AUDITING THEORY MCQ BY SALOSAGCOL
CHAPTER 1
1. Broadly defined, the subject matter of any audit consist of
a. Financial statements
b. Economic data
c. Assertions
d. Operating data
2. An audit of financial statements is conducted to determine if the
a. Organization is operating efficiency and effectively
b. Auditee is following specific procedures or rules set down by some
higher authority
c. Overall financial statement statements are stated in accordance with the
applicable financial reporting framework
d. Client’s internal control is functioning as intended
3. Most of the independent auditor’s work in formulating an opinion on
financial statement consist of
a. Studying and evaluating internal control
b. Obtaining and examining evidential matter
c. Examining cash transaction
d. Comparing recorded accountability with assets
4. In financial statement audits, the audit process should be conducted
in accordance with
a. The audit program
b. Philippine standard on auditing
c. Philippine accounting standards
d. Philippine Financial Reporting Standards
5. Which of the following best describe the operational audit?
a. It requires the constant review by internal auditors of the
administrative controls as they relate to operations of the company.
b. It concentrates on implementing financial and accounting control in a
newly organized company.
c. In attempts and is designed to verify the fair presentation of a
company’s results of operations.
d. It concentrates on seeking out aspects of operations in which waste would
be reduced by the introduction of controls.
6. The auditor communicates the results of his or her work through the medium
if the
a. Engagement letter
b. Audit report
c. Management letter
d. Financial statement
7. Which of the following types of auditing is performed most commonly by
CPA’s on a contractual basis?
a. Internal Auditing
b. Income tax auditing
c. Government auditing
d. External auditing
8. Independent auditing can best be describe as a
a. Professional activity that measures and communicates
financial accounting data
b. subset accounting
c. Professional activity that attest to the fair presentation of
financial statement
d. Regulatory activity that prevents the issuance of improper financial
information
9. Which of the following statements is not a distinction between
independent auditors and internal auditors?
a. Independent auditors represent third party users external to the auditee
entity, whereas internal auditors report directly to management.
b. Although independent auditors strive for both validity and relevance of
evidence, internal auditors are concerned almost exclusively with
validity.
c. Internal auditors are employees of the auditee, whereas independent
auditors are independent contractors.
d. The internal auditor’s span of coverage goes beyond financial auditing
to encompass operational and performance auditing.
10. Which of the following has the primary responsibility for the fairness of
the representations made in the financial statements?
a. Client’s management
b. Audit Committee
c. Independent auditor
d. Board of Accountancy
11. An audit of the financial statements of KIA Corporation is being conducted by
an external auditor. The external auditor is expected to
a. express an opinion as to the fairness of KIA’s financial statements.
b. express an opinion as to the attractiveness of KIA for
investment purposes.
c. certify the correctness of KIA’s Financial Statements.
d. examine all evidence supporting KIA’s financial statements.
12. Which of the following statements about independent financial statements
audit is correct?
a. The audit of financial statements relieves management of its
responsibilities for the financial statement
b. An audit is designed to provide limited assurance that the
financial statements taken as a whole are free from material
misstatement
c. The procedures required to conduct an audit in accordance with PSAs
should be determined by the client who engaged the services of the
auditor.
d. The auditor’s opinion is not an assurance as to the future viability of the
entity as well as the effectiveness and efficiency with which
management has conducted the affairs of the entity.
13. The reason an independent auditor gathers evidence is to
a. Form an opinion on the financial statements
b. Detect fraud
c. Evaluate management
d. Evaluate internal controls
14. An attitude that includes a questioning mind and critical assessment of
audit evidence is referred to as
a. Due professional care
b. Professional skepticism
c. Reasonable assurance
d. Supervision
15. Jack has been retained as auditor of EVC Company. The function of Jack’s
opinion on financial statements of EVC Company is to
a. Improve financial decisions of company management
b. Lend Credibility to management’s representation
c. Detect fraud and abuse in management operations
d. Serve requirements of BIR, SEC, or Central Bank
16. Which of the following is not one of the limitations of an audit?
a. The use of testing
b. Limitations imposed by client
c. Human error
d. Nature of evidence that the auditor obtains
17. Which of the following statements does not properly describe a limitation of
an audit?
a. Many audit conclusions are made on the basis of examining a sample of
evidence.
b. Some evidence supporting peso representation in the financial
statement must be obtained by oral or written representation of
management.
c. Fatigue can cause auditors to overlook pertinent evidence.
d. Many financial statement assertions cannot be audited.
18. Which of the following is not one of the general principles governing the audit
of financial statements?
a. The auditor should plan and perform the audit with an attitude of
professional skepticism.
b. The auditor should obtain sufficient appropriate evidence primarily
through inquiry and analytical procedure to be able to draw
reasonable conclusions.
c. The auditor should conduct the audit in accordance with PSA.
d. The auditor should comply with the Philippine Code of Professional Ethics.
19. Which of the following statements does not describe a condition that creates
a demand for auditing?
a. Conflict between an information preparer and a user can result in biased
information.
b. Information can have substantial economic consequence for a
decision- maker.
c. Expertise is often required for information preparation and verification.
d. Users can directly assess the quality of information.
20. Which of the following statements does not properly describe an element
of theoretical framework of auditing?
a. The data to be audited can be verified.
b. Short-term conflicts may exist between mangers who prepare the
data and auditors who examine the data.
c. Auditors act on behalf of the management.
d. An audit benefits the public
CHAPTER 2
1. An intentional act by one more individuals among management, employees,
or third parties which results in misrepresentation of financial statement
refers to
a. Error
b. Noncompliance
c. Fraud
d. Illegal acts
2. The responsibility for the detection and prevention of errors, fraud
and noncompliance with laws and regulations rests with
a. Auditor
b. Client’s legal counsel
c. Fraud
d. Illegal acts
3. The auditor’s best defense when material misstatements in the
financial statements are not uncovered in the audit is that
a. The audit was conducted in accordance with generally accepted
accounting principles
b. Client is guilty of contributory negligence
c. The audit was conducted in accordance with PSAs
d. Issuing a representation letter to the auditor
4. The following statements relate to the auditor’s responsibility for the detection
of errors and fraud. Identify the correct statements.
I.
Due to the inherent limitation of the audit, there is a possibility
that material misstatements in the financial statements may
not be detected.
II.
The subsequent discovery of material misstatement of the
financial information resulting from fraud or error does not, in
itself, indicate that the auditor failed to follow the basic
principles and essential procedures of an audit.
a. I only
b. Both Statements are true
c. II only
d. Both statements are false
5. What
a.
b.
c.
d.
primarily differentiates fraud from an error
Materiality
Effect on misstatements
Intent
Frequency of occurrence
6. The term “error” refers to unintentional misrepresentation of
financial information. Examples of errors are when
I.
Assets have been misappropriated
II.
Transactions without substance have been recorded
III.
Records and documents have been manipulated and falsified
IV.
The effects of the transaction have been omitted from
the records
a.
b.
c.
d.
all of the above statements are true
only statements I and III are true
all of the above statements are false
only statement II and IV are true
7. Which of the following best identifies the two types of fraud?
a.
b.
c.
d.
Theft of assets and employee fraud.
Misappropriation of asset and defalcation.
Management fraud and employee fraud.
Fraudulent financial reporting and management fraud.
8. Which of the following statements best describe an auditor’s
responsibility to detect errors
and fraud?
a. An auditor should assess the risk that errors and fraud may cause
the financial statements to contain material misstatements and
should design the audit to provide reasonable assurance of
detecting errors and fraud that are material to the financial
statements.
b. An auditor is responsible to detect material errors, but has no
responsibility to detect material fraud that are concealed through
employee collusion or management override of the internal control
structure.
c. An auditor has no responsibility to detect errors and fraud unless
analytical procedures or tests of transactions identify conditions
causing a reasonably prudent auditor to suspect that the financial
statements were materially misstated.
d. An auditor has no responsibility to detect errors and fraud because
an auditor is not an insurer and an audit does not constitute a
guarantee.
9. “The auditor would ordinarily expect to find evidence to support
management representations and not assume that they necessarily
correct”.
