Arens/Elder/Beasley

Chapter 9
1. The two primary classes of transactions in the sales and collection cycle are:
a. sales and sales discounts.
b. sales and cash receipts.
c. sales and sales returns.
d. sales and accounts receivable.

2. Which of the following types of receivables would not deserve the special attention of the
auditor?
a. Accounts receivables with credit balances.
b. Accounts that have been outstanding for a long time.
c. Receivables from affiliated companies.
d. Each of the above would receive special attention.

3. Auditors are often concerned with three aspects of internal controls related to the sales and
collection cycle. Which of the following is not one of those controls?
a. Controls that detect or prevent embezzlements.
b. Controls over cutoff.
c. Controls over acquisitions.
d. Controls related to the allowance for doubtful accounts.

4. Cutoff misstatements occur:

a. either by error or fraud.
b. by error only.
c. by fraud only.
d. randomly without causes related to errors or fraud.

5. Generally accepted accounting principles require that material sales returns and allowances be:
a. recorded in the period when the merchandise is returned.
b. recorded in the period when the credit memo is issued.
c. matched with related sales.
d. recorded as a debit to the sales account.

6. Communication addressed to the debtor requesting him or her to confirm whether the balance as
stated on the communication is correct or incorrect is a:
a. representation letter.
b. negative confirmation.
c. bank confirmation.
d. positive confirmation.

7. The most effective test of details of accounts receivable is the:

a. detail tie-in of the records.
b. analysis of the allowance for doubtful accounts.
c. confirmation of accounts receivable.
d. examination of sales invoices.

8. When should auditors not perform alternative procedures in testing the accounts receivable
balance?
a. When customers do not return positive confirmation requests.
b. When customers do not return negative confirmation requests.
 c. When confirmations are deemed to be ineffective as an audit procedure.
d. When confirmations are too costly to use.

9. Because of its central role in auditing of accounts receivable, the ______________ is one of the
first items tested.
a. accounts receivable master file
b. customer file
c. aged trial balance
d. sales register

10. When do most companies record sales returns and allowances?

a. During the month in which the sale occurs.
b. During the accounting period in which the return occurs.
c. Whenever the customer contacts the company regarding the credit.
d. During the month after the sale occurs.

Chapter 10
1. Which of the following misstatements is most likely to be uncovered during an audit of a client’s
bank reconciliation?
a. Duplicate payment of a vendor’s invoice.
b. Billing a customer at a lower price than indicated by company policy.
c. Failure to record a collection of a note receivable by the bank on the client’s behalf.
d. Payment to an employee for more than the hours actually worked.

2. Which of the following is the focus of an audit of cash for most companies?
a. General cash account.
b. Payroll cash account.
c. Petty cash account.
d. Money market account.

3. Cash is important to auditors primarily because of the potential for:

a. errors.
b. fraud.
c. liquidity.
d. expenditures.

4. The auditor uses a proof of cash to determine whether:

All recorded cash disbursements were paid by the bank. All amounts that were paid by the bank were
recorded.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
5. A proof of cash represents:
a. a test of controls and substantive test of transactions.
b. a substantive test of transactions.
c. a substantive test of transactions and test of details of balances.
d. a test of details of balances.
6. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would
examine all of the following except the:
a. general ledger.
b. bank confirmation.
c. cutoff bank statement.
d. year-end bank statement.

7. Which of the following is not a “cash equivalent”?

a. Time deposits.
b. Certificates of deposit.
c. Money market funds.
d. Marketable securities.

8. The general cash account is considered significant in almost all audits:

a. where the ending balance is material.
b. even when the ending balance is immaterial.
c. except those of not-for-profit organizations.
d. where either the beginning or ending balance is material.

9. Because cash is the most desirable asset for people to steal, it has a higher:
a. control risk.
b. inherent risk.
c. detection risk.
d. liquidity risk.

10. The process of transferring money from one bank account to another and improperly recording
the transaction is referred to as:
a. kiting.
b. lapping.
c. scamming.
d. embezzling.

Chapter 11
1. The audit of ______ is often the most difficult and complex part of an audit.
a. property, plant and equipment
b. cash
c. inventory
d. prepaid insurance

2. Inventory is a complex area to audit for all but which of the following reasons?
a. Inventory is often in different locations.
b. There are several acceptable valuation methods and some entities use different methods
for different types of inventory.
c. Inventory is often the largest account in working capital.
d. Inventory valuation includes few estimates.

