1. The permanent file section of the working papers that is kept for each audit client most likely contains
a. Review notes pertaining to questions and comments regarding the audit work performed.
b. A schedule of time spent on the engagement by each individual auditor.
c. Correspondence with the client's legal counsel concerning pending litigation.
d. Narrative descriptions of the client's internal control policies and procedures

2. Of the following procedures, which is not considered part of "obtaining an understanding of the client's environment?"
a. Examining trade publications to gain a better understanding of the client's industry.
b. Confirming customer accounts receivable for existence and valuation.
c. Touring the client's manufacturing and warehousing facilities to gain a clearer understanding of operations.
d. Studying the internal controls over cash receipts and disbursements.

3. If working papers are to have the characteristics that will ensure that they achieve their primary purposes, which of the following is the most important?
a. Working papers must be of standard format and standard content.
b. Working papers must be properly indexed and cross- referenced to the draft audit report.
c. Working papers must provide sufficient, competent, and useful information to support the audit report.
d. Working papers must be arranged in logical order following the audit program sequence.

4. Which of the following is not an example of analytical evidence?
a. Compared inventory turnover by major class with the prior year on a monthly and quarterly basis.
b. Compared gross profit percentages by major product classes with the prior year.
c. Examined invoices for plant asset additions to determine whether the client had erroneously recorded ordinary repairs as plant assets.
d. Examined monthly performance reports and investigated significant variations from budgeted amounts.

5. Choose the best illustration of objective audit evidence from the following
a. The paid invoice file containing invoices matched with receiving reports and purchase orders.
b. Management's assertion that payment procedures require matching of invoice with receiving report and purchase order.
c. Clerical staff assurances that management policy regarding payment of invoices--matching of invoice with receiving report and purchase order--is always followed.
d. The treasurer's statement of not remembering any exceptions in which an invoice was submitted for payment that was not accompanied by a matching receiving report and purchase order.

6. An initial (first-time) audit requires more audit time to complete than a recurring audit. One of the reasons for this is that
a. New auditors are usually assigned to an initial audit.
b. Predecessor auditors need to be consulted.
c. The client's business, industry, and internal control are unfamiliar to the auditor and need to be carefully studied.
d. A larger proportion of customer accounts receivable need to be confirmed on an initial audit.

7. Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit?
a. Time and expense summary.
b. Engagement letter.
c. Progress flowchart.
d. Audit program.

8. An auditor wants to develop an audit test to evaluate the reasonableness of the quantity of scrap material resulting from a certain production process compared to industry standards. Which would be the most competent type of evidence available to satisfy this objective?
a. Documentary.
b. Hearsay.
c. Physical.
d. Analytical.

9. As part of audit planning, CPAs should design audit programs for each individual audit and should include audit steps and procedures to
a. Detect and eliminate fraud.
b. Increase the amount of management information available.
c. Provide assurances that the objectives of the audit are met.
d. Ensure that only material items are audited.

10. Of the following audit procedures, which best supports the valuation objective?
a. Performing a lower of cost or market test of the client's inventories.
b. Reviewing a contingent liability footnote for proper wording.
c. Searching for unrecorded liabilities.
d. Observing the client's year-end physical inventory taking.

11. An assumption underlying analytical procedures is that
a. These procedures cannot replace tests of balances and transactions.
b. Statistical tests of financial information may lead to the discovery of material errors in the financial statements.
c. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations.
d. Relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

12. An auditor is examining accounts receivable. What is the most competent type of evidence in this situation?
a. Interviewing the personnel who record accounts receivable.
b. Verifying that postings to the receivable account from journals have been made.
c. Receipt by the auditor of a positive confirmation.
d. No response received for a request for a negative confirmation.

13. With respect to the auditor's planning of a year-end examination, which of the following statements is always true?
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of the specific audit procedures that will be performed.
d. It is an acceptable practice to carry out substantial parts of the examination at interim dates.

14. A letter to the auditor in response to an inquiry is an example of
a. Physical evidence.
b. Confirmation evidence.
c. Documentary evidence.
d. Analytical evidence.

15. Which of the following statements about working papers is correct?
a. Working papers are not permitted to be used as a reference source by the client.
b. The auditor should document the understanding of the client's internal control obtained to plan the audit
c. Working papers may be regarded as a substitute for the client's accounting records.
d. When reporting on comparative financial statements, the independent auditor may discard working papers after two years.

16. Which of the following factors is most important in determining the competence of audit evidence?
a. The reliability of the evidence in meeting the audit objective.
b. The objectivity of the auditor gathering the evidence.
c. The quantity of the evidence obtained.
d. The independence of the source of evidence.

17. The procedures specifically outlined in an audit program are primarily designed to
a. Protect the auditor in the event of litigation.
b. Detect errors or fraud.
c. Test internal evidence.
d. Gather evidence.

18. When reviewing audit working papers, the primary responsibility of an audit supervisor is to determine that:
a. Each worksheet is properly identified with a descriptive heading.
b. Working papers are properly referenced and kept in logical groupings.
c. Standard departmental procedures are adhered to with regard to work paper preparation and technique.
d. Working papers adequately support the audit findings, conclusions, and report.