This is an example of
a.
b.
c.
d.
Unprofessional behavior
An attitude of professional skepticism
Due diligence
A rule in code of professional conduct.
10. Which of the following statement is true?
errors.
a. It is usually easier for the auditor to uncover fraud than errors.
b. It is usually easier for the auditor to uncover errors than fraud.
c. It is usually equally difficult for the auditor to uncover errors or
fraud.
d. Usually, the auditor does not design procedures to uncover fraud or
11. The most difficult type of misstatement to detect is fraud based on
a. The over recording of transaction
b. The non-recording of transactions
c. Recorded transactions in subsidiaries
d. Related party receivable
12. If an auditor was engaged to discover errors or fraud and the auditor
performed extensive detail work, which of the following could the auditor
be expected to detect?
a.
b.
c.
d.
Misposting if recorded transactions
Unrecorded transaction
Counterfeit signatures on paid checks
Collusive fraud
13. Which of the following statements is incorrect?
a. The responsibility for the prevention and detection of fraud
and error rests with management.
b. The auditor is not and cannot be held responsible for the detection
of fraud or error.
c. In planning an audit, the auditor should assess the risk that fraud
or error may cause the financial statements to contain material
misstatement.
d. The risk of not detecting material fraud is higher than the risk of not
detecting a material misstatement arising from error.
14. Which of the following statement about fraud or error is incorrect?
a. The auditor is not and cannot be held responsible for the
prevention of fraud and error.
b. The responsibility for the prevention and detection of fraud and
error rests with management.
c. The auditor should plan and perform the audit with an attitude of
professional skepticism, recognizing that conditions or events
may be found that fraud or error may exist.
d. The likelihood of detecting fraud is ordinarily higher than that of
detecting error.
15. Which of the following is not an assurance that the auditors give to
the parties who rely on the financial statements?
a. Auditors know how the amounts and disclosures in the
financial statements were produced.
b. Auditor’s give assurance that the financial statements are accurate.
c. Auditors gathered enough evidence to provide a reasonable
basis for forming an opinion.
d. If the evidence allows the auditors to do so, auditors give assurance
in the form of opinion, as to whether the financial statements as a
whole are fairly presented in conformity with GAAP.
16. Which of the following is most likely to be presumed to represent
fraud risk on an audit?
a. Capitalization of repairs and maintenance into the property,
plant and equipment asset account.
b. Improper revenue recognition
c. Improper interest expense accrual
d. Introduction of significant new products
17. Which of the following conditions or events would least likely increase
risk of fraud or error?
a.
b.
c.
d.
Questions with respect to competence or integrity of management
Unusual pressures within the entity
Unusual transactions
Lack of transaction trail
18. Which of the following would be least likely to suggest to an auditor
that the client’s financial statement are materially misstated?
a. There are numerous delays in preparing timely internal
financial reports.
b. Management does not correct internal control structure weaknesses
that it knows about.
c. Differences are reflected in the customer’s confirmation replies.
d. There have nee two new controllers this year.
19. Which of the following circumstances would least likely cause auditor
to consider whether a material misstatement exists?
a. The turnover of senior accounting personnel exceptionally low.
b. Management places substantial emphasis on meeting,
earning projections.
c. There are significant unusual transactions near year-end.
d. Operating and financing decisions are dominated by one person.
20. Which of the following conditions would not normally cause the auditor
to question whether material errors or possible fraud exists?
a. The accounting department is overstaffed.
b. Differences exist between control accounts and
supporting subsidiary records.
c. Transactions are not supported by proper documentation.
d. There are frequent changes of auditors lawyers.
CHAPTER 3:
1. The primary responsibility for establishing and maintaining an internal control
rests with
a. The external auditors
b. The internal auditors
c. Management and those charged with governance
d. The controller or the treasurer
2. The fundamental purpose of an internal control is to
a. Safeguard the resources of the organization
b. Provide reasonable assurance that the objectives of the organization are
achieved
c. Encourage compliance with organization objectives
d. Ensure the accuracy, reliability and timeliness of information
3. Which of the following is not one of the three primary objectives of effective
internal control?
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations
c. Compliance with laws and regulations
d. Assurance of elimination of business risk.
4. Which of the following internal control objectives would be most relevant to the
audit?
a. Operational objective
b. Compliance objective
c. Financial reporting objective
d. Administrative control objective
5. An act of two or more employee to steal assets and cover their theft by
misstating the accounting records would be referred to as:
a. Collusion
b. A material weakness
c. A control deficiency
d. A significant deficiency
6. Which of the following is not one of the components of an entity’s internal
control?
a. Control risk
b. Control activities
c. Information and communication
d. The control environment
7. The overall attitude and awareness of an entity’s board of director concerning
the importance of the internal control usually is reflected in its
a. Computer-based controls
b. System of segregation of duties
c. Control environment
d. Safeguard over access of assets
8. In evaluating the design of the entity’s internal control environment, the auditor
considers the certain subcomponents of control environment and how they have
been incorporated into the entity’s processes. Subcomponents of control
environment would include
a. Integrity and ethical values
b. Commitment to competence
c. Organizational structure
d. Information and communications systems
9. Which of the following components of an entity’s internal control structure
includes the development of employee promotion and training policies?
a. Control activities
b. Control environment
c. Information and communication
d. Quality control system
10. Which of the following subcomponents of the control environment define the
existing lines of responsibility and authority?
a. Organizational structure
b. Management philosophy and operating style
c. Human resource policies and practices
d. Management integrity and ethical values
11. Which of the following is not one of the subcomponents of the control
environment?
a. Management philosophy and operating style
b. Organizational structure
c. Adequate separation of duties
d. Commitment to competence
12. Which of the following deal with ongoing or periodic assessment of quality of
internal control by management?
a. Quality control activities
b. Monitoring activities
c. Oversight activities
d. Management activities
13. The policies and procedures that help ensure that management directives are
carried out are referred to as the:
a. Control environment
b. Control activities
c. Monitoring of controls
d. Information systems
14. Which of the following is not one of the specific control activities that are
relevant to financial statement audit?
a. Performance reviews
b. Physical controls
c. Segregation of duties
d. Monitoring
15. Proper segregation of functional responsibilities in an effective structure of
internal control calls for separation of functions of
a. Authorization, execution, and payment
b. Authorization, recording, and custody
c. Custody, execution, and reporting
d. Authorization, payment, and recording
16. Which of the following best describes the purpose of the control activities?
a. The actions, policies and procedures that reflect the overall attitudes of
the management
b. The identification and analysis of risks and relevant to the preparation of
the financial statements
c. The policies and procedures that help ensure that necessary actions are
taken in order to achieve the entity’s objectives
d. Activities that deal with the ongoing assessment of the quality of internal
control by management
17. When the auditor attempts to understand the operation of the accounting
system by tracing a few transactions through the accounting system, the
auditor is said to be:
a. Tracing
b. Vouching
c. Performing a walk through
d. Testing controls
18. Which of the following is not a medium that can normally be used by an auditor
to record information concerning a client’s internal control policies and
procedures?
a. Narrative memorandum
b. Flowchart
c. Procedures manual
d. Questionnaire
19. An auditor uses the knowledge provided by the understanding of internal
control and the final assessed level of control risk primarily to determine the
nature, timing and extent of the
a. Attribute tests
b. Tests of controls
c. Compliance tests
d. Substantive tests
20. Based on the requirement of PSA 3330, how frequently must an auditor test
operating effectiveness of controls that appear to functions as they have in past
years and on which the auditor wishes to rely in the current year?
a. Monthly
b. Each audit
c. At least every second audit
d. At least every third audit
CHAPTER 4:
1. These are acts of omission or commission by the entity being audited, either
intentional or unintentional, which are contrary to the prevailing laws and
regulations.
a. Fraud
b. Misappropriation
c. Noncompliance
d. Defalcation
2. In order to achieve the objectives of the accountancy profession, professional
accountants have to observe a number of prerequisites or fundamental
principles. The fundamental principles include the following except
a. Objectivity
b. Professional competence and due care
c. Technical standards
d. Confidence
3. The principle of professional competence and due care imposes certain
obligations on professional accountants. Which of the following is not one of
those obligations required by this principle?
