Multiple Choice Questions
1. Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. These results most likely would indicate that:
a. Internal control activities are not operating effectively.
b. Fraud exists among the relevant account balances.
c. Additional tests of details are required.
d. The communication with the audit committee should be revised.
2. Auditors should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide:
a. Information concerning the progress of cases to date
b. Corroborative evidential matter
c. An estimate of the dollar amount of the probable loss
d. An expert opinion regarding whether a loss is possible, probable, or remote
3. In an audit of contingent liabilities, which of the following procedures would be least effective?
a. Reviewing a bank confirmation letter
b. Examining customer confirmation replies
c. Examining invoices for professional services
d. Reading the minutes of the board of directors
4. Which of the following matters would an auditor most likely include in a management representation letter?
a. Communications with the audit committee concerning weaknesses in the internal control structure
b. The completeness and availability of minutes of stockholders' and directors' meetings
c. Plans to acquire or merge with other entities in the subsequent year
d. Management's acknowledgment of its responsibility for the detection of employee fraud
5. Which of the following statements ordinarily is included among the written client representations obtained by the auditor?
a. Management acknowledges that there are no material weaknesses in the internal control structure.
b. Sufficient evidential matter has been made available to permit the issuance of an unqualified opinion.
c. The financial statements are fairly presented in conformity with generally accepted accounting principles.
d. Management acknowledges responsibility for illegal actions committed by employees.
6. An auditor accepted an engagement to audit the 2007 financial statements of EFG Corporation and began the fieldwork on September 30, 2007. EFG gave the auditor the 2007 financial statements on January 17, 2008.The auditor completed the fieldwork on February 10, 2008 and delivered the report on February 16, 2008.The management representation letter normally would be dated
a. December 31, 2007
b. January 17, 2008
c. February 10, 2008
d. February 16, 2008
7. Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating Zero's plan for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero's plans to
a. Make credit terms for sales on account more lenient.
b. Strengthen internal controls over cash disbursements.
c. Purchase production facilities currently being leased from a related party.
d. Postpone expenditures for research and development projects.
8. Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate that there could be substantial doubt about an entity's ability to continue as a going concern?
a. Review compliance with the terms of debt agreements.
b. Confirm accounts receivable from principal customers.
c. Reconcile interest expense with debt outstanding.
d. Confirm bank balances.
9. Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances.
The auditor should first:
a. Request the permission of the client to undertake the confirmation of accounts receivable.
b. Perform alternative procedures to provide a satisfactory basis for the unqualified opinion.
c. Assess the importance of the omitted procedures to the auditor's ability to support the previously expressed opinion.
d. Inquire whether there are persons currently relying, or likely to rely, on the unqualified opinion.
10. Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
a. Confirming a sample of material accounts receivable established after year end.
b. Comparing the financial statements being reported on with those of the prior period.
c. Investigating personnel changes in the accounting department occurring after year end.
d. Inquiring as to whether any unusual adjustments were made after year end.