19. Auditors apply analytical procedures to the client's operations in order to identify
a. Improper separation of accounting and other financial duties.
b. Weaknesses of a material nature in the client's internal control.
c. Unusual transactions.
d. Noncompliance with prescribed control procedures.

20. Which of the following workpapers would one normally expect to find in the permanent file?
a. A copy of a long-term bond indenture.
b. The working trial balance.
c. An analysis of additions and disposals relating to marketable securities.
d. A workpaper analyzing customer replies to confirmation requests.

21. The in-charge auditor decides that work papers are complete
a. When satisfied that the audit objectives have been met and the working papers support the conclusions.
b. When working papers make reference to the steps outlined in the audit program.
c. Only after the auditor who prepared the working papers has signed and dated them.
d. When proper cross-references to other working papers are noted.

22. Of the following procedures, which does not produce analytical evidence?
a. Compare revenue, cost of sales, and gross profit with the prior year and investigate significant variations.
b. Examine monthly performance reports and investigate significant revenue and expense variances.
c. Confirm customers' accounts receivable and clear all material exceptions.
d. Compare sales trends and profit margins with industry averages and investigate significant differences.

23. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
a. Documents mailed by outsiders to the auditor.
b. Correspondence between the auditor and vendors.
c. Sales invoices inspected by the auditor.
d. Computations made by the auditor.

24. Analytical procedures are
a. Substantive tests designed to evaluate a system of internal control.
b. Tests of control procedures designed to evaluate the validity of management's representation letter.
c. Substantive tests designed to evaluate the reasonableness of financial information.
d. Tests of control procedures designed to detect errors in reported financial information.

25. Which of the following statements relating to the competence 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 competent.

26. An auditor test counted a batch of inventory. This is an example of what kind of evidence?
a. Analytical.
b. Documentary.
c. Physical.
d. Hearsay.

27. In evaluating the reasonableness of advertising expense, which of the following would be the best evidence?
a. Oral evidence obtained through discussions with company marketing executives and representatives of the advertising agency retained.
b. Documentary evidence obtained by vouching charges to the account and by retracing charges from source documents to the account.
c. Analytical evidence developed by comparing the ratio of advertising expenses to sales with historical data for the company and industry.
d. Arithmetical evidence developed by re-computing charges submitted by the advertising agency and paid by the company.

28. Which of the following is not a consideration in the development of audit programs?
a. Internal control over the recording of plant asset additions and repairs and maintenance expenditures is found to be weak.
b. The client constructed a major addition to its central manufacturing facility during the year under audit.
c. The client is a private university located in the Midwest.
d. The client's board or directors is elected by the stockholders at the annual meeting.

29. Audit working papers are used to record the results of the auditor's evidence-gathering procedures. When preparing working papers, the auditor should remember that working papers should be
a. Kept on the client's premises so that the client can have access to them for reference purposes.
b. The primary support for the financial statements being examined.
c. Considered as a part of the client's accounting records that are retained by the auditor.
d. Designed to meet the circumstances and the auditor's needs on each engagement.

30. The main advantage of properly indexed working papers is to
a. Reduce the size of the file.
b. Better organize the working papers.
c. Allow division of labor within the audit team.
d. Facilitate the efficient use of audit staff.

31. Which of the following is not a typical analytical procedure?
a. Study of relationships of financial information with relevant nonfinancial information.
b. Comparison of financial information with similar information regarding the industry in which the entity operates.
c. Comparison of recorded amounts of major disbursements with appropriate invoices.
d. Comparison of recorded amounts of major disbursements with budgeted amounts.

32. Which of the following is an example of inferential evidence?
a. The auditor observes the taking of the client's physical inventory and performs test counts.
b. The auditor inspects marketable securities for existence.
c. An auditor, who notes that customer accounts receivable have increased significantly in the current year as a percentage of sales, suspects that a larger proportion of the accounts will prove uncollectible.
d. The auditor counts cash on hand at year-end.

33. Which of the following would be least likely to be comparable between similar corporations in the same industry line of business?
a. Earnings per share.
b. Return on total assets before interest and taxes.
c. Accounts receivable turnover.
d. Operating cycle.

34. Which of the following is not an example of confirmation evidence?
a. Requesting the client's outside legal counsel to evaluate the possible outcome of pending litigation.
b. Questioning the client's employees about existing internal control policies and procedures.
c. Requesting the client's customers to verify year-end accounts receivable balances.
d. Requesting payees to respond in writing to the terms contained in notes payable appearing in the client's ledger.

35. A CPA, in performing an independent audit, would most likely use recalculation as a substantive test for which of the following expense-related accounts?
a. Purchases of supplies.
b. Interest expense.
c. Advertising expense.
d. Repairs and maintenance expense.

36. During the course of an audit engagement, an auditor prepares and accumulates audit working papers. The primary purpose of the audit working papers is to
a. Aid the auditor in adequately planning his work.
b. Provide a point of reference for future audit engagements.
c. Support the underlying concepts included in the preparation of the basic financial statements.
d. Support the auditor's opinion.