a. To act diligently in accordance with applicable technical and professional
standards
b. To be fair, intellectually honest and free of conflict of interest
c. To become aware and understand relevant technical, professional and
business developments
d. To obtain professional knowledge and experience to enable them to fulfil
their responsibilities
4. The phase of professional competence that requires a professional accountant
to adopt a program designed to ensure quality control in the performance of
professional services consistent with technical and professional standards is:
a. Attainment of professional competence
b. Maintenance of professional competence
c. Application of professional competence
d. Review of professional competence
5. The essence of the due care principle is that the auditor should not be guilty of:
a. Bias
b. Errors in judgement
c. Fraud
d. Negligence
6. The principle of confidentiality applies to:
a. Professional accountants in public practice
b. Professional accountants in commerce and industry
c. Professional accountants in government
d. All professional accountants
7. The principle of confidentiality imposes an obligation on professional
accountants to refrain from:
a. Disclosing confidential information to another party even if client
authorizes the disclosure
b. Using confidential information acquired as a result of professional and
business relationships to their personal advantage or the advantage of
the third parties
c. Disclosing information to defend themselves in case of litigation
d. Responding to an inquiry or investigation conducted by the Professional
Regulatory Board of Accountancy
8. A CPA should not disclose confidential information obtained during an audit
engagement in which one of the following situations?
a. When the security of the state requires
b. With the consent of the client
c. In defense of himself when sued by his client
d. To a successor auditor without the client’s permission
9. Which of the following is considered a violation of rules on confidentiality?
a. The CPA discloses information to protect his own interest in the course of
legal proceedings
b. The CPA discloses information to a successor auditor after obtaining the
client’s permission
c. The CPA discloses information to another CPA in compliance with a quality
control review conducted by the BOA
d. The CPA divulges information disclosed to him by a prospective client.
10. In which of the following circumstances would a CPA be bound by the ethics to
refrain from disclosing any confidential information obtained during course of a
professional engagement?
a. The CPA is issued summon enforceable by the court order which orders
the CPA to present confidential information
b. A major stockholder of a client company seeks accounting information
from CPA after the management declined to disclose the requested
information
c. Confidential client information is made available with the client’s
permission
d. An inquiry by the PRC and the CPA needs the disclosure to defend himself
11. The principle of professional behaviour requires a professional accountant to
a. Be straightforward and honest in performing professional services
b. Be fair and should not allow prejudice or bias, conflict of interest or
influence of others to override objectivity
c. Perform professional services with due care, competence and diligence
d. Act in a manner consistent with the good reputation of the profession and
refrain from any conduct which might bring discredit to profession
12. Which of the following most accurately states how objectivity has been defined
by the Code of Ethics?
a. Being honest and straight forward in all professional and business
relationships.
b. A state of mind that permits the provision of an opinion without being
affected by influences that compromise professional judgement
c. A combination of impartiality, intellectual honesty and a freedom from
conflict of interest
d. Avoiding facts and circumstances that could reduce the public confidence
in the professional accountant’s report
13. Which fundamental principle is seriously threatened by an engagement that is
compensated based on the net proceeds on loans received by the client from a
commercials bank?
a.
b.
c.
d.
Integrity
Objectivity
Confidentiality
Professional behaviour
14. Independence is required whenever a professional accountant performs:
a. Professional services
b. Assurance services
c. Non-assurance services
d. Tax consultancy services
15. It refers to the avoidance of facts and circumstances that are so significant that
a reasonable and informed third party, having knowledge of all relevant
information, including safeguards applied, would reasonably conclude a firm’s or
a member of the assurance team’s integrity, objectivity or professional
scepticism had been compromised.
a. Independence in fact
b. Independence in appearance
c. Independence in mind
d. Inherent independence
16. This occurs as a result of the financial or other interests of a professional
accountant or of an immediate or close family member.
a. Self-interest threat
b. Self-review threat
c. Advocacy threat
d. Familiarity threat
17. Acting for an audit client in the resolution of a dispute or litigation would most
likely create
a. Self-interest threat
b. Intimidation threat
c. Advocacy threat
d. Familiarity threat
18. The preparation of accounting records of financial statements for an audit client
will most likely create
a. Self-interest threat
b. Self-review threat
c. Intimidation threat
d. Familiarity threat
19. Accepting gift or undue hospitality from an assurance client would create most
likely create
a. Familiarity threat
b. Self-review threat
c. Advocacy threat
d. Intimidation threat
20. Using the same senior personnel on an assurance engagement over a long
period of time would most likely create
a. Intimidation threat
b. Advocacy threat
c. Familiarity threat
d. Self-interest threat
CHAPTER 5
1. This consists of checking the mathematical accuracy of documents of records.
a. Reperformance
b. Confirmation
c. Recalculation
d. Inspection
2. Which of the following assertions does not relate to balances at period end?
a. Existence
b. Occurrence
c. Valuation or allocation
d. Rights and obligations
3. Which of the following assertions does not relate to classes of transactions
and events for the period?
a. Completeness
b. Valuation
c. Cut-off
d. Accuracy
4. An assertion that transactions are recorded in the proper accounting period is:
a. Classification
b. Occurrence
c. Accuracy
d. Cut-off
5. Which of the following is not normally performed in the preplanning or
pre- engagement phase?
a. Deciding whether to accept or reject an audit engagement
b. Inquiring from predecessor auditor
c. Preparing an engagement letter
d. Making a preliminary estimate of materiality
6. Before accepting an engagement to audit a new client, a CPA is required
to obtain
a. A preliminary understanding of the prospective client’s industry and
business
b. The prospective client’s signature to the engagement letter
c. An understanding of the prospective client’s control environment
d. A representation letter from the prospective client
7. Preliminary knowledge about the client’s business and industry must be
obtained prior to the acceptance of the engagement primarily to
a. Determine the degree of knowledge and expertise required by the
engagement
b. Determine the integrity of management
c. Determine whether the firm is independent with the client
d. Gather evidence about the fairness of the financial statements
8. In an audit, communication between the predecessor and incoming
auditor should be
a. Authorized in an engagement letter
b. Acknowledged in a representation letter
c. Either written or oral
d. Written and included in the working papers
9. Arnel, CPA, is succeeding Von, CPA, on the audit engagement of Almar
Corporation. Arnel plans to consult Von and to review Von’s prior year
working papers. Arnel may do so if
a. Von and Almar consent
b. Almar consents
c. Von consents
d. Von and Arnel consent
10. An incoming auditor should request the new client to authorize the
predecessor auditor to allow a review of the predecessor’s
Engagement letter
Working Paper
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
11. Engagement letter that documents and confirms the auditor’s acceptance of
the engagement would normally be sent to the client
a. Before the audit report is issued
b. After the audit report is issued
c. At the end of fieldwork
d. Before the commencement of the engagement
12. Which of the following is not one of the principal contents of an
engagement letter?
a. Objective of the financial statements
b. Unrestricted access to records and documents
c. Limitations of the engagement
d. Management’s responsibility for the financial statements
13. Arrangements concerning which of the following are least likely to be included
in engagement letter?
a. Auditor’s responsibilities
b. Fees and billing
c. CPA investment in client securities
d. Other forms of reports to be issued in addition to the audit report
14. The audit engagement letter should generally include a reference to each of
the following except
a. The expectation of receiving a written management representation letter
b. A request for the client to confirm the terms of engagement
c. A description of the auditor’s method of sample selection
d. The risk that material misstatements may remain undiscovered
15. Which of the following would be least likely to be included in the
auditor’s engagement letter
a. Forms of the report
b. Extent of his responsibilities
c. Objectives and scope of the audit
d. Type of opinion to be issued
16. According to PSA 210, the auditor and the client should agree on the terms
of engagement. The agreed terms would need to be recorded in a(n)
a. Memorandum to be placed in the permanent section of the auditing
working papers
b. Engagement letter
c. Client representation letter
d. Comfort letter
17. Which of the following factors most likely would influence an
auditor’s determination of the auditability of the entity’s financial
statements
a. The complexity of the accounting systems
b. The existence of related party transactions
c. The adequacy of the accounting records
d. The operating effectiveness of control procedures
18. Which of the following factors most likely would cause an auditor not to accept
a new audit engagement?