3. The audit procedure “observe the client taking a physical inventory count and test the count” is
sufficient to determine all of the following except:
a. whether recorded inventory actually exists.
b. whether recorded inventory was properly valued by the client.
 c. whether recorded inventory was properly counted by the client.
d. whether client inventory instruction had properly been followed.

4. Almost all companies need physical controls over their assets to prevent loss. Which of the
following is not an example of such a control?
a. Perpetual inventory master files.
b. Segregated, limited-access storage areas.
c. Custody of assets assigned to specific responsible individuals.
d. Approved prenumbered documents for authorizing movement of inventory.

5. The classes of transactions in the acquisition and payment cycle include acquisition of:
a. goods.
b. goods and services.
c. goods and services, and cash disbursements.
d. goods and services, cash disbursements, and purchase returns and allowances.

6. The overall objective in the audit of the acquisition and payment cycle is:
a. to ensure the reliability of the affected accounts.
b. to ensure the accuracy of the affected accounts.
c. to evaluate whether the affected accounts are fairly stated in accordance with GAAP.
d. to evaluate whether fraudulent payments were made.

7. The audit of the acquisition and payment cycle often takes ____ time to audit than other cycles.
a. less
b. about the same
c. more
d. no less

8. What typically initiates the acquisitions and payment cycle?

a. Issuance of a purchase requisition or request for purchase of goods/services.
b. Issuance of payment to vendor.
c. Approval of a new vendor.
d. Purchase requisition.

9. What typically ends the acquisitions and payment cycle?

a. Issuance of a purchase requisition or request for purchase of goods/services.
b. Issuance of a payment to a vendor.
c. Approval of a new vendor.
d. Purchase requisition.

10. The receipt of goods and services in the normal course of business represents the date clients
normally recognize:
a. income.
b. the liability.
c. warranty assets.
d. expenses.

Chapter 12
1. Property, plant, and equipment are assets that:
a. have expected lives of more than one year.
 b. are used in the business.
c. are not acquired for resale.
d. meet all of the requirements stated above.

2. It should ordinarily be unnecessary to examine supporting documentation for each addition to

property, plant, and equipment, but it is customary to verify:
a. all large transactions.
b. all unusual transactions.
c. a representative sample of typical additions.
d. all three of the above.

3. The auditor must know the client’s capitalization policies to determine whether acquisitions are:
Recorded in accordance with GAAP Treated consistently with those of the preceding year
Necessary
a. Yes Yes Yes
b. Yes No No
c. No No No
d. Yes Yes No

4. To be capitalized as part of property, plant and equipment, assets must:

a. have expected useful lives of more than one year.
b. not be acquired for resale.
c. be useful in multiple productive capacities within the organization.
d. a and b, but not c.

5. Which of the following statements about the audit of fixed assets is not correct?

a. The primary accounting record for manufacturing equipment and other property, plant
and equipment is generally a fixed asset master file.
b. Manufacturing equipment and current assets are normally audited in the same fashion
regardless of the activity within a particular account.
c. The emphasis on auditing fixed assets is on verification of current-period acquisitions.
d. Failure to record the acquisition of a fixed asset affects the income statement until the
assets is fully depreciated.

6. The extent to which auditors verify current period acquisitions of property, plant and equipment
normally depends upon:
a. assessed control risk for acquisitions.
b. tolerable misstatement.
c. Both a and b.
d. Neither a nor b.

7. Failure to capitalize a fixed asset at the correct amount affects __________ until the company
disposes of the asset.
a. the balance sheet only
b. the income statement only
c. the cash flow statement only
d. both the income statement and the balance sheet

8. Which of the following is not likely to be a test related to the audit of manufacturing equipment?
 a. Verify current year additions.
b. Observe current year disposals.
c. Verify depreciation expense.
d. Perform analytical procedures.

9. Changing circumstances may require a change in the useful life of an asset. When this occurs, it
involves a change in:
a. accounting estimate rather than a change in accounting principle.
b. accounting principle rather than a change in accounting estimate.
c. both accounting principle and accounting estimate.
d. neither accounting principle nor accounting estimate.

10. The auditor ___________ to test the accuracy or classification of fixed assets recorded in prior
periods.
a. normally needs
b. never needs
c. normally does not need
d. is required

Chapter 13
1. Which of the following statements is correct?
a. Bonds are frequently issued by companies in small amounts.
b. There are relatively few transactions in the capital acquisition and repayment cycle, and
each transaction is typically highly material.
c. A primary emphasis in auditing debt is on existence.
d. Audit procedures for Notes Payable and Interest Income are often performed
simultaneously.

