Cost management has evolved from a focus on measurement to one of identifying those measures that are critical to the organization's success

Cost management has evolved from a focus on measurement to one of identifying those measures that are critical to the organization's success. Given this new focus, indicate which one of the following types of cost management systems cost managers are likely to be striving for.

A) Basic transaction reporting systems

B) A system that focuses on reliable financial reports

C) A system that tracks key operating data and develops accurate cost information

D) A system in which strategically relevant cost management information is an integral part


Answer: D) A system in which strategically relevant cost management information is an integral part\

The IMA ethical standard that requires the management accountant to act with integrity

A) requires the management accountant to mitigate actual conflicts of interest.

B) is not a part of the IMA Statement of Ethical Professional Practice.

C) is necessary to ensure that the management accountant's credibility is not impaired.

D) is necessary to ensure that the management accountant does not violate confidentiality.


Answer: A) requires the management accountant to mitigate actual conflicts of interest.

The strategy map can be compared to the balanced scorecard (BSC) in that

A) the strategy map is a subset of the BSC.

B) the strategy map deals with the strategy component of the BSC.

C) the strategy map provides a guide to implementing the BSC by linking the critical success factors.

D) the strategy map and the BSC are unrelated.


Answer: C) the strategy map provides a guide to implementing the BSC by linking the critical success factors.

Professional certifications are issued by the American Institute of Certified Public Accountants (AICPA), the Institute of Management Accountants (IMA), the Chartered Institute of Management Accountants (CIMA),

Professional certifications are issued by the American Institute of Certified Public Accountants (AICPA), the Institute of Management Accountants (IMA), the Chartered Institute of Management Accountants (CIMA), and the Chartered Professional Accountants of Canada (CPA-Canada), among other professional accounting organizations. The Certificate in Management Accounting (CMA) is issued by the

A) CIMA.

B) IMA.

C) CPA-Canada.

D) AICPA.


Answer: B) IMA

To determine whether a particular action is professionally ethical or not, using the Institute of Management Accountants Statement of Ethical Professional Practice, it is necessary to know:

A) whether the act is legal in your jurisdiction.

B) the intent and the business context of the act.

C) the amount of the fraud or theft that is involved.

D) whether the management accountant is certified.


Answer: B) the intent and the business context of the act.

A management method in which managers and employees commit to a process of continuous improvement is best described as

A) total quality management.

B) business process improvement.

C)lean accounting.

D) the theory of constraints.


Answer: B) business process improvement

Walmart, Costco, and Dollar General are retailers that probably compete on the basis of

Walmart, Costco, and Dollar General are retailers that probably compete on the basis of

A) quality and customer service.

B) product differentiation.

C) low prices.

D) desirable locations.


Answer: C) low prices.

The management accountants in an organization probably report directly to the

A) controller.

B) treasurer.

C) chief executive officer (CEO).

B) chief financial officer (CFO).


Answer: A) Controller

Which of the following is the correct sequence in which cost management information is developed and used?

A) Business events, data, information, analysis, decisions

B) Business events, data, analysis, information, decisions

C) Business events, information, analysis, knowledge, decisions

D) Business events, data, information, knowledge, decisions


Answer: D) Business events, data, information, knowledge, decisions.

Management accounting, as defined by the IMA, uses the expertise of the management accountant to

Management accounting, as defined by the IMA, uses the expertise of the management accountant to

A) improve quality and reduce manufacturing cost.

B) implement a strategy of cost leadership or differentiation.

C) implement a tactic of customer value and shareholder value.

D) improve business performance and the life-cycle of operations.


Answer: B) implement a strategy of cost leadership or differentiation.

Which of the following documents is used as a basis for posting to the DM section of the job cost sheet?

A Purchase requisition
B material req
C Receiving report
D Purchase order
E Time Card


Answer: B

The IMA definition of management accounting states that

A) management accounting is the process of gathering, reporting, and analyzing information for management decision making.

B) management accounting is a profession that involves preparation and analysis of cost information, budgeting, and performance measurement and analysis to assist managers in decision making.

C) management accounting involves partnering in management decision making, planning, and performance measurement to assist in the formulation and implementation of an organization's strategy.

D) management accounting is a set of practices in which accountants, working within companies, help managers to make better decisions based on accurate financial information.


Answer: C) management accounting involves partnering in management decision making, planning, and performance measurement to assist in the formulation and implementation of an organization's strategy.

For which of the following businesses would the job order cost system be appropriate?

For which of the following businesses would the job order cost system be appropriate?

A auto repair shop
B crude oil refinery
C drug manufacturer
D beer distillery


Answer: A

Cost pools are:

A costs that are accumulated before being allocated to cost objects on some common basis
B costs that are relevant to decision making but irrelevant to financial reporting
C product costs that are assigned to cost objects using DL or MH
D accounts in the product life cycle from research and development to customer service


Answer: A

Which of the following documents is used as the basis for posting to the DL section of the job cost sheet?

A Purchase requisition
B material req
C Receiving report
D Purchase order
E Time Card


Answer: E

Which of the following statements are false regarding cost allocations and product costing?

Which of the following statements are false regarding cost allocations and product costing?

A It is easier to determine the individual product cost for a manufacturer than it is for a wholesaler
B In general, indirect costs are assigned, while direct costs are allocated.
A only A is false
B Only B is false
C Both A and B are false
D neither A nor B is false


Answer: C

Which of the following is not a characteristic of job costing?

