36.

In accordance with the independence standards of the GAO for performing audits in accordance
with generally accepted auditing standards, which of the following is not an example of an
external impairment of independence?
a. Reducing the extent of audit work due to pressure from management to reduce audit fees.
b. Selecting audit items based on the wishes of an employee of the organization being audited.
c. Bias in the items the auditor decided to select for testing.
d. Influence by management on the personnel assigned to the audit.

37. Under the independence standards of the GAO for performing audits in accordance with
generally accepted government auditing standards, which of the following are overreaching
principles for determining whether a nonaudit service impairs independence?
I. Auditors must not perform nonaudit services that involve performing management functions.
II. Auditors must ot audit their own work or provide nonaudit services in situations in which the
nonaudit servicesare significant or material to the subject matter of the audit.
III. Auditors must not perform nonaudit services which require independence.
a. I only
b. I and II only.
c. I, II, and III.
d. I and III only.

38. Which of the following bodies enforce the audit requirements of the Employee Retirement
Security Act of 1974 (ERISA) with respect to employee benefit plans?
a. The Department of Labor.
b. The Department of Pension Management.
c. The SEC.
d. The PCAOB.

39. The requirement for independence by the auditor regarding audits of employee benefit plans
apply to the plan as well as
a. Investment companies doing business with the plan
b. Members of the plan.
c. The plan sponsor.
d. The actuary form doing services for the plan.
12. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial audit.
d. Can be changed at the auditor’s discretion.

13. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk from that originally planned. To achieve an overall audit risk level
that is substantially the same as the planned audit risk level, the auditor would
a. Decrease substantive testing.
b. Decrease detection risk.
c. Increase inherent risk.
d. Increase materiality levels.
 26. Which of the following is correct
concerning requirements about auditor
communications about fraud?
a. Fraud that involves senior management
should be reported directly to the audit
committee regardless of the amount involved.
b. Fraud with a material effect on the financial
statements should be reported directly by the
auditor to the SEC.
c. Fraud with a material effect on the financial
statements should ordinarily be disclosed by
the auditor through use of an “emphasis of
matter” paragraph.
d. The auditor has no responsibility to disclose
fraud outside the entity under any
circumstance.
27. When performing a financial statement audit, auditors are required to explicitly assess the risk of
material misstatements due to
a. Errors.
b. Fraud.
c. Illegal Acts.
d. Business Risk.

28. Audits of financial statements are designed to obtain assurance of detecting misstatement due to
ERROR FRAUDULENT FINANCIAL REPORTING MISAPPROPRIATION
OF ASSETS
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes No

29. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected
for all of the following, except
a. Employee Collusion.
b. Falsified documentation.
c. Need to apply professional judgment in evaluating fraud risk factors.
d. Professional scepticism.

30. The most difficult type of misstatement to detect is fraud based on

31. When considering fraud risk factors relating to management’s characteristic, which of the
following is least likely to indicate the risk of possible misstatement due to fraud?
a. Failure to correct known reportable conditions on a timely basis.
b. Nonfinancial management’s preoccupation with the selection of accounting principles.
c. Significant portion of management’s compensation represented by bonuses based upon
achieving unduly aggressive operating results.
d. Use of unusually conservative accounting practices.

32. Which of the following conditions identified during fieldwork of an audit is most likely to affect
the auditor’s assessment of the risk of misstatement due to fraud?
a. Checks for significant amounts outstanding at year-end.
b. Computer generated documents.
c. Missing documents.
d. Year-end adjusting journal entries.

33. Which of the following is most likely to be a response to the auditor’s assessment that the risk of
material misstatement due to fraud for the existence of inventory is high?
a. Observe test counts of inventory at certain locations on an unannounced basis.
b. Perform analytical procedures rather than taking test counts.
c. Request that inventories be counted prior to year-end.
d. Request that inventory counts at the various locations be counted on different dates so as to
allow the same auditor to be present at every count.

34. Which of the following is most likely to be an example of fraud?

35. 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 projection.
d. The rate of change in the entity’s industry is low.

36. 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 GAAP.
93. b. Request Star to reissue the prior year’s financial statements with the appropriate revisions.
c. Notify Tell about the information and make inquiries about the integrity of Star’s management.
d. Request Star to arrange a meeting among the three parties to resolve the matter.

94. A successor auditor should request the new client to authorize the predecessor auditor to allow a
review of the predecessor’s
61. How large must the actual loss identified by the auditor be for a control deficiency to possibly be
considered a material weakness?
Immaterial Material Immaterial Material
a. Yes Yes c. No Yes
b. Yes No d. No No
139. d. Management’s current plans to reduce its ownership equity in the entity.

140. Which of the following statements is correct concerning significant deficiencies in an audit?
a. An auditor is required to search for significant deficiencies during an audit.
b. All significant deficiencies are also considered to be material weakness.