2. The capital acquisition and repayment cycle does not include:

a. payment of interest.
b. payment of dividends.
c. payment of vendor invoices.
d. acquisition of capital through interest-bearing debt.

3. Responsibility for the issuance of new notes payable should be vested in the:
a. board of directors.
b. purchasing department.
c. accounting department.
d. accounts payable department.

4. Which of the following accounts would not normally be seen in the equity section of the balance
sheet?
a. Donated capital
b. Dividends declared
c. Common stock
d. Accrued revenue

5. Which one of the following is not a characteristic of the capital acquisition and repayment cycle?
a. The exclusion of a few transactions is rarely material by itself.
b. There is a legal relationship between the client and the holder of the equity securities.
 c. There is a direct relationship between the interest and dividends accounts and debt and
equity.
d. Relatively few transactions affect the account balances, but each transaction is often
highly material in amount.

6. Which of the following statements is true?

a. There is an inverse relationship between the interest and dividends accounts and debt and
equity.
b. There is no relationship between the interest and dividends accounts and debt and equity.
c. There is a direct relationship between the interest and dividends accounts and debt and
equity.
d. None of the above is true.

7. Which of the following is not an objective of the auditor’s examination of notes payable?
a. To determine whether internal controls are adequate.
b. To determine whether client’s financing arrangements are effective and efficient.
c. To determine whether transactions regarding the principal and interest of notes are
properly authorized.
d. To determine whether the liability for notes and related interest expense and accrued
liabilities are properly stated.

8. The primary focuses of the audit of debt are:

a. accuracy and completeness.
b. accuracy and existence.
c. completeness and valuation.
d. accuracy and valuation.

9. Which of the following owners’ equity transactions do corporations not record in their accounting
systems?
a. Issuance of cash dividends.
b. Issuance of preferred stock.
c. Sale of common stock on the secondary market.
d. Each of the above is recorded.

10. When a company maintains its own records of stock transactions and outstanding stock, internal
controls must be adequate to ensure that:
a. actual owners are recorded in the bylaws.
b. the correct amount of dividends is paid to stockholders owning the stock on the dividend
record date.
c. the correct amount of dividends is paid to stockholders owning the stock on the
declaration date.
d. actual owners are recorded in the minutes.

Chapter 14
1. Which of the following is not a condition for a contingent liability to exist?
a. There is a potential future payment to an outside party that would result from a current
condition.
b. There is uncertainty about the amount of the future payment.
c. The outcome of an uncertainty will be resolved by some future event.
d. The amount of the future payment is reasonably estimable.
2. If a potential loss on a contingent liability is remote, the liability usually is:
a. disclosed in footnotes, but not accrued.
b. neither accrued nor disclosed in footnotes.
c. accrued and indicated in the body of the financial statements.
d. disclosed in the auditor’s report but not disclosed on the financial statements.

3. Which of the following is an incorrect combination of the “likelihood of occurrence” and

financial statement treatment?
a. Remote: no disclosure.
b. Probable (amount is estimable): financial statements are adjusted.
c. Reasonably possible (amount is estimable): financial statements are adjusted.
d. Probable (amount is not estimable): footnote disclosure is required.

4. One of the auditor’s primary concerns relative to presentation and disclosure-related objectives is:
a. accuracy.
b. existence.
c. completeness.
d. occurrence.

5. At the completion of the audit, management is asked to make a written statement that it is not
aware of any undisclosed contingent liabilities. This statement would appear in the:
a. management letter.
b. letter of inquiry.
c. letters testamentary.
d. letter of representation.

6. The responsibility for identifying and deciding the appropriate accounting treatment for
contingent liabilities rests with a company’s _____.
a. auditors.
b. legal counsel.
c. management.
d. management and the auditors.

7. The auditor has a responsibility to review transactions and activities occurring after the year-end
to determine whether anything occurred that might affect the statements being audited. The
procedures required to verify these transactions are commonly referred to as the review for:
a. contingent liabilities.
b. subsequent year’s transactions.
c. late unusual occurrences.
d. subsequent events.

