1. Which of the following presumptions is correct about the reliability of evidential matter?
a. Information obtained indirectly from outside sources is the most reliable evidential matter.
b. To be reliable, evidential matter should be convincing rather than persuasive.
c. Reliability of evidential matters refers to the amount of corroborative evidence obtained.
d. Effective internal control provides the most assurance about the reliability of evidential matter.

2. Which of the following statements relating to the appropriateness of evidential matter is always true?
a. Evidential matter gathered by an auditor from outside an enterprise is reliable.
b. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions.
c. Oral representations made by management are not valid evidence.
d. Evidence gathered by auditors must be both valid and relevant to be considered appropriate.

3. In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are
a. Consistent with prior periods.
b. Similar to industry guidelines.
c. Objective and not susceptible to bias.
d. Deviations from historical patterns.

4. Which of the following is least likely to be a factor in the auditor€™s decision about the extent of the documentation of a particular audit area?
a. The risk of material misstatement.
b. The extent of the judgment involved in performing the procedures.
c. The nature and extent of exceptions identified.
d. Whether or not the client has an internal audit function.

5. Which of the following is an example of fraudulent financial reporting?
a. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses.
c. An employee steals inventory and the €œshrinkage€ is recorded in cost of goods sold.
d. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

6. Which of the following best describes what is meant by the term €œfraud risk factor€?
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presence have often been observed in circumstances where frauds have occurred.
c. Factors whose presence requires modification of planned audit procedures.
d. Reportable conditions identified during an audit.

7. Audits of financial statements are designed to obtain assurance of detecting misstatement due to

8. Which of the following characteristics most likely would heighten an auditor€™s concern about the risk of intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low.
b. Insiders recently purchased additional shares of the entity€™s stock.
c. Management places substantial emphasis on meeting earnings projections.
d. The rate of change in the entity€™s industry is slow.

9. Which of the following statements reflects an auditor€™s responsibility for detecting misstatements due to errors and fraud?
a. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud involving employee collusion or management override.
b. An auditor should plan the audit to detect misstatements due to errors and fraud that are caused by departures from the applicable financial reporting framework.
c. An auditor is not responsible for detecting misstatements due to errors and fraud unless the application of GAAS would result in such detection.
d. An auditor should design the audit to provide reasonable assurance of detecting misstatements due to errors and fraud that are material to the financial statements.

10. Under Statements on Auditing Standards, which of the following would be classified as an error?
a. Misappropriation of assets for the benefit of management.
b. Misinterpretation by management of facts that existed when the financial statements were prepared.
c. Preparation of records by employees to cover a fraudulent scheme.
d. Intentional omission of the recording of a transaction to benefit a thirdparty.

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Fraudulent Misappropriation Errors Financial Reporting of Assets a. Yes b. Yes c. Yes Yes Yes No Yes Yes No Yes No d. No