MULTIPLE-CHOICE QUESTIONS
1. Which of the following might require an auditor to rely on a specialist to obtain sufficient appropriate evidence related to acquisitions?
a. The acquired organization has assets that may have been impaired.
b. The acquired organization has environmental liabilities related to site clean-up costs.
c. The acquired organization has liabilities related to employee pension plans.
d. All of the above.

2. A Level 3 fair value estimate is an estimate based on which of the following?
a. The value of similar assets traded on a foreign exchange.
b. The value of the same asset, but traded on a foreign exchange.
c. The value is not readily observable in any marketplace and therefore requires an estimate using a model.
d. The value is not readily observable, but there are market trades of similar assets that can serve as a surrogate for value of the asset in question.

3. Which of the following pieces of evidence would most likely not be considered by the auditor in evaluating the potential impairment of goodwill?
a. The acquisition made by a competitor of a company that is not a direct competitor of the client.
b. The current market capitalization of the company in comparison with its net book value.
c. The cash flows and operating data of the reporting unit since acquisition compared with estimates made at the time of acquisition.
d. The growth or decline in market share of the reporting unit since acquisition.

4. An audit client has invested heavily in new equity and debt securities. Which of the following would not constitute an appropriate role for the company's board of directors?
a. Receive and review periodic reports by the internal audit function on compliance with company investment policies and procedures.
b. Approve all new investments.
c. Review and approve written policies and guidelines for investments in marketable securities.
d. Periodically review the risks inherent in the portfolio of marketable securities to determine whether the risk is within parameters deemed acceptable by the board.

5. Which of the following factors is a risk factor associated with derivative securities that should be considered by the auditor?
a. Management's objective for entering into such transactions may relate to misstating the financial statements.
b. The complexity of the security.
c. The organization's experience with such securities.
d. All of the above are risk factors.

6. Which of the following conditions most likely indicates the existence of a significant deficiency in internal control over financial reporting?
a. The auditor obtains evidence of a material misstatement resulting from a missing control.
b. There is a deficiency, or combination of deficiencies, that is less severe than a material weakness, yet important enough to communicate to those charged with governance.
c. There is a reasonable possibility that a material misstatement in the financial statements could occur.
d. The auditor detects fraud committed by senior management.

7. Which of the following factors should an auditor consider when evaluating the severity of an identified control deficiency?
a. Magnitude of the potential misstatement.
b. Likelihood of misstatement.
c. Either a. or b., but not both.
d. Both a. and b.

8. For which of the following audit areas would the external auditor be least likely to rely on work performed by a client's internal audit function?
a. Valuation of a client's restructuring charge.
b. Existence of inventory.
c. Cutoff tests of revenue.
d. Existence of cash.

9. An internal auditor's work would most likely affect the nature, timing, and extent of external audit procedures when the internal auditor's work relates to which of the following assertions?
a. Valuation of contingencies.
b. Valuation of intangible assets.
c. Existence of fixed asset additions.
d. Valuation of related-party transactions.