8. Which type of subsequent event requires consideration by management and evaluation by the
auditor?
Subsequent events that have a direct effect on the financial statements and require adjustment.
Subsequent events that have no direct effect on the financial statements but for which disclosure
is considered.
a. Yes Yes
b. No No
c. Yes No
d. No Yes
9. Which of the following is not one of the three main reasons why it is essential that audit files be
thoroughly reviewed by another member of the audit firm at the completion of the audit?
a. To evaluate the performance of inexperienced personnel.
b. To counteract the bias that frequently enters into the auditor’s judgment.
c. To make sure that the audit meets the CPA firm’s standard of performance.
d. To evaluate the accuracy of the auditing firm’s time budget for the engagement.

10. Which of the following subsequent events is most likely to result in an adjustment to a company’s
financial statements?
a. Merger or acquisition activities.
b. Bankruptcy (due to deteriorating financial condition) of a customer with an outstanding
accounts receivable balance.
c. Issuance of common stock.
d. An uninsured loss of inventories due to a fire.

Chapter 15
1. Auditing standards require that the audit report must be titled and that the title must:
a. Include the word “independent”
b. Indicate if the auditor is a CPA
c. Indicate if the auditor is a proprietorship, partnership or incorporated
d. Indicate the type of audit opinion issued Merger or acquisition activities.

2. To emphasize the fact that the auditor is independent, a typical addressee of the audit report could
be:
Company Controller Shareholders Board of Directors
a. No Yes Yes
b. No No Yes
c. Yes Yes No
d. Yes No No

3. Conditions requiring a departure from an unqualified audit report include all but which of the
following?
a. Management refused to allow the auditors to confirm significant accounts receivable for
which there where no alternative procedures performed.
b. Management decided not to allow the auditor to confirm significant accounts receivable
but the auditor obtained sufficient appropriate evidence by examining subsequent cash
receipts.
c. The audit partner’s dependent child received a gift of 100 shares of a client’s stock for
her birthday from a grandparent Indicate if the auditor is a proprietorship, partnership or
incorporated
d. Management has determined that fixed assets should be reported in the balance sheet at
their replacement value rather than historical costs. The auditors do not concur.

4. When the auditor concludes that there is substantial doubt about the entity’s ability to continue as
a going concern, the appropriate audit report would be:
a. An unqualified opinion with an explanatory paragraph
b. A disclaimer of opinion
c. Neither a nor b
d. Either a or b
5. Whenever the client imposes restriction on the scope of the audit, the auditor should be concerned
that management may be trying to prevent discovery of misstatements. In such cases, the auditor
will likely issue a:
a. Disclaimer of opinion in all cases
b. Qualification of both scope and opinion in all cases
c. Disclaimer of opinion whenever materiality is in question
d. Qualification of both scope and opinion whenever materiality is in question

6. Which of the following statement is true?

a. The auditor is required to issue a disclaimer of opinion in the event of a material
uncertainty.
b. The auditor is required to issue a disclaimer of opinion in the event of a going concern
problem.
c. The auditor is required to issue a disclaimer of opinion for a material uncertainty and for
a going concern problem.
d. The auditor has the option, but is not required, to issue a disclaimer of opinion for a
material uncertainty or for a going concern problem.
7. An auditor determines the financial statements include a material departure from GAAP. Which
type of opinion may be issued?
Disclaimer Qualified Adverse
a. Yes No No
b. No Yes No
c. Yes No Yes
d. No Yes Yes

8. The objective of the ordinary audit of financial statements is the expression of an opinion on:
a. The fairness of the financial statements
b. The accuracy of the financial statements
c. The accuracy of the annual report
d. The balance sheet and income statement

9. An auditor who issues a qualified opinion because sufficient appropriate evidence was not
obtained should describe the limitation in an explanatory paragraph. The auditor should also refer
to the limitation in the:
Scope Paragraph Opinion Paragraph Notes to the Financial statements
a. Yes No Yes
b. No Yes Yes
c. No Yes No
d. Yes Yes No

10. When the auditor evaluates the effect of a change in accounting principle, the materiality of the
change should be based on:
a. The prior years presented
b. The current year effect of the change
c. Guidelines included in GAAS
d. The effect on total assets
Chapter 16
1. Two key concepts that underlie management’s design and implementation of internal control are
a. Costs and materiality
b. Absolute assurance and costs
c. Inherent limitation and reasonable assurance
d. Collusion and materiality

2. The preliminary judgment about materiality is the ____ amount by which the auditor believes the
statements could be misstated and still not affect the decisions of reasonable users.
a. Minimum
b. Maximum
c. Mean average
d. Median average

3. To be effective, an internal audit department must be independent of

a. Operating departments
b. The accounting departments
c. Both a and b
d. Either a or b, but not both

4. Which of the following is the auditor least likely to consider when estimating misstatements in
the population?
a. Prior experience with the client.
b. Results of current year tests of controls.
c. Results of analytical procedures already performed.
d. Acceptable audit risk.