a. An inadequate understanding of the entity’s interval control structure
b. The close proximity to the end of the entity’s fiscal year
c. Concluding that the entity’s management probably lacks integrity
d. An inability to perform preliminary analytical procedures before
assessing control risk
19. Which of the following should an auditor obtain from the predecessor
auditor prior to accepting an audit engagement
a. Analysis of balance short accounts
b. Analysis of income statements accounts
c. All matters of continuing accounting significance
d. Facts that might bear on the integrity of management
20. An incoming auditor most likely would make specific inquiries of the
predecessor auditor regarding
a. Specialized accounting principles of the client’s industry
b. The competency of the client’s internal audit staff
c. The uncertainty inherent in applying sampling procedures
d. Disagreements with management as to auditing procedures
CHAPTER 6:
1. Which of the following statements is most correct regarding the primary
purpose of audit procedures?
a. To detect all errors or fraudulent activities as well as illegal activities
b. To comply with the SEC
c. To gather corroborative audit evidence about management’s
assertions regarding the client’s financial statements
d. To determine the amount of errors in the balance sheet accounts in order
to adjust the accounts to actual
2. A procedure designed to test for monetary misstatements directly affecting
the validity of the financial statement balances is a:
a. Test of controls
b. Substantive test
c. Test of attributes
d. Monetary-unit sampling test
3. You are auditing the company’s purchasing process for goods and services.
You are primarily concerned with the company not recording all purchase
transactions. Which audit procedure below would be the most effective audit
procedure in this case?
a. Vouching from the accounts payable account to the vendor invoices.
b. Tracing vendor invoices to recorded amounts in the accounts
payable account.
c. Confirmation of accounts payable recorded amounts.
d. Reconciling the accounts payable subsidiary ledger to the
accounts payable account.
4. The information obtained by the auditor in arriving at the conclusions on
which the audit opinion is based is called:
a. Audit working papers
b. Audit assertions
c. Audit evidence
d. Audit standards
5. The major reason an independent auditor gathers evidence is to
a. form an opinion on the financial statements.
b. detect fraud.
c. evaluate management.
d. evaluate internal control.
6. Which of the following is the best example of a corroborating evidence?
a. General journal
b. Worksheet cost allocation
c. Vendor’s invoice
d. Cash receipts journal
7. Which of the following statements about audit evidence is correct?
a. Appropriateness is the measure of the quantity of audit evidence.
b. Sufficiency is the measure of the quality of audit evidence and
its relevance to a particular assertion and its reliability.
c. Audit evidence is more persuasive when items of evidence from different
sources or of different nature are consistent.
d. There should be a one-to-one relationship between audit objective
and audit procedure.
8. Evidence is generally considered appropriate when:
a. it has been obtained by random selection.
b. there is enough of it to afford a reasonable basis for an opinion
on financial statements.
c. it has the qualities of being relevant, objective, and free from known bias.
d. it consists of written statements made by managers of the
enterprise under audit.
9. Evidence are generally considered sufficient when:
a. it is appropriate.
b. there is enough of it to afford a reasonable basis for an opinion
on financial statements.
c. it has the qualities of being relevant, objective and free from unknown
bias.
d. it has been obtained by random selection.
10. Appropriateness of evidence is a measure of the:
a. quantity of evidence.
b. quality of evidence.
c. sufficiency of evidence.
d. meaning of evidence.
11. The sufficiency and appropriateness of evidential matter ultimately is based
on the
a. availability of corroborating data.
b. Philippine Standard on Auditing.
c. pertinence of the evidence.
d. judgment of the auditor.
12. An example of an external document that provides reliable information for
the auditor is:
a. employees time reports.
b. bank statements.
c. purchase order for company purchases.
d. carbon copies of checks.
13. An example of a document that the auditor receives from the client, but
which was prepared by someone outside the client’s organization, is a:
a. confirmation.
b. sales invoice.
c. vendor invoice.
d. bank reconciliation.
14. To be considered reliable evidence, confirmations must be controlled by:
a. a client employee responsible for accounts receivable.
b. a financial statement auditor.
c. a client’s internal audit department.
d. a client’s controller or CFO.
15. Given the economic and time constraints in which auditors can collect
evidence about management assertions about the financial statements, the
auditor normally gathers evidence that is:
a.
b.
c.
d.
irrefutable.
conclusive.
persuasive.
completely convincing.
16. It refers to the material (working papers) prepared by and for, or obtained
and retained by the auditor in connection with the performance of the audit.
a. Documentation
b. Audit report
c. Accounting data
d. Corroborative evidence
17. Which of the following best describes one of the primary objectives of
audit documentation?
a. Defend against claims of a deficient audit.
b. Provide a principal support for the income taxation return.
c. Provide documentation that the audit was conducted in accordance
with auditing standards.
d. Provide additional support or recorded amounts to the client.
18. Which of the following is not an expert upon whose work an auditor may relay?
a. Actuary
b. Internal auditor
c. Appraiser
d. Engineer
19. An expert whose expertise is used by the entity in preparing financial
statements is called a(n):
a. Financial expert
b. Management expert
c. Auditor’s expert
d. Specialist
20. External auditors must obtain evidence regarding what attributes of an
internal audit department if the external auditors intend to rely on internal
auditor’s work?
a. Integrity
b. Objectivity
c. Competence
d. All of the above
CHAPTER 7
1. This involves developing an overall strategy for the expected conduct and
scope of the examination; the nature, extent, and timing of which vary with
the size and complexity, and experience with and knowledge of the entity.
a. Audit planning
b. Audit procedure
c. Audit program
d. Audit working papers
2. Initial planning involves four matters. Which of the following is not one of these?
a. Develop an overall audit strategy
b. Request that bank balances be confirmed
c. Schedule engagement staff and audit specialists
d. Identify the client’s reason for the audit
3. A CPA is conducting the first examination of a client’s financial statements.
The CPA hopes to reduce the audit work by consulting with the predecessor
auditor and reviewing the predecessor’s working papers. This procedure is
a. Acceptable if the client and the predecessor auditor agree to it.
b. Acceptable if the CPA refers in the audit report to reliance upon
the predecessor auditor’s work.
c. Required if the CPA is to render an unmodified opinion.
d. Unacceptable because the CPA should bring an independent
viewpoint to a new engagement.
4. The preliminary judgment about materiality and the amount of audit
evidence accumulated are
related.
a. directly
b. indirectly
c. not
d. inversely
5. According to PSA 320, materiality should be considered by the auditor when:
Determining the nature, timing
Evaluating
the
effects and extent of audit procedures.
of
misstatements
a.
YES
YES
b.
YES
NO
c.
NO
NO
d.
NO
YES
6. Which of the following statements is not correct about materiality?
a. The concept of materiality recognizes that some matters are
important for fair presentation of financial statements in conformity
with the applicable financial reporting framework, while other matters
are not important.
b. An auditor considers materiality for planning purposes in terms of the
largest aggregate level of misstatements that could be material to any
one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances
and necessarily involve both quantitative and qualitative judgments
d. An auditor’s consideration of materiality is influenced by the
auditor’s perception of the needs of a reasonable person who will
rely on the financial statements.
7. “Performance materiality” is the term used to indicate materiality at the:
a. balance sheet level
b. account balance level
c. income statement level
d. company-wide level
8. When comparing level of materiality used for planning purposes and the level
of materiality used for evaluating evidence, one would most likely expect
a. The level of materiality to be always similar.
b. The level of materiality for planning purposes to be similar.
c. The level of materiality for planning purposes to be higher.
d. The level of materiality for planning purposes to be based on
total assets while the level of materiality for evaluating purposes
to be based on net income.
9. Qualitative factors can affect an auditor’s assessment of materiality. Which of
the following qualitative factors could influence the assessment of
materiality?
