materiality levels

7. Question 4-7
The acceptable level of detection risk is inversely related to the   
A. 
Assurance provided by substantive tests.
B. 
Risk of misapplying audit procedures.
C. 
Preliminary judgment about materiality levels.
D. 
Risk of failing to discover material misstatements.

8. Question 4-8
Generally accepted auditing standards state that analytical procedures   
A. 
Should be applied in the planning and final review stages of the audit and as a substantive test during the audit.
B. 
Should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit.
C. 
Should be applied in the planning stage and can be applied as a substantive test in the final review stage.
D. 
Should be applied in the final review stage and can be applied as a substantive test in the planning stage.

9. Question 4-9 In the planning stage, analytical procedures are used to
Identify potential problem areas.
B. 
Provide direct evidence about the balances in accounts.
C. 
Determine the mathematical correctness of the financial statements.
D. 
All of the above.

10. Question 4-10
Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should   
A. 
Consider the matter a scope limitation.
B. 
Perform additional audit procedures to investigate the matter further.
C. 
Intensify the audit with the expectation of detecting management fraud.
D. 
Withdraw from the engagement.

11. Question 4-11
Analytical procedures used in planning an audit should focus on   
A. 
Reducing the scope of tests of controls and substantive tests.
B. 
Providing assurance that potential material misstatements will be identified.
C. 
Enhancing the auditor's understanding of the client's business.
D. 
Assessing the adequacy of the available evidential matter.

12. Question 4-12
The type of financial analysis that expresses balance sheet accounts as percentages of total assets is known as:   
A. 
Horizontal analysis.
B. 
Vertical analysis.
C. 
Net worth analysis.
D. 
Expenditure analysis.

13. Question 5-1
In an issuer audit, an audit team's responsibility would not include   
A. 
assessing the effectiveness of a client's internal controls.  
B. 
communicating internal control deficiencies.
C. 
designing client's internal controls.
D. 
documentation of understanding of a client's internal controls.

14. Question 5-2
Which of the following is not a component of internal controls?   
A. 
Control environment
B. 
Control activities
C. 
Inherent risk
D. 
Monitoring

15. Question 5-3
Which of the following is a factor in the control environment?   
A. 
Segregation of duties
B. 
Information processing
C. 
Performance reviews
D. 
Management's philosophy and operating style

16. Question 5-4
The "obtaining an understanding" work phase of internal control evaluation would not give auditors an overall acquaintance with the client's   
A. 
control environment.
B. 
information and communication system.
C. 
control activity effectiveness.
D. 
monitoring activities.

17. Question 5-5
When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?   
A. 
Test the operating effectiveness of such controls in the current audit.
B. 
Document that reliance and proceed with the original audit strategy.
C. 
Inquire of management as to the effectiveness of the controls.
D. 
Report the reliance in the report on internal controls.

18. Question 5-6
Which of the following procedures is considered a test of controls?   
A. 
An auditor reviews the entity's check register for unrecorded liabilities.
B. 
An auditor evaluates whether a general journal entry was recorded at the proper amount.
C. 
An auditor interviews and observes appropriate personnel to determine segregation of duties.
D. 
An auditor reviews the audit workpapers to ensure proper sign-off.

19. Question 5-7
Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?   
A. 
Require all employees to record arrival and departure by using the time clock.
B. 
Have a payroll clerk recalculate all time cards.
C. 
Require all employees to sign their time cards.
D. 
Require employees to have their direct supervisors approve their time cards.

20. Question 5-8
Which of the following should an auditor do when control risk is assessed at the maximum level?   
A. 
Perform fewer substantive tests of details
B. 
Perform more tests of controls
C. 
Document the assessment
D. 
Document the control structure more extensively

21. Question 5-9
Which of the following statements is correct regarding internal control?   
A. 
A well-designed internal control environment ensures the achievement of an entity's control objectives.
B. 
An inherent limitation to internal control is the fact that controls can be circumvented by management override.
C. 
A well-designed and operated internal control environment should detect collusion perpetrated by two people.
D. 
Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.