5. While performing a substantive test of details during an audit, the auditor determined that the
sample results supported the conclusion that the recorded account balance was materially
misstated. Which of the following is not likely to be an acceptable reaction to this discovery?
a. Perform expanded audit tests in the relevant areas
b. Increase detection risk in the relevant areas
c. Increase the sample size
d. Take no action until tests of other audit areas are completed

6. Which of the following subsequent events is most likely to result in an adjustment to a company’s
financial statements?
a. Merger or acquisition activities.
b. Bankruptcy (due to deteriorating financial condition) of a customer with an outstanding
accounts receivable balance.
c. Issuance of common stock.
d. An uninsured loss of inventories due to a fire.

7. During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage
bonds. When performing audit work in connection with the bond issue, the independent auditor
should:
a. confirm the existence of the bondholders.
b. review the minutes for authorization.
c. trace the net cash received from the issuance to the bond payable account.
d. inspect the records maintained by the bond trustee.
8. In connection with the audit of a current issue of long-term bonds payable, the auditor should:
a. decide whether the bond issue was made without violating state or local law.
b. ascertain that the client has obtained the opinion of counsel on the legality of the issue.
c. calculate the effective interest rate to see if it is substantially the same as the rates for
similar issues.
d. determine whether bondholders are persons other than owners, directors, or officers of
the company issuing the bond.

9. The auditor can best verify a client’s bond sinking fund transactions and year-end balance by:
a. confirmation with the bond trustee.
b. confirmation with individual holders of retired bonds.
c. examination and count of the bonds retired during the year.
d. recomputation of interest expense, interest payable, and amortization of bond discount or
premium.

10. To achieve effective internal accounting control over fixed asset additions, a company should
establish procedures that require:
a. authorization and approval of major fixed asset additions.
b. capitalization of the cost of fixed asset additions in excess of a specific dollar amount.
c. classification, as investments, of those fixed asset additions that are not used in the
business.
d. performance of recurring fixed asset maintenance work solely by maintenance
department employees.

Chapter 17
1. Because the same CPA firm does both the annual audit and the public company interim financial
statement review, they are referred to as _______.
a. bookkeepers
b. accountants
c. auditors
d. CPAs

2. A(n) _______ results in a conclusion that represents positive assurance.

a. review
b. compilation
c. examination
d. agreed upon procedure engagement

3. Compilation reports may be of all but which of the following types?

a. Compilation with limited independence.
b. Compilation with full disclosure
c. Compilation without independence.
d. Compilation that omits substantially all disclosures.

4. A CPA firm can issue a compilation report:

a. only if the partners are independent.
b. only if all the partners and the staff in the office performing the engagement are
independent.
c. if the partners have no material or direct immaterial interest in client.
d. even if it is not independent.
5. Which of the following would not be included in a CPA’s report based upon a review of the
financial statements of a nonpublic entity?
a. A statement that the review was in accordance with generally accepted auditing
standards.
b. A statement that all information included in the financial statements is the representation
of management.
c. A statement describing the principal procedures performed.
d. A statement describing the auditor’s conclusions based upon the results of the review.
6. The statement that “Nothing came to our attention which would indicate that these statements are
not fairly presented” expresses which of the following?
a. Disclaimer of an opinion.
b. Negative assurance.
c. Negative confirmation.
d. Shared opinion.

7. For reviews, an accountant does which of the following?

Obtain an understanding of internal control. Perform tests of controls. Perform tests of
transactions.
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. No No No

8. Specific attestation standards have been developed in all but which of the following areas?
a. Pro forma financial information.
b. Compliance with laws and regulations.
c. Prospective financial statements.
d. Standards have been developed for all of the above.

9. Reports on agreed-upon procedures are intended to be distributed:

a. to only the involved parties, who would have the requisite knowledge about those
procedures and the level of assurance resulting from them.
b. to only the involved parties, who would have the requisite knowledge about those
procedures but not the level of assurance resulting from them.
c. to any party to whom the client wishes.
d. only to the stockholders of the client.

10. Which of the following types of engagement reports would provide positive assurance?
a. An examination.
b. A review.
c. An agreed-upon procedures engagement.
d. A compilation.

Prepared by:
Orendain L.
Ortigas J.
Pabilona H.
Padilla J.