I.
Misstatements that are otherwise immaterial may be material if affect
earnings trends.
II.
Minor misstatements resulting from the consequences of
contractual obligations.
a. I only
b. II only
c. I and II
d. neither I or II
10.Auditors frequently refer to the terms audit assurance, overall assurance, ad
level of assurance to refer to
.
a. detection risk
b. audit report risk
c. acceptable audit risk
d. inherent risk
11.The risk that financial statements are likely to be misstated materially
without regard to the effectiveness of internal control is the;
a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk
12.When planning a financial statement audit, the auditor should assess
inherent risk at the
Financial statement level Account balance or transaction class level
a.
b.
c.
d.
YES
YES
NO
NO
YES
NO
NO
YES
13.Which of the following is an incorrect statement?
a. Detection risk cannot be changed at the auditor’s discretion.
b. If individual audit risk remains the same, detection risk bears
an inverse relationship to inherent and control risk.
c. The greater the inherent and control risk the auditor believes exist,
the less detection risk that can be accepted.
d. The auditor might make separate or combines assessments of inherent
risk and control risk.
14.Relationship between control risk and detection risk is ordinarily
a. Parallel
b. Direct
c. Inverse
d. Equal
15.Which of the following is not correct regarding an auditor’s decision that a
lower acceptable audit risk is appropriate?
a. More evidence is accumulated
b. Less evidence is accumulated
c. Special care is required in assigning experienced staff
d. Review of audit documentation is performed by personnel not
assigned to the engagement
16.These consist of the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationship that are inconsistent
with other relevant information or deviate from predictable amount.
a. Financial statement analysis
b. Variance analysis
c. Analytical procedures
d. Regression analysis
17. Which of the following statements about analytical procedures is incorrect?
a. Analytical procedures are required to be performed in the
planning phase of the audit.
b. Analytical procedures are required to be done during the testing phase
of the audit.
c. Analytical procedures are required to be done during the
completion phase of the audit.
d. Analytical procedures may be performed in the planning, testing and
completion phases of the audit.
18.In developing the overall audit plan and audit program, the auditor
should assess inherent risk at the:
Audit plan
a.
b.
c.
d.
Audit program
Financial statement level Accounting balance level
Account balance level
Financial statement level
Account balance level
Account balance level
Financial statement level Financial statement level
19. An auditor should design the written audit program so that
a. All material transactions will be selected for substantive testing
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls
or tests of transactions.
20. Which of the following matters would least likely appear in the audit program?
a. Specific procedures that will be performed.
b. Specific audit objectives.
c. Estimated time that will be spent in performing certain procedures.
d. Documentation of the accounting and internal control systems
being reviewed.
CHAPTER 8
1. This involves the application of the procedures to less than 100% of the items
within an account balance or class of transactions. This enables the auditor to
obtain and evaluate audit evidence about some characteristics of the selected
items in order to form an opinion about the characteristics of all items
supporting an account balance or transaction class.
a. Audit techniques
b. Selective testing
c. Audit sampling
d. Specific identification
2. Audit sampling for substantive tests is appropriate when
a. Analytical procedures are used
b. The auditor wants to eliminate sampling risks
c. A population contains small number of large value items
d. Tests of details are performed
3. Audit sampling for test of control is generally appropriate when
a. Control leaves evidence of performance
b. Control leaves no evidence of performance
c. 100% of the transactions is tested
d. Examining specific high value items in the population
4. In a sampling application, the group of items about which the auditor wants to
estimate some characteristic is called the
a. Population
c. Attribute of interest
b. Sample
d. Sampling unit
5. Non-sampling error occur when the audit tests do not uncover existing
exceptions in the
a. Population
b. Planning stage
c. Sample
d. Financial statement
6. PSA 530 identifies two general approaches to audit sampling. They are
a. Random & nonrandom
b. Statistical & nonstatistical
c. Precision & reliability
d. Risk and nonrisk
7. The relationship between sample size and the allowable sampling risks is
a. Direct
b. Inverse
c. Sample deviation rate
d. Expected deviation rate
8. Principal methods of sampling selection include all of the following except
a. Haphazard
b. Random number
c. Systematic
d. Statistical
9. A sample in which every possible combination of items in the population has a
chance of constituting the sample is a
a. Representative sample
b. Random sample
c. Statistical sample
d. Judgment sample
10. The process which requires the calculation of an interval and them selects the
items based on the size of the interval is
a. Statistical sampling
b. Systematic selection
c. Random selection
d. Computerized selection
11.A method of sampling in which all the items in the population are divided into
two or more sub-population is
a. Variable sampling
b. Stratified sampling
c. Attribute sampling
d. Divisible sampling
12. If the auditor is concerned that a population may contain exceptions, the
determination of a sample size sufficient to include at least one such exception
is a characteristic of
a. Discovery sampling
b. Random sampling
c. Variables sampling
d. Peso-unit sampling
13. Which of the following statistical sampling plans does not use a fixed sample
size for tests of controls?
a. PPS sampling
b. Value-weighted sampling
c. Sequential sampling
d. Variables sampling
14. Value weighted sampling is most appropriate when the auditor
a.
b.
c.
d.
Anticipates understatement errors
Expects no errors
Anticipate overstatement errors
Has assessed control risk at high level
15. The maximum amount of error in a population that the auditor is willing to
accept is referred to as the
a. Acceptable risk
b. Tolerable error
c. Expected error
d. Tolerable materiality
16. The deviation rate the auditor expects to find in the population, before testing
begins, is called the
a. Tolerable deviation rate
b. Computer upper deviation rate
c. Sample deviation rate
d. Expected deviation rate
17. Which of the following sampling methods would be most appropriate in
performing tests of controls over authorization of cash disbursements
a. Attributes
b. Variables
c. Ratio
d. Stratified
18. In assessing sample risk, alpha risk relate to the
a.
b.
c.
d.
Efficiency of the audit
Selection of the sample
Effectiveness of the audit
Audit quality controls
19. Which of the following sampling plans would be designed to estimate a
numerical measurement of a population such as peso value?
a. Numerical sampling
b. Sampling attributes
c. Discovery sampling
d. Sampling for variables
20. Statistical samples do not allow
a.
b.
c.
d.
A. more efficient samples
Measurement of sample reliability
Replacement of the auditor’s professional judgment
Measurement of sample risk
CHAPTER 9
1. 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 account receivable and clear all material exceptions.
d. Compare sales trends and profit margins with industry average and investigate
significant differences
2. Which of the following comparisons is most useful to an auditor in evaluating the results of
an entity’s operations?
a. Prior year accounts payable to current year accounts payable
b. Prior year payroll expense to budgeted current year payroll expense
c. Current year revenue to budgeted current year revenue
d. Current year warranty expense to current year contingent liabilities.
3. Which of the following analytical procedures should be applied to the income statement?
a. Select sales and expense items and trace amounts to related supporting documents
b. Ascertain that the new income amount in the statement of cash flows agrees with
the net income amount in the income statements
c. Obtain from the client representatives, the beginning and ending inventory amounts
that were used to determine costs of sales
d. Compare the actual revenues and expenses with the corresponding figures of the
previous year and investigate significant differences.
4. Which of the following tends to be most predictable for the purpose of analytical
procedures applied as substantive test?
a. Relationships involving balance sheet accounts
b. Transactions subject to management discretion
c. Relationships involving income statement accounts.
d. Data subject to audit testing in the prior year
5. Auditors try to identify predictable relationships when using analytical procedures.
Relationships involving transactions from which of the following accounts most likely would
yield the highest level of evidence?
a. Accounts payable
b. Advertising expense
c. Accounts receivable
d. Interest expense.
6. Auditors sometimes use comparison of ratios as audit evidence. For example, an
unexplained decrease in the ratio of gross profit to sales may suggest which of the
following possibilities?
a. Unrecorded purchases
b. Unrecorded sales.
c. Merchandise purchase being charged to operating expense
d. Fictitious sales
7. Which
a.
b.
c.
d.
result of an analytical procedure suggests the existence of obsolete merchandise?