A Each job is distinguishable from the other jobs
B Identical units are produced on an ongoing basis
C Job cost data are used for setting prices and bids
D It is possible to compare actual costs with estimated costs


Answer: B

Which of the following companies would most likely use job costing?

A paper manufacturer
B paint producer
C breakfast cereal maker
D advertising agency


Answer: D

When a manufacturing company has a highly automated manufacturing plant producing many different products,

When a manufacturing company has a highly automated manufacturing plant producing many different products, what is probably the most appropriate basis of applying OH costs to WIP?

A DL hours
B DL $
C Maching H
D Cost of materials


Answer: C

The basic cost flow model is:

A BB+TO=TI+EB
B BB+TO-TI=EB
C EB=BB+TI-TO
D EB-BB=TO-TI
E EB+TI-TO=BB


Answer: C

The Cost Flow Diagram includes all of the following except:

A Selling expenses
B DM
C DL
D FMOH
E VMOH


Answer: A

In a labor intensive company in which more OH is used by more highly skilled and paid ees, which activity base would be

In a labor intensive company in which more OH is used by more highly skilled and paid ees, which activity base would be most appropriate for applying OH to production?

A DL$
B DM$
C DLH
D MH
E Sales value of the product produced


Answer: A

Which of the following is NOT a data problem an analyst must watch for when estimating cost behavior?

A missing data
B Outliers
C Allocated Costs
D Depreciable Assets


Answer: D

Which of the following is the difference between variable costs and fixed costs?

A variable costs per unity fluctuate and fixed CPU remain constant
B variable CPU are fixed over the relevant range and fixed CPU are variable
C Total variable costs are variable over the relevant range and fixed in the long term, while fixed costs never change
D Variable CPU change in varying increments, while fixed CPU change in equal units
E total variable costs can be varied by mgmt, while fixed costs are uncontrollable


Answer: B

In the standard regression equation of y=a+bx, the letter y is best described at the:

In the standard regression equation of y=a+bx, the letter y is best described at the:

A independent variable
B dependent variable
C slope of the equation
D intercept of the equation


Answer: B

Which of the following statements is (are) true regarding product costing?

A individual product costs are relevant for managerial decision-making but irrelevant for preparing the financial statements
B A common decision facing managers is determining the price at which to sell their product or provide their services.
A only A is true
B only B is true
C Both A and B are true
D neither A nor B is true


Answer: B

In the cost equation TC+F+VX, V is best described as:

A costs that do not vary with changes in the activity level.
B intercept of the cost equation
C slope of the cost equation
D activity level used to estimate the dependent variable


Answer: C

Which of the following cost estimation methods finds the variable portion of a mixed cost before calculating the fixed portion?

Which of the following cost estimation methods finds the variable portion of a mixed cost before calculating the fixed portion?

A Scattergraph
B High-Low
C Account analysis
D Linear regression
E engineering approach


Answer: B

A disadvantage of the high-low method of cost analysis is that it:

A typically results in totally inaccurate cost formula
B is too time consuming to apply
C uses only two data points, which may not be representative of normal conditions
D relies totally on the judgement of the person performing the cost analysis


Answer: C

In the standard regression equation of y=a+bx, the letter a is best described as the:

A independent variable
B dependent variable
C slope of the equation
D intercept of the equation


Answer: D

In determining cost behavior in business, the cost function is often expressed as Y= a+bX. Which on the the following cost estimate methods

In determining cost behavior in business, the cost function is often expressed as Y= a+bX. Which on the the following cost estimate methods should NOT be used in estimating fixed and variable costs for the equation?

A Scattergraph method
B Simple regression
C High-Low point method
D Multiple regression
E Management analysis of data


Answer: E

In the cost equation TC=F+VX, X is best described as the:

A costs that do not vary with changes in the activity level.
B costs that do vary with changes in the activity level.
C total cost estimate at a particular activity level.
D activity level used to estimate the total cost


Answer: D

A manager is trying to estimate the manufacturing costs of a new product. The company makes several other products that utilize some of the same manufacturing procedures as the new product. Which cost estimate method would be the best method to determine the total cost of manufacturing the new product?

A Engineering estimates
B Regression analysis
C Account Analysis
D Scattergraph
E High-low

Lakeside Company estimated manufacturing overhead costs for 2009 at $378,000, based on 180,000 estimated direct labor hours

Lakeside Company estimated manufacturing overhead costs for 2009 at $378,000, based on 180,000 estimated direct labor hours. Actual direct labor hours for 2009 totaled 195,000. Manufacturing overhead contains debit entries totaling $391,500. What was the amount of manufacturing overhead for 2009?

A) $31,500 underallocated
B) $31,500 overallocated
C) $18,000 underallocated
D) $18,000 overallocated



Answer: D

The journal entry to record $200 of depreciation on factory equipment for the current period involves which of the following?

A) debit to accumulated depreciation-factory equipment for $200
B) credit to manufacturing overhead for $200
C) debit to depreciation expense-factory equipment for $200
D) debit to manufacturing overhead for $200


Answer: D

Door Company estimated manufacturing overhead costs for 2009 at $378,000. The predetermined manufacturing overhead rate was based on 105,000

Door Company estimated manufacturing overhead costs for 2009 at $378,000. The predetermined manufacturing overhead rate was based on 105,000 estimated direct labor hours. Actual direct labor hours for 2009 totaled 110,000. The manufacturing overhead account showed debit entries totaling $394,000. For the year, was overhead over or underallocated and by how much?

A) $16,000 underallocated
B) $2,000 overallocated
C) $2,000 underallocated
D) $16,000 overallocated


Answer: B

Actual manufacturing overhead for the current period is $19,600 while allocated manufacturing overhead for the current period is $18,700. What is the proper entry to dispose of the manufacturing overhead balance?