37. Which of the following is not an appropriate auditing procedure supporting fairness of financial presentation?
a. Inspecting plant asset additions for existence.
b. Recalculating accrued interest on notes payable.
c. Examining invoices in support of legal fees recorded during the fiscal year.
d. Reviewing the client's production quality control program.

38. Sales commissions as a percentage of sales declined significantly during the year under audit. Of the following possible causes, the most likely is
a. Sales increased during the year.
b. The sales force was reduced at the end of the year.
c. Sales commission rates were increased at the beginning of the year.
d. Fictitious sales were recorded at year-end to inflate earnings. Commissions were not recorded on these sales.

39. Which of the following is responsible for the fairness of the representations made in financial statements?
a. Client's management.
b. Independent auditor.
c. Audit committee.
d. AICPA.

40. An audit program provides proof that
a. Sufficient competent evidential matter was obtained.
b. The work was adequately planned.
c. There was compliance with generally accepted standards of reporting.
d. There was a proper study and evaluation of internal control.

41. Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion?
a. The audit program.
b. The auditor's judgment.
c. Generally accepted auditing standards.
d. The auditor's working papers.

42. During the working paper review, an audit supervisor finds that the auditor's reported findings are not adequately cross-referenced to supporting documentation. The supervisor will most likely instruct the auditor to
a. Prepare a working paper to indicate that the full scope of the audit was carried out.
b. Familiarize him/herself with the sequence of working papers so that he(she) will be able to answer questions about the conclusions stated in the report.
c. Eliminate any cross-references to other working papers since the system is unclear.
d. Provide a workpaper indexing system that shows the relationship between findings, conclusions, and the related facts.

43. Which of the following would be the most relevant form of evidence to evaluate the reasonableness of account balances?
a. Analytical.
b. Documentary.
c. Physical.
d. Hearsay.

44. Generally, what source of evidence should most impact audit conclusions?
a. External
b. Inquiry.
c. Oral.
d. Informal.

45. Most of the independent auditor's work in formulating an opinion on the financial statements consists of
a. Studying and evaluating internal control.
b. Obtaining and examining evidential matter.
c. Examining cash transactions.
d. Comparing recorded accountability with assets.

46. During an audit of the accounts receivable function, you found that the accounts receivable turnover rate had fallen from 7.3 to 4.3 over the last three years. What is the most likely cause of the decrease in the turnover rate?
a. An increase in the discount offered for early payment.
b. A more liberal credit policy.
c. A change from net 30 to net 25.
d. Greater cash sales.

47. Which of the following is generally included or shown in the auditor's working papers?
a. The procedures used by the auditor to verify the personal financial status of members of the client's management team.
b. Analyses that are designed to be a part of, or a substitute for, the client's accounting records.
c. Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing the financial statements.
d. The manner in which exceptions and unusual matters disclosed by the auditor's procedures were resolved or treated.

48. To test for unsupported entries in the ledger, the direction of audit testing should be from the
a. Ledger entries.
b. Journal entries.
c. Externally generated documents.
d. Original source documents.

49. Which of the following does not describe one of the functions of audit workpapers?
a. Facilitates third-party reviews.
b. Aids in the planning, performance, and review of audits.
c. Provides the principal evidential support for the auditor's report.
d. Aids in the professional development of the operating staff.

50. The principal reason for developing a written audit program is to help assure that the
a. Audit work is properly supervised.
b. Audit work is properly planned and documented.
c. Audit report contains only significant findings.
d. Work of different auditors is properly coordinated.

51. One of the primary roles of an audit program is to:
a. Serve as a tool for planning, directing, and controlling audit work.
b. Document an auditor's understanding of the internal control.
c. Provide for a standardized approach to the audit engagement.
d. Delineate the audit risk accepted by the auditor.

52. The principal purpose for cross-indexing audit working papers is to
a. Give the working papers a professional appearance.
b. Explain the use of tick marks.
c. Provide explanation of the audit steps performed.
d. Provide a trail for the auditor and the reviewer.

53. Audit information is generally considered relevant when it is:
a. Derived through valid statistical sampling.
b. Objective and unbiased.
c. Factual, adequate, and convincing.
d. Consistent with the audit objectives.

54. External auditors often confirm assertions contained in the organization's financial statements and accounting records with third parties. Which of the following best explains why confirmation produces evidence of high quality?
a. Written assertions from knowledgeable third parties provide sufficient evidence to achieve most audit objectives.
b. Confirmation by knowledgeable third parties is usually the most relevant evidence available.
c. Confirmation by knowledgeable third parties is usually the least costly evidence available.
d. Confirmation by knowledgeable third parties is highly competent because of its independent source.

55. As a category of evidence, documents may be external or internal. As an auditor reviewing your client's accounts receivable, which of the following is an example of internal documentary evidence?
a. The carrier's bill of lading.
b. Sales invoice copies.
c. A customer's purchase order.
d. A vendor's month-end statement.