Decrease in the inventory turnover rate.
Decrease in the ratio of gross profit to sales
Decrease in the ratio of inventory to accounts payable
Decrease in the ratio of inventory to accounts receivable
8. If accounts receivable turned over 8 times in 2014 as compared to only 6 times in 2015, it
is possible that there were
a. Unrecorded credit sales in 2015.
b. Unrecorded cash receipts in 2014
c. More thorough credit investigations made by the company late in 2014
d. Fictitious sales in 2015
9. Which of the following would not be classified as an analytical procedure?
a. Benchmarking the company’s profitability ratios against others in the industry
b. Variance analysis of actual revenue versus budgeted amounts for production
c. Reperforming the client’s depreciation expense using the client’s accounting policies for
capital expenditures made during the year
d. Reconciling fixed assets disposition with the fixed asset ledger.
10. An auditor compares this year’s revenues and expenses with those of the prior year and
investigates all changes exceeding 10%. By this procedure the auditor is most likely to
learn that
a. An increase in property tax rates has not been recognized in the client’s accrual
b. This year’s provision for uncollectible account is inadequate because of worsening
economic conditions
c. December payroll taxes were not paid
d. The client changed its capitalization policy for small tools during the year.
CHAPTER 10
1. The primary emphasis in most tests of details of balances is on the
a. Balance sheet accounts
b. Revenue accounts
c. Cash flow statements accounts.
d. Expense account
2. Evidence is usually more persuasive for balance sheet accounts where it is obtained:
a. As close to the balance sheet date as possible
b. Only from transactions occurring on the balance sheet date
c. From various times throughout the client’s year
d. From time period when transactions during the fiscal year.
3. Which of the following assertions is relevant to whether the company has title to the cash
accounts as of the balance sheet date?
a. Existence or occurrence
b. Completeness
c. Rights and obligations.
d. Valuation or allocation
4. Which of the following assertions is relevant to whether the cash balances reflect the true
underlying economic value of those assets?
a. Existence or occurrence
b. Completeness
c. Rights and obligations
d. Valuation or allocation.
6. Employee steals a payment from Customer X. To cover the theft, the employee applies a
payment from Customer Y to Customer X’s account. Before Customer Y has time to notice that its
account has not been appropriately credited, the employee applies a payment from Customer Z to
Customer Y’s account.
a. Skimming
b. Kiting
c. Collateralizing
d. Lapping.
7. Which of the following controls represents a control over cash that is unique to cash accounts?
a. Separation of duties
b. Restrictive endorsements of customer checks.
c. Periodic internal audits
d. Competent, well-trained employees
8. Which of the following assertions is relevant to the audit procedure for marketable securities
that requires the auditor to examine selected documents to identify any restrictions on the
marketability of securities?
a. Existence or occurrence
b. Completeness
c. Rights and obligations.
d. Valuation or allocation
9. Which of the following represents a reasonable test of controls for cash receipts and cash
management controls?
a. Document internal controls over cash by completing the internal control questionnaire
or by flowcharting the process.
b. Prepare an independent bank reconciliation
c. Obtain a bank confirmation
d. Obtain a bank cutoff statement
10. Which of the following assertions is relevant to whether the marketable securities balances
include all securities transactions that have taken place during the period?
a. Existence or occurrence
b. Completeness.
c. Rights and obligations
d. Valuation or allocation
CHAPTER 11
1. A proper segregation of duties requires
a. An individual authorizing a transaction records it
b. An individual authorizing a transaction maintains a custody of the asset that
resulted from the transaction
c. An individual maintain custody of an asset be entitled to access the accounting
records for the asset
d. An individual recording a transaction not compare the accounting record of the
asset with the asset itself
2. The primary responsibility for establishing and maintaining an internal control rests with
a. The external auditors
b. The internal auditors
c. Management and those charged with governance
d. The controller or the treasurer
3. When the auditor attempts to understand the operation of the accounting system by
tracing a few transactions through the accounting system, the auditor is said to be:
a. Tracing
b. Vouching
c. Performing a walk-through
d. Testing controls
4. Which of the following statements is incorrect about walk-through tests?
a. It involves tracing a few transactions through the accounting systems.
b. This procedure may form part of tests of control.
c. The nature and extent of walk-through tests performed by the auditor are such
that they alone would provide sufficient appropriate audit evidence to support a
low assessment of control risk.
d. This procedure is performed to determine whether the controls are being
implemented.
5. You are auditing the company’s purchasing process for goods and services. You are
primarily concerned with the company not recording all purchase transactions. Which audit
procedure below would be the most effective audit procedure in this case?
a. Vouching from the accounts payable account to the vendor invoices.
b. Tracing vendor invoices to recorded amounts in the accounts payable account.
c. Confirmation of accounts payable recorded amounts.
d. Reconciling the accounts payable subsidiary ledger to the accounts payable
account.
6. Which
a.
b.
c.
d.
7. Which
a.
b.
c.
d.
result of an analytical procedure suggests the existence of obsolete merchandise?
Decrease in inventory turnover rate
Decrease in the ratio of gross profit to sales
Decrease in the ratio of inventory to accounts payable
Decrease in the ratio of inventory to accounts receivable
of the following is the best example of a corroborating evidence?
General journal
Worksheet cost allocations
Vendor’s invoice
Cash receipts journal
8. An entity’s ongoing monitoring activities often include
a. Periodic audits by the audit committee.
b. Reviewing the purchasing function.
c. The audit of the annual financial statements.
d. Control risk assessment in conjunction with quarterly reviews.
9. Which of the following is an example of fraudulent financial reporting?
a. Company management changes inventory count tags and overstates ending
inventory, while understating costs of goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his
actions by debiting an expense account, thus overstating expenses.
c. An employee steals small tools from the company and neglects to return them; the
cost is reported as a miscellaneous operating expense.
d. An employee omitted an entry to record a bank transfer to cover a cash shortage.
10. When obtaining audit evidence about the effective operation of internal controls, the
auditor considers all of the following except
a. How they were applied
b. The consistency with which they were applied during the period
c. By whom they were applied
d. Why they were applied
CHAPTER 12
1. Which of the following is an internal control weakness related to acquisition of factory
equipment?
a. Acquisitions are to be made through and approved by the department in need of
the equipment.
b. Variances between authorized equipment expenditures and actual costs are to be
immediately reported to management.
c. Depreciation policies are reviewed only once a year.
d. Advance executive approvals are required for equipment acquisitions.
2. It is an approximation of the amount of an item in the absence of a precise means of
measurement
a. Accounting estimate
b. Audit sampling
c. Materiality
d. Audit risk
3. In evaluating the reasonableness of an accounting estimate, an auditor most likely would
concentrate on key factors and assumptions that are
a. Consistent with prior periods.
b. Similar to industry guidelines.
c. Objective and not susceptible to bias.
d. Deviations from historical patterns.
4. In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to
determine whether the estimates are
a. Not subject to bias.
b. Consistent with the industry guidelines.
c. Based on objective assumptions.
d. Reasonable in the circumstances.
5. The auditor should adopt one or a combination of the following approaches in the audit of
an accounting estimate:
I. Review and test the process used by management to develop the estimate.
II. Use an independent estimate for comparison with that prepared by management.
III. Review subsequent events which confirms the estimate made.
a.
b.
c.
d.
Any of the above
None of the above
Either I or II
I only
6. In evaluating the assumptions on which the estimate is based, the auditor would need to
pay particular attention to assumptions which are
a. Reasonable in light of actual results in prior periods.
b. Consistent with those used for other accounting estimates.
c. Consistent with management’s plans which appear appropriate.
d. Subjective or susceptible to material misstatement.
7. Which of the following statements is incorrect about accounting estimates?
a. Management is responsible for making accounting estimates included in the
financial statements.
b. The risk of material misstatement is greater when accounting estimates are
involved.
c. The evidence available to support an accounting estimate will often be more
difficult to obtain and less conclusive than evidence available to support other
items in the financial statements.
d. When evaluating accounting estimates, the auditor should pay particular attention
to assumptions that are objective and are consistent with industry patterns.