A) debit cost of goods sold and credit manufacturing overhead for $900
B) debit cost of goods sold and credit finished goods inventory for $900
C) debit manufacturing overhead and credit cost of goods sold for $900
D) debit manufacturing overhead and credit work in process inventory for $900


Answer: A

Manufacturing overhead is overallocated $1,000 at the end of the current period. The journal entry to dispose of the overallocated overhead balance involves a debit to:

A) manufacturing overhead and a credit to cost of goods sold for $1,000
B) cost of goods sold and a credit to manufacturing overhead for $1,000
C) manufacturing overhead and a credit to work in process inventory for $1,000
D) cost of goods sold and a credit to finished goods inventory for $1,000


Answer: A

The journal entry to assign $1,500 of direct labor and $200 of indirect labor for the current period involves a debit to what account(s)?

The journal entry to assign $1,500 of direct labor and $200 of indirect labor for the current period involves a debit to what account(s)?

A) manufacturing overhead for $1,700
B) work in process inventory for $1,500 and a credit to manufacturing overhead for $200
C) work in process inventory for $1,500 and a debit to manufacturing overhead for $200
D) work in process inventory for $1,700


Answer: C

How is the predetermined manufacturing overhead rate used to allocate manufacturing overhead calculated?

A) by dividing the total estimated manufacturing overhead costs by the total estimated quantity of allocation base
B) by dividing the total estimated quantity of allocation base by the total estimated manufacturing overhead costs
C) by multiplying the total estimated manufacturing overhead costs by the total estimated quantity of allocation base
D) by dividing the total estimated manufacturing overhead costs by the total actual quantity of the allocation base


Answer: A

Which of the following is the most significant cost for a service company which used job order costing?

A) labor costs
B) indirect costs
C) supplies costs
D) overhead costs


Answer: A

The Hemingway Company uses a job costing system. In April, material requisitions of $44,000 were issued (direct materials, $40,000) and materials

The Hemingway Company uses a job costing system. In April, material requisitions of $44,000 were issued (direct materials, $40,000) and materials purchases of both direct and indirect materials totaled $56,600. The ending balance in materials inventory was $18,400. What was the beginning balance?

A) $5,800
B) $31,000
C) $25,600
D) none of the above


Answer: A

Actual manufacturing overhead for 2009 amounts to $102,500, allocated manufacturing overhead for 2009 amounts to $98,700. By how much is manufacturing overhead over/underallocated?

A) $3,800 underallocated
B) $1,900 underallocated
C) $1,900 overallocated
D) $3,800 overallocated


Answer: A

When a job is completed in a job costing system, the journal entry involves which accounts?

A) a debit to finished goods inventory and a credit to work in process inventory for the cost of the job B) a debit to finished goods inventory and a credit to work in process inventory for the sales price of the job
C) a debit to cost of goods sold and a credit to finished goods inventory for the cost of the job D) a debit to work in process inventory and a credit to finished goods inventory for the cost of the job


Answer: A

The journal entry to issue $500 of direct materials and $30 of indirect materials to production involves a debit to what account(s)?

The journal entry to issue $500 of direct materials and $30 of indirect materials to production involves a debit to what account(s)?

A) work in process inventory for $500 and a debit to manufacturing overhead for $30
B) work in process inventory for $500 and a credit to manufacturing overhead for $30
C) manufacturing overhead for $530
D) work in process inventory for $530


Answer: A

Direct materials flow directly into what account?

A) cost of goods sold
B) finished goods inventory
C) manufacturing overhead
D) work in process inventory


Answer: D

Allocation of direct and indirect materials requires a credit to what account?

A) materials inventory
B) manufacturing overhead
C) work in process inventory
D) finished goods inventory


Answer: A

The entry to transfer direct labor and indirect labor costs from manufacturing wages into production includes a debit to which of the following?

The entry to transfer direct labor and indirect labor costs from manufacturing wages into production includes a debit to which of the following?

A) manufacturing overhead and work in process inventory
B) finished goods inventory
C) manufacturing overhead
D) finished goods inventory and work in process inventory


Answer: A

The __________ is a document prepared by manufacturing personnel to request materials for the production process.

A) cost ticket
B) manufacturing ticket
C) job order card
D) materials requisition


Answer: D

In job costing, indirect materials used in production are credited to which of the following?

A) finished goods inventory
B) materials inventory
C) manufacturing overhead
D) work in process inventory


Answer: B

The entry to record the purchase of materials on account using a job costing system would include a:

The entry to record the purchase of materials on account using a job costing system would include a:

A) debit to materials inventory.
B) debit to accounts payable.
C) debit to work in process inventory.
D) credit to work in process inventory.


Answer: A

In job costing, direct materials used in production are debited to which of the following?

A) manufacturing overhead
B) work in process inventory
C) finished goods inventory
D) either manufacturing overhead or work in process inventory


Answer: B

Which of the following would be debited to record the requisition of direct materials?

A) materials inventory
B) work in process inventory
C) finished goods inventory
D) cost of goods manufactured


Answer: B

Which of the following would be credited to accumulate the actual labor costs incurred?

Which of the following would be credited to accumulate the actual labor costs incurred?

A) manufacturing overhead
B) work in process inventory
C) manufacturing wages
D) wages payable


Answer: D

Which of the following would be debited to record direct labor costs actually incurred?