8. Which of the following would an auditor generally perform to obtain assurance that
accounting estimates are properly accounted for and disclosed?
a. Inquiry of management
b. Make an independent estimate for comparison with client’s estimate
c. Review subsequent events
d. Obtain knowledge about the applicable financial reporting standards related to the
accounting estimate.
9. Which of the following procedures would an auditor least likely perform when evaluating
the reasonableness of management’s estimates?
a. Make an independent estimates for comparison with management estimates
b. Read the minutes of board of director’s meeting
c. Review and test the process used by management
d. Review subsequent events which confirm the estimates made
10. Which of the following procedures would an auditor ordinarily perform first in evaluating
management’s accounting estimates for reasonableness?
a. Develop independent expectations of management’s estimates.
b. Consider the appropriateness of the key factors or assumption used in preparing
the estimates.
c. Test the calculations used by the management in developing the estimates.
d. Obtain an understanding of how management developed its estimates.
CHAPTER 13
1. The current file of an auditor’s working papers most likely would include a copy of the
a. Bank reconciliation
b. Articles of incorporation
c. Pension plan contract
d. Flowchart of the internal control procedures
2. The primary concern of the auditor regarding related party transactions is that
a. They are reported to proper regulatory authorities because they are illegal
b. Their form be emphasized rather than their economic substance
c. Their existence and significance be adequately disclosed
d. Their effects are eliminated from the financial statements
3. The permanent file of an auditor’s working papers generally would not include
a. Bond indenture agreements
b. Working trial balance
c. Lease agreements
d. Flowchart of the intentional control structure
4. A person or firm possessing special skill, knowledge and experience in a particular field other
than accounting and auditing is called a/an
a. Professional
b. Consultant
c. Expert
d. Assistant
5. Which of the following is not an expert upon whose work an auditor may rely?
a. Actuary
b. Internal auditor
c. Appraiser
d. Engineer
6. To operate effectively, an internal auditor must be independent of
a. The line functions of the organization
b. The entity
c. The employer-employee relationship which exists for other employees in the organization
d. The audit committee of the board of directors
7. The sufficiency and appropriateness of evidential matter ultimately is based on the
a. Availability of corroborating data
b. Philippine Standards on Auditing
c. Pertinence of the evidence
d. Judgment of the auditor
8. An auditor’s working papers will generally be least likely to include documentation showing
how the
a. Client’s schedules were prepared
b. Engagement had been planned
c. Client’s system of internal control had been reviewed and evaluated
d. Unusual matters were resolved
9. Audit files that are updated with new information of continuing importance is called
a. Current files
b. Working paper file
c. Permanent files
d. Correspondence file
10. The permanent (continuing) file of an auditor’s working papers more likely would include
copies of the
a. Bank statements
b. Lead schedule
c. Debt agreements
d. Attorney’s letters
CHAPTER 14
1. “Subsequent events” are defined as events which occur subsequent to the
a. Financial statement date
b. Date of the auditor’s report
c. Financial statement date but prior to the date of the auditor’s report
d. Date of the auditor’s report and concern contingencies which are not reflected in the financial
statements
2. Which of the following events in the subsequent period will require disclosure in the notes to
financial statements?
a. Realization of recorded year-end receivables at a different amount than recorded
b. Settlement of recorded year-end estimated product warranty liabilities at a different amount
than recorded
c. Purchase of a machine
d. Purchase of a business
3. Which of the following statements about a representation letter is not correct?
a. It is optional
b. It is addressed to the auditor
c. It confirms oral representation made by management
d. Its date should coincide with the date of the audit report
4. A representation letter issued by a client
a. Is essential for the preparation of the audit program
b. Is a substitute for testing
c. Does not reduce auditor’s responsibility
d. Reduces the auditor’s responsibility only to the extent that it is relied upon
5. Which of the following conditions or events most likely would cause an auditor to have
significant doubt about an entity’s ability to continue as a going concern?
a. Cash flow from operating activities are negative
b. Research and development projects are postponed
c. Significant related party transactions are pervasive
d. Stock dividends replace annual cash dividends
6. The date of the management representation letter should coincide with the date of the
a. Balance sheet
b. Latest interim financial statements
c. Auditor’s report
d. Latest related party transaction
7. If a lawyer refuses to furnish corroborating information regarding litigation, claims and
assessments, the auditor should
a. Honor the confidentiality of the client-lawyer relationship
b. Consider the refusal to be tantamount to a scope limitation
c. Seek to obtain the corroborating information from management
d. Disclose this fact in a footnote to the financial statements
8. Soon after Kyle’s audit report was issued, Kyle learned of certain related party transactions that
occurred during the year under audit. These transactions that occurred during the year under
audit. These transactions were not disclosed in the notes to the financial statements. Kyle should
a. Plan to audit the transactions during the next engagement
b. Recall all copies of the audited financial statements
c. Determine whether the lack of disclosure would affect the auditor’s report
d. Ask the client to disclose the transactions in subsequent interim statements
9. The auditor is most likely to discover omitted audit procedures during
a. Preparation of the management letter
b. Follow-up procedures performed in compliance with generally accepted auditing standards
c. The conference held with the client prior to issuing the audit report
d. A post engagement review performed as part of the firm’s quality control inspection program
10. When an investigation of the discovery of facts existing at the report date confirms the
existence of the fact and the auditor believes the information is important to those relying or
likely to rely on the financial statements, the auditor should immediately:
a. Take steps to prevent future reliance on the audit report
b. Notify the SEC or other regulatory agency
c. Resign from the engagement
d. Take no action since the auditor is not responsible for such matters
CHAPTER 15
1. Which of the following statement is not correct about the unmodified audit report in the
financial statement?
a. The auditor’s report shall include a section with a heading “Management’s
Responsibility for the financial statements”
b. The auditor’s report shall include a section with a heading “Auditor’s Responsibility”
c. The auditor’s report shall include a section with a heading “Basis for Opinion”
d. The auditor’s report shall include a section with a heading “Opinion”
2. PSA 700 requires the auditor’s report to describe management’s responsibility for the
financial statements. The description shall include an explanation that management is
responsible for the preparation of the financial statements and
a. For selecting and applying appropriate accounting policies
b. For such internal control as it determines necessary to enable the preparation of
financial statement that are free from material misstatement
c. For making accounting estimates that are reasonable in the circumstances
d. Preventing collusion among employees
3. Which
a.
b.
c.
d.
section of the auditor’s report gives a general description of opinion
Introductory paragraph
Auditor’s responsibility
Management’s responsibility
Auditor’s Opinion
4. The auditor’s inability to obtain sufficient appropriate audit evidence may arise from all of
the following conditions, except
a. Restriction imposed my management on the scope of the audit
b. Limitations beyond the control of the entity
c. Limitations relating to the nature or timing of the auditor’s work
d. Restrictions on the disclosures in the financial statements
5. When an auditor expresses a qualified opinion due to a material misstatement, the auditor
shall include in the opinion paragraph
a.
b.
c.
d.
A description of material
misstatement
Yes
Yes
No
No
A quantification of effects of
misstatement if practicable
No
Yes
No
Yes
6. Which of the following is correct about “Emphasis of a Matter” paragraph
a. In a very rare circumstances, the “Emphasis of a Matter” paragraph may be used
as a substitute for a qualification of an opinion
b. An “Emphasis of a Matter” paragraph may be used to give emphasis to as specific
item that has not been appropriately disclosed in the notes to the financial
statements
c. An “Emphasis of a Matter” paragraph may be used to restrict the distribution of the
auditor’s report when examining special purpose financial statements
d. An “Emphasis of a Matter” paragraph may be used to alert the readers that the
financial statement are presented in accordance with a special purpose framework
7. Which
a.
b.
c.
d.
of the following circumstances will least likely affect the auditor’s opinion?