A) wages payable
B) manufacturing wages
C) manufacturing overhead
D) finished goods inventory


Answer: B

Which of the following would be debited to assign the costs of indirect labor?

A) manufacturing overhead
B) wages payable
C) finished goods inventory
D) work in process inventory


Answer: A

What type of costing system would a manufacturer of plywood use?

What type of costing system would a manufacturer of plywood use?

A) job costing
B) process costing
C) either job costing or process costing
D) both job costing and process costing


Answer: B

Which of the following companies is most likely to use job costing?

A) Exxon Mobil Oil Refinery
B) Elizabeth's Custom Furniture Company
C) DuPont Chemical Company
D) Kellogg's Cereal Company


Answer: B

________ is assigning costs such as direct materials and direct labor to products.

A) Cost assigning
B) Cost tracing
C) Cost allocation
D) None of the these


Answer: B

Which of the following is an example of an industry that would use a process costing system rather than a job costing system?

Which of the following is an example of an industry that would use a process costing system rather than a job costing system?

A) custom furniture
B) unique furniture accessories
C) paint
D) aircraft


Answer: C

What type of costing system would a manufacturer of luxury yachts use?

A) job costing
B) process costing
C) either job costing or process costing
D) both job costing and process costing


Answer: A

What type of businesses can use a job costing system?

A) service and manufacturing businesses
B) Service and merchandising businesses
C) manufacturing and merchandising businesses
D) Service, merchandising, and manufacturing businesses


Answer: D

Which of the following is correct with respect to closing out overapplied manufacturing overhead to Cost of Goods Sold versus

Which of the following is correct with respect to closing out overapplied manufacturing overhead to Cost of Goods Sold versus closing it out to Cost of Goods Sold and Finished Goods and Work in Process inventories?

A. The balance in the Work in Process account after allocation will be higher if the overapplied manufacturing overhead is closed out by allocating it to all appropriate accounts.
B. The balance in the Work in Process account after allocation will be the same under either method.
C. Net operating income will be higher if all of the overapplied manufacturing overhead is closed out to Cost of Goods Sold.
D. Cost of Goods Sold will be lower if the overapplied manufacturing overhead is closed out by allocating it to the inventory accounts as well as to Cost of Goods Sold.



Answer: C

The document used to accumulate the costs of a job is called the:

A) manufacturing overhead document.
B) job cost record.
C) labor time ticket.
D) materials inventory requisition form.


Answer: B

Overapplied manufacturing overhead occurs when:

A. applied overhead exceeds actual overhead.
B. applied overhead exceeds estimated overhead.
C. actual overhead exceeds estimated overhead.
D. budgeted overhead exceeds actual overhead.


Answer: A

Which costing system would better account for a unique individual product?

Which costing system would better account for a unique individual product?

A) job costing system
B) product costing system
C) process costing system
D) overhead costing system


Answer: A

What are the two basic types of costing systems? 

A) product costing and materials inventory costing
B) job costing and process costing
C) periodic costing and process costing
D) periodic costing and perpetual costing


Answer: B

The balance in the Work in Process account equals:

A. the balance in the Finished Goods inventory account.
B. the balance in the Cost of Goods Sold account.
C. the balances on the job cost sheets of uncompleted jobs.
D. the balance in the Manufacturing Overhead account.


Answer: C

Martinez Aerospace Company uses a job-order costing system. The direct materials for Job #045391 were purchased in July

Martinez Aerospace Company uses a job-order costing system. The direct materials for Job #045391 were purchased in July and put into production in August. The job was not completed by the end of August. At the end of August, in what account would the direct material cost assigned to Job #045391 be located?

A. Raw materials inventory
B. Work in process inventory
C. Finished goods inventory
D. Cost of goods manufactured


Answer: B

In a job-order costing system, indirect materials that have been previously purchased and that are used in production are recorded as a debit to:

A. Work in Process inventory.
B. Manufacturing Overhead.
C. Finished Goods inventory.
D. Raw Materials inventory


Answer: B

Which terms will make the following statement true? When manufacturing overhead is overapplied, the Manufacturing Overhead account has a balance and applied manufacturing overhead is greater than manufacturing overhead.

A. debit, actual
B. credit, actual
C. debit, estimated
D. credit, estimated


Answer: B

In a job-order costing system, direct labor cost is ordinarily debited to:

In a job-order costing system, direct labor cost is ordinarily debited to:

A. Manufacturing Overhead.
B. Cost of Goods Sold.
C. Finished Goods.
D. Work in Process.


Answer: D

In a job-order costing system, the use of direct materials that have been previously purchased is recorded as a debit to:

A. Raw Materials inventory.
B. Work in Process inventory.
C. Finished Goods inventory.
D. Manufacturing Overhead.


Answer: B

Which of the following accounts is debited when direct labor is recorded?

A. Work in process
B. Salaries and wages expense
C. Salaries and wages payable
D. Manufacturing overhead


Answer: A

In computing its predetermined overhead rate, Marple Company inadvertently left its indirect labor costs out of the computation

In computing its predetermined overhead rate, Marple Company inadvertently left its indirect labor costs out of the computation. This oversight will cause:

A. Manufacturing Overhead to be overapplied.
B. the Cost of Goods Manufactured to be understated.
C. the debits to the Manufacturing Overhead account to be understated.
D. the ending balance in Work in Process to be overstated.


Answer: B

Which of the following is the correct formula to compute the predetermined overhead rate?

A. Estimated total units in the allocation base divided by estimated total manufacturing overhead costs.
B. Estimated total manufacturing overhead costs divided by estimated total units in the allocation base.
C. Actual total manufacturing overhead costs divided by estimated total units in the allocation base.


Answer: D. Estimated total manufacturing overhead costs divided by actual total units in the allocation base.

Which of the following would probably be the least appropriate allocation base for allocating overhead in a highly automated manufacturer of specialty valves?

A. Machine-hours
B. Power consumption
C. Direct labor-hours
D. Machine setups

Answer: C

If the auditors encounter a significant scope limitation in evaluating a public company`s internal control over financial reporting

If the auditors encounter a significant scope limitation in evaluating a public company`s internal control over financial reporting, which of the following types of opinions on the effectiveness of the company`s internal control over financial reporting would be appropriate?

a. qualified opinion or adverse opinion
b. unqualified opinion or adverse
c. unqualified opinion or disclaimer of opinion
d. disclaimer of opinion


Answer: d. disclaimer of opinion

What document is used to determine the actual amount of direct labor to record on a job cost sheet?

A. Time ticket
B. Payroll register
C. Production order
D. Wages payable account


Answer: A

Which of the following statements is not true with respect to the auditor's report on internal control over financial reporting?

a. the report may be presented with the report on the entity's financial statements as a combined report
b. the auditor will issue an adverse opinion if one or more material weaknesses exist
c. the report will be dated as of the date of the financial statements
d. the report will express an opinion on the effectiveness of internal control over financial reporting


Answer: c. the report will be dated as of the date of the financial statements

Which of the following information would be included in the introductory paragraph of the auditor's report on internal control over financial reporting

Which of the following information would be included in the introductory paragraph of the auditor's report on internal control over financial reporting if the report is presented separately from the auditor's report on the entity's financial statements?

a. the fact that the auditors conducted an audit of the entity's financial statements
b. statements identifying the responsibility of the auditors and management for internal control over financial reporting
c. a reference to the auditors` report and opinion on the entity's financial statements
d. the definition of material weakness in internal control over financial reporting


Answer: b. statements identifying the responsibility of the auditors and management for internal control over financial reporting

When completing the audit of internal controls for an issuer, the PCAOB requires auditors of public companies to audit internal controls over

a. all of the answers are correct
b. compliance with regulations
c. financial reporting
d. operations

Answer: c. financial reporting

When completing the audit of internal controls for an issuer, AS5 requires auditors of public companies to report on

a. management's report on internal control- no; an audit of internal control- no
b. management's report on internal control- yes; an audit of internal control- yes
c. management's report on internal control- no; an audit of internal control- yes
d. management's report on internal control- yes; an audit of internal control- no


Answer: c. management's report on internal control- no; an audit of internal control- yes

Which report would not be appropriate for a public accounting firm to provide on financial reporting controls?

Which report would not be appropriate for a public accounting firm to provide on financial reporting controls?

a. unqualified-- no material weaknesses found
b. disclaimer of opinion-- significant deficiencies exist
c. adverse-- material weaknesses exist
d. disclaimer of opinion-- unable to perform all necessary procedures


Answer: b. disclaimer of opinion-- significant deficiencies exist

A material weakness is a situation in which

a. it is reasonably possible that a material misstatement would not be detected on a timely basis
b. it is reasonably possible that an immaterial misstatement would not be detected on a timely basis
c. there is a remote likelihood that a material misstatement would not be detected on a timely basis
d. it is probable that an immaterial financial statement misstatement would not be detected on a timely basis


Answer: a. it is reasonably possible that a material misstatement would not be detected on a timely basis

When planning the audit of internal controls for an issuer, the audit team should

a. identify significant accounts, locations, and assertions
b. re-perform control activities performed by client employees to determine their effectiveness
c. conduct a walkthrough of the internal control process
d. make inquiries of employees regarding the existence of control activities


Answer: a. identify significant accounts, locations, and assertions

When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on:

When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on:

a. neither answer is correct
b. both answers are correct
c. whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure
d. whether the account has a history of errors


Answer: c. whether there is a reasonable possibility that the company's controls will fail to prevent or detect a misstatement of an account balance or disclosure

A bridge work-paper shows the connection between

a. management objectives and accounting system procedures
b. control evaluation findings and subsequent audit procedures
c. financial statement assertions and tests of controls
d. management objectives and entity control activities


Answer: b. control evaluation findings and subsequent audit procedures

Which of the following does not accurately summarise auditor's requirements regarding internal control?

a. test controls- public entity yes; non public entity yes
b. documenting- public entity yes; non public entity yes
c. evaluating control risk- public entity yes; non public entity yes
d. understanding- public entity yes; non public entity yes


Answer: a. test controls- public entity yes; non public entity yes

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the

The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the

a. administrative controls from the internal accounting controls
b. authorisation of transactions from the custody of related assets
c. human resources function from the controllership function
d. operational responsibility fro, the record-keeping responsibility


Answer: b. authorisation of transactions from the custody of related assets

Tests of controls in a GAAS audit are required for

a. obtaining evidence about the financial statement assertions
b. obtaining evidence about the operating effectiveness of client control activities
c. accomplishing control over the occurrence of recorded transactions
d. applying analytical procedures to financial statement balances


Answer: b. obtaining evidence about the operating effectiveness of client control activities

A transaction-level internal control activity is best described as

a. a method for recording, summarising, and reporting financial information
b. an action taken by auditors to obtain evidence
c. the functioning of the board of directors in support of its audit committee
d. an action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company


Answer: d. an action taken by client personnel for the purpose of preventing, detecting, and correcting errors and frauds in transactions to eliminate or mitigate risks identified by the company