A client imposed scope limitation
A circumstance imposed scope limitations
Inadequacy of disclosure in the notes to financial statements
Uncertainty arises about entity’s continued existence
8. When reporting on comparative financial statements where the financial statements of the
prior year have been examined by the predecessor auditor whose report is not presented,
the successor auditor should make
a. No reference to the predecessor auditor
b. Reference to the predecessor auditor only if the predecessor auditor expressed a
qualified opinion
c. Reference to the predecessor auditor only if the predecessor auditor expressed an
unmodified opinion
d. Reference to the predecessor auditor regardless of the type of opinion expressed
by the predecessor auditor
9. Which of the following best describes the auditor’s responsibility for “other information”
included in the annual report to the stockholders that contains financial statements and
the auditor’s report?
a. The auditor has no obligation to read the other information.
b. The auditor has no obligation to corroborate the other information but should read
it to determine whether it is materially inconsistent with the financial statements
c. The auditor should extend the examination to the extent necessary to verify the
other information.
d. The auditor must modify the auditor’s report to state that the other information is
unaudited or not covered by the auditor’s report
10. If the auditor’s report on audited financial statements contains an adverse or disclaimer of
opinion, the auditor’s report on the summary financial statements should
a. Not have to indicate the fact that the auditor’s report on the audited financial
statements contains an adverse or disclaimer of opinion
b. Indicate the effect of such modification on the summary financial statements
c. Indicate the basis for that opinion
d. Contain either an adverse or disclaimer of opinion on the summary financial
statements
CHAPTER 16
1. Which of the following procedures should an auditor generally perform regarding
subsequent events?
a. Compare the latest available interim financial statements with the financial
statements being audited.
b. Send second requests to the client’s customers who failed to respond to initial
account receivable confirmation request.
c. Communicate material weaknesses in the internal control structure to the client’s
audit committee
d. Review the cut-off bank statements for several months after the year-end.
2. The procedures to identify events that may require adjustment of, or disclosure in, the
financial statements would be performed as near as practicable to the date of the auditor’s
report. These procedures would ordinarily include the following except
a. Reviewing procedures management has established to ensure that subsequent
events are identified.
b. Reading minutes of the meetings of shareholders, the board of directors and audit
and executive committee held after period end and inquiring about matters
discussed at meetings for which minutes are not yet available.
c. Testing the effectiveness of those internal control policies and procedures that may
have significantly changed in the subsequent period.
d. Inquiring or extending previous oral or written inquiries, of the entity’s lawyers
concerning litigation and claims.
3. Which of the following subsequent events will be least likely to result in an adjustment to
the financial statements?
a. Culmination of events affecting the realization of account receivable owned as of
the balance sheet date.
b. Culmination of events affecting the realization of inventories owned as of the
balance sheet date.
c. Material changes in the settlement of liabilities which were estimated as of the
balance sheet date.
d. Material changes in the quoted market prices of listed investment securities since
the balance sheet date.
4. Which of the following is not among the characteristics of the procedures performed in
completing the audit?
a. They are optional since they have only an indirect impact on the opinion to be
expressed
b. They involve many subjective judgments by the auditor.
c. They are usually after the balance sheet date.
d. They are usually performed by audit managers or other senior members of the
audit team who have extensive audit experience with the client.
5. Which of the following procedures would an auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
a. Recomputing a sample of large-peso transactions occurring after year-end for
arithmetic accuracy.
b. Investigating changes in stockholders’ equity occurring after year-end.
c. Inquiring of the entity’s legal counsel concerning litigation, claims and assessments
arising after year-end.
d. Confirming ban accounts established after year-end.
6. A major customer of an audit client suffers a fire just prior to completion of year-end field
work. The audit client believes that this event could have a significant direct effect on the
financial statements. The auditor should
a. Advise management to disclose the event in notes to the financial statements.
b. Disclose the event in the auditor’s report.
c. Withhold submission of the auditor’s report until the extent of the direct effect on
the financial statements is known.
d. Advise management to adjust the financial statements.
7. Which of the following statement about representation letter is not correct?
a. It is optional
b. It is addressed to the auditor
c. It confirms oral representation made by management
d. Its date should coincide with the date of the audit report.
8. Which of the following conditions or events most likely would cause an auditor to have
significant doubt about an entity’s ability to continue as a going concern??
a. Cash flow from operating activities are negative
b. Research and development projects are postponed
c. Significant related party transactions are pervasive
d. Stock dividends replace annual cash dividends
9. Analytical procedures in the overall review should be:
a. Applied to every item on the financial statement.
b. Performed by the partner or manager on the engagement
c. Based on financial statement data before all audit adjustments and reclassification
have been recognized.
d. Performed only when material misstatement is expected.
10. After issuing a report, an auditor has no obligation to make continuing inquiries or perform
other procedures concerning the audited financial statements, unless
a. Information, which existed at the report date and may affect the report, comes to
the auditor’s attention.
b. Management of the entity request the auditor to reissue the auditor’s report
c. Information about an event that occurred after the end of fieldwork comes to the
auditor’s attention
d. Final determinations and resolutions are made of contingencies that had been
disclosed in the financial statements.
CHAPTER 17
1. Which of the following best describes a review service?
a. A review engagement focuses on providing advice in a three-party contract.
b. A review engagement focuses on providing assurance on the internal controls of a
public company.
c. A review engagement focuses on providing limited assurance on financial statements
of a public company.
d. A review engagement focuses on providing on reasonable assurance on the assertions
contained in the financial statements of a public company.
2. When performing a review on financial statements, the CPA is required to
a. Apply analytical procedures and make inquiries from third parties by sending
confirmation letters.
b. Assess the effectiveness of the client’s accounting and internal control systems.
c. Obtain corroborative evidence to support management’s responses to inquiries.
d. Obtain understanding of the client’s business and industry.
3. A review does not provide assurance that the CPA will become aware of all significant
matters that would be disclosed in an audit. However, if the CPA becomes aware that
information coming to his attention is incorrect, incomplete, or otherwise unsatisfactory,
he should
a. Withdraw immediately from the engagement
b. Perform additional procedures he deems necessary to achieve limited assurance.
c. Perform a complete audit and issue a standard audit report with appropriate
qualifications.
d. Downgrade the engagement to a compilation and issue the appropriate report
4. An agreed-upon procedures is one in which:
a. The auditor and management agree that the procedures will be applied to all
accounts and circumstances
b. The auditor and management agree that the procedures will not be applied to all
accounts and circumstances
c. The auditor and management or a third party agree that the engagement will be
limited to certain specific procedures.
d. The auditor and management or a third party agree that the auditor will apply his or
her judgment to determine procedures to be performed.
5. Distribution of which of the following types of reports is limited?
a. Audit
b. Review
c. Agreed-upon procedures
d. Examination
6. Which of the following procedures would an accountant most likely perform in a
compilation engagement?
a. Collect, classify and summarize financial information
b. Apply analytical procedures
c. Assess risk components
d. Test the accounting records
7. A CPA should perform analytical procedures during engagement to
I.
Audit
II.
Review
III.
Compile
a. Yes, Yes, Yes
b. Yes, Yes, No
c. No, Yes, No
d. Yes, No, No
8. Which of the following is not one of the elements of an assurance engagement?
a. Sufficient appropriate evidence
b. A subject matter
c. Suitable criteria
d. An opinion about whether the subject matter conform, in all material respects, with
identified criteria
9. In an engagement to examine prospective financial information, the auditor should obtain
sufficient appropriate evidence as to whether:
I.
Management’s best estimate assumptions on which the prospective financial
information is based are not unreasonable and, in the case of hypothetical
assumptions, such assumptions are consistent with the purpose of the information.
II.
The prospective financial information is properly prepared on the basis of the
assumptions.
III.
The prospective financial information is properly presented and all material
assumptions are adequately disclosed, including a clear indication as to whether
they are best-estimate assumptions or hypothetical assumptions.
IV.
The prospective financial information is prepared on a consistent basis with
historical financial statements, using appropriate accounting principles.
a. I, II, III and IV
b. I, II and III
c. I and II
d. I, II and IV
10. The party responsible for assumptions identified in the preparation of prospective financial
statements is usually
a.
b.
c.
d.
A third-party lending institution
The client’s management
The reporting accountant
The independent auditor