According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal

According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to

a. determine that the company's employees are processing the controls according to the policy and procedure manuals at the company
b. determine whether the company's controls are processing company data effectively
c. determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors and fraud that could result in material misstatements, if they operate as prescribed
d. none of the answers are correct


Answer: c. determine that the company's controls will satisfy the company's control objectives and can effectively prevent or detect errors and fraud that could result in material misstatements, if they operate as prescribed

Which of the following is a preventative control?

a. detailed fluctuation analysis completed by the CFO for revenue
b. separation of duties between the payroll and personnel departments
c. recalculation of a sample of payroll entries by internal auditors
d. reconciliation of a bank account


Answer: b. separation of duties between the payroll and personnel departments

In most audits of large entities, control risk assessment contributes to audit efficiency, which means that

a. auditors will be able to reduce the cost of substantive procedures by an amount less than the costs of tests of controls
b. the cost of control evaluation will exceed the cost of substantive procedures
c. the cost of substantive procedures will exceed the cost of control evaluation work
d. auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs


Answer: d. auditors will be able to reduce the cost of substantive procedures by an amount more than the control evaluation costs

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of the client?

Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of the client?

a. all of the answers are correct
b. an internal control questionnaire
c. a flowchart of the documents and procedures used by the company
d. a narrative memorandum describing the control system


Answer: b. an internal control questionnaire

The primary purpose for obtaining an understanding of a nonpublic audit client's internal control is to

a. provide the rational for the inherent risk assessment at the financial statement assertion level
b. provide information for a communication of internal control-related matters to management
c. provide a basis for making constructive suggestions in a management letter
d. determine the nature, timing and extent of tests to be performed in the audit



Answer: d. determine the nature, timing and extent of tests to be performed in the audit

The most important fundamental component of an entity's internal control is

a. reliability of financial reporting
b. people who operate the control system
c. compliance with laws and regulations
d. effectiveness and efficiency of operations


Answer: b. people who operate the control system

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except

To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except

a. confirmation of balances
b. inspection of documentation
c. inquiry of client personnel
d. observation of company operations


Answer: a. confirmation of balances

Effectiveness of audit procedures would be reduced by

a. performing procedures during the interim period as opposed to at the fiscal year-end date
b. performing audit procedures at the fiscal year-end date as opposed to the interim period
c. deciding to obtain external evidence instead of internal evidence
d. selecting larger sample sizes for audit


Answer: a. performing procedures during the interim period as opposed to at the fiscal year-end date

An audit committee is

a. a committee composed of persons not associating in any way with the client or the board of directors
b. composed of internal auditors
c. composed of members of a company's board of directors who are not involved in the day-to-day operations of the company
d. composed of members of the audit team


Answer: c. composed of members of a company's board of directors who are not involved in the day-to-day operations of the company

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors

When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to

a. determine whether to contact law enforcement officials
b. recommend remedial actions to the audit committee
c. evaluate the effect of the noncompliance on the financial statements
d. determine whether other similar acts could have occurred


Answer: c. evaluate the effect of the noncompliance on the financial statements

Auditors perform analytical procedures in the planning stage of an audit for the purpose of

a. identifying unusual conditions that deserve more auditing effort
b. determining which of the financial statement assertions are the most important for the client's financial statements
c. determining the nature, timing, and extent of audit procedures for auditing the inventory
d. deciding that matters to cover in an engagement letter


Answer: a. identifying unusual conditions that deserve more auditing effort

Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation?

a. auditors must design tests to detect all noncompliance that directly affects the financial statements
b. auditors must design tests to obtain reasonable assurance that all noncompliance with direct material statement effects is detected
c. the responsibility for detecting noncompliance exactly parallels the responsibilities for errors and fraud
d. auditors must design tests to detect all material noncompliance that indirectly affects the financial statements


Answer: b. auditors must design tests to obtain reasonable assurance that all noncompliance with direct material statement effects is detected

It is acceptable under generally accepted auditing standards for an audit team to

It is acceptable under generally accepted auditing standards for an audit team to

a. assess inherent risk at zero and perform a minimum of detection work
b. assess control risk at zero and perform a minimum of detection work
c. decide that audit risk can be 40 percent
d. assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive detection work


Answer: d. assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive detection work

Auditors are not responsible for accounting estimates with respect to

a. determining the reasonableness of estimates
b. determining that estimates are adequately disclosed in the financial statements
c. determining that estimates are presented in conformity with GAAP
d. making the estimates


Answer: d. making the estimates

An audit strategy contains

a. documentation of the assertions under audit, the evidence obtained, and the conclusions reached
b. reconciliation of the account balances in the financial statements with the account balances in the client's general ledger
c. specifications of procedures the auditors believe appropriate for the financial statements under audit
d. specifications of auditing standards relevant to the financial statements being audited


Answer: c. specifications of procedures the auditors believe appropriate for the financial statements under audit

Under the Private Securities Litigation Reform Act, independent auditors are required to first

Under the Private Securities Litigation Reform Act, independent auditors are required to first

a. report clearly inconsequential noncompliance to the audit committee of the client's board of directors
b. resign from the audit engagement and report the instances of noncompliance to the SEC
c. report to the SEC all instances of noncompliance that believe have a material effect on financial statements if the board of directors does not first report to the SEC
d. report in writing all instances of noncompliance to the client's board of directors


Answer: c. report to the SEC all instances of noncompliance that believe have a material effect on financial statements if the board of directors does not first report to the SEC

Analytical procedures used when planning an audit should concentrate on

a. accounts and relationships that can represent specific potential problems and risks in the financial statements
b. management assertions in financial statements
c. weaknesses in the company's internal control activities
d. predictability of account balances on individual transactions


Answer: a. accounts and relationships that can represent specific potential problems and risks in the financial statements

When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following?

a. evidence of a conservative systematic bias
b. assumptions that are similar to industry guidelines
c. key factors that are consistent with prior periods
d. measurements that are objective and not susceptible to bias


Answer: a. evidence of a conservative systematic bias

The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion

The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work?

a. 0.10
b. 0.00
c. 0.20
d. 0.75


Answer: a. 0.10

When a company that sells its products for a (gross) profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods ratio will

a. decrease
b. increase
c. remain unchanged
d. not be able to be determined with the information provided


Answer: a. decrease

Analytical procedures can be used in which of the following ways?

a. as "attention-directing" methods when planning an audit at the beginning
b. as a means of overall review at the end of the audit
c. as substantive audit procedures to obtain evidence during an audit
d. all of the answers are correct


Answer: d. all of the answers are correct

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05)

If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to

a. be unchanged
b. change from 0.1 to 0.04
c. change from 0.2 to 0.3
d. change from 0.25 to 0.1


Answer: d. change from 0.25 to 0.1

Which of the following is a specific procedural response to a particular fraud risk in an account balance or class of transactions?

a. exercising more professional skepticism
b. performing procedures such as inventory observation and cash counts on a surprise or unannounced basis
c. studying management's selection and application of accounting principles more carefully
d. carefully avoiding conducting interviews with people in the fraud-rich areas


Answer: b. performing procedures such as inventory observation and cash counts on a surprise or unannounced basis

Analytical procedures are generally used to produce evidence from

a. detailed examination of external, external-internal, and internal documents
b. relationships among current financial balances and prior balances, forecasts and non-financial data
c. confirmations mailed directly to the auditors by client customers
d. physical observation of inventories


Answer: b. relationships among current financial balances and prior balances, forecasts and non-financial data

The likelihood that material misstatements may have entered the accounting system and not been detected

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as

a. risk of material misstatement
b. inherent risk
c. control risk
d. detection risk


Answer: a. risk of material misstatement

One of the typical characteristics of management fraud is

a. falsification of documents in order to misappropriate funds from an employer
b. conversion of stolen inventory to cash deposited in a falsified bank account
c. victimisation of investors through the use of materially misleading financial statements
d. illegal acts committed by management to evade laws and regulations


Answer: c. victimisation of investors through the use of materially misleading financial statements

Which of the following circumstances would most likely cause an audit team to perform extended procedures?

a. supporting documents are produced when requested
b. the company has recently hired a new chief financial officer after the previous on retired
c. the company maintains several different petty cash funds
d. the client made several large adjustments at or near year-end


Answer: d. the client made several large adjustments at or near year-end

The risk that the auditors' own procedures will lead to the decision that material misstatements do not exist in the financial statements

The risk that the auditors' own procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is

a. audit risk
b. inherent risk
c. control risk
d. detection risk


Answer: d. detection risk

The risk of material misstatements is composed of which audit risk components?

a. inherent risk, control risk and detection risk
b. inherent risk and detection risk
c. inherent risk and control risk
d. control risk and detection risk


Answer: c. inherent risk and control risk

When evaluating whether accounting estimates made by mangement are reasonable, the audit team would be most interested in which of the following?

a. evidence of a conservative systematic bias
b. assumptions that are similar to industry guidelines
c. key factors that are consistent with prior periods
d. measurements that are objective and not susceptible to bias


Answer: a. evidence of a conservative systematic bias

Auditing standards do not require auditors of financial statements to

Auditing standards do not require auditors of financial statements to

a. assess the risk of occurrence of errors and frauds
b. understand the nature of errors and frauds
c. report all errors and frauds found to police authorities
d. design audits to provide reasonable assurance of detecting errors and frauds


Answer: c. report all errors and frauds found to police authorities

Enterprise risk management is the responsibility of:

a. company management
b. the external auditors
c. the company's insurance providers
d. all of the answers are correct


Answer: a. company management

Failure to meet company objectives is a result of

a. audit risk
b. inherent risk
c. information risk
d. business risk


Answer: d. business risk

A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables the auditor to

A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables the auditor to

a. substantiate the accuracy of data through self-checking digits and hash totals
b. utilise the speed and accuracy of the computer
c. verify the performance of machine operations that leave visible evidence of occurrence
d. gather and store large quantities of supportive audit evidence in machine-readable form


Answer: b. utilise the speed and accuracy of the computer

An audit plan contains

a. specifications of audit standards relevant to the financial statements being audited
b. documentation of the assertions under audit, the evidence obtained, and the conclusions reached
c. specifications of procedures that auditors believe appropriate for the financial statements under audit
d. reconciliation of the account balances in the financial statements with the account balances in the client's general ledger


Answer: c. specifications of procedures that auditors believe appropriate for the financial statements under audit

If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit?"

a. cost of goods sold
b. inventory
c. bad debt expense
d. accounts receivable


Answer: d. accounts receivable

Confirmations of accounts receivable provide evidence primarily about which two assertions?

Confirmations of accounts receivable provide evidence primarily about which two assertions?

a. existence and rights & obligations
b. valuation and rights & obligations
c. completeness and valuation
d. existence and completeness

Answer: a. existence and rights & obligations

The revenue cycle of a company generally includes which accounts?

a. inventory, accounts payable, and general expenses
b. cash, notes payable, and capital stock
c. cash, accounts receivable, and sales
d. inventory, general expenses, and payroll


Answer: c. cash, accounts receivable, and sales

When auditing the existence assertion for an asset, auditors proceed from the

a. general ledger back to the supporting original transaction documents
b. supporting original transaction documents to the general ledger
c. financial statement amounts back to the potentially unrecorded items
d. potentially unrecorded items forward to the financial statement amounts


Answer: a. general ledger back to the supporting original transaction documents

Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account

Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in the

a. planning memorandum in the current file
b. administrative audit documentation in the current file
c. permanent file audit documentation
d. current file audit documentation


Answer: d. current file audit documentation

With respect to the concept of materiality, which one of the following statements is correct?

a. materiality is a matter or professional judgment
b. materiality depends on the nature of the transaction rather than the dollar amount of the transaction
c. materiality depends on the dollar amount of an item relative to other items in the financial statements
d. materiality is determined by reference to AICPA guidelines


Answer: a. materiality is a matter or professional judgment

An auditor's permanent file audit documentation most likely will contain

a. excerpts of the corporate charter and bylaws
b. the most recent engagement letter
c. memoranda of conference with management
d. internal control analysis for the current year


Answer: a. excerpts of the corporate charter and bylaws

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date?

a. inspecting communications with the client's legal counsel regarding recorded contingent liabilities
b. scanning the minutes for significant transactions with members of the board of directors
c. reviewing accounting records for recurring transactions occurring near year-end
d. interviewing internal auditors about their reporting responsibilities


Answer: b. scanning the minutes for significant transactions with members of the board of directors

Spreadsheet software would be most useful for which of the following audit activities?

a. drafting a planning memorandum
b. preparing a comparison of current-year expenses with those from the previous year
c. preparing an audit plan
d. testing internal controls over computerised accounting applications


Answer: b. preparing a comparison of current-year expenses with those from the previous year

Which of the following is an advantage of computer-assisted audit techniques (CAATs)?

a. the use of CAATs can be substituted for a relatively large part of the required testing
b. the software can be used for audits of clients that use differing computer equipment and file formats
c. the use of CAATs has reduced the need for the auditor to study input controls for computer-related procedures
d. the CAATs programs are well written in one computer language


Answer: b. the software can be used for audits of clients that use differing computer equipment and file formats

Which of the following communications is most likely to be written before the balance-sheet date?

Which of the following communications is most likely to be written before the balance-sheet date?

a. a report to the audit committee on the results of testing of internal control over cash receipts
b. an attorney's letter regarding contingent liabilities
c. confirmation letters to vendors confirming the amounts they owe to the client
d. an engagement letter


Answer: d. an engagement letter

Prior to accepting a new engagement, a public accounting firm should

a. assess the firm's resources to ensure that they are sufficient to permit them to accept the engagement
b. attempt to contact the predecessor auditors
c. all of the answers are correct
d. evaluate the integrity of management


Answer: c. all of the answers are correct

Which of the following procedures would most likely be performed during planning?

a. performing a search for unrecorded liabilities
b. reporting internal control deficiencies to the audit committee
c. surprise counts of the client's petty cash fund
d. identifying related parties


Answer: d. identifying related parties

When auditing Vandalay Jewelry, Costanza CPA was not familiar with the quality and cut of the company's precious jewel inventory

When auditing Vandalay Jewelry, Costanza CPA was not familiar with the quality and cut of the company's precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist in the inventory valuation. Should Costanza refer to Benes's work in the audit report?

a. the auditors' report should mention that use of a specialist only when the specialist's findings affect the auditors' conclusion
b. the use of a specialist need not be mentioned if the auditors decide to take responsibility for the specialist's findings
c. yes, the auditors' report should mention that fact that a specialist was used
d. the auditors' report should mention the specialist only if Vandalay agrees with specialist's findings


Answer: a. the auditors' report should mention that use of a specialist only when the specialist's findings affect the auditors' conclusion

An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?

a. methods of statistical sampling the auditor will use
b. schedules and analyses to be prepared by the client's employees
c. client representations about availability of all minutes of meetings of the board of directors
d. specification of litigation in progress against the client


Answer: b. schedules and analyses to be prepared by the client's employees

Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit?

a. avoiding the problem of doing too little work (under-auditing)
b. being able to fine-tune the audit work for effectiveness and efficiency
c. being able to decide early what type of audit opinion to issue
d. avoiding the problem of doing more work than necessary (over-auditing)


Answer: c. being able to decide early what type of audit opinion to issue

When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity,

When planning an audit, which of the following is not a factor that affects auditors' decisions about the quantity, type, and content of audit documentation?

a. the auditors' judgment about materiality
b. the auditors' judgment about their independence with regard to the client
c. the existence of new sales contracts important for the client's business
d. the auditors' need to document compliance with generally accepted auditing standards


Answer: b. the auditors' judgment about their independence with regard to the client

When initiating communications with predecessor auditors, prospective auditors should expect

a. to take responsibility for obtaining the client's consent for the predecessor to give information about prior audits
b. to obtain copies of some or all of the predecessor auditor's audit documentation
c. to conduct interviews with the partner and manager in charge of the predecessor public accounting firm's engagement
d. all of the answers are correct


Answer: d. all of the answers are correct

Generally accepted auditing standards require that auditors always prepare and use

a. the written time budgets and schedules for performing each audit
b. a written audit plan
c. a written client consent to discuss audit matters with prospective auditors
d. a written planning memorandum explaining the auditors' understanding of the client's business


Answer: b. a written audit plan