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Audit Theory-Final Exam
Accountancy (STI College)
Studocu is not sponsored or endorsed by any college or university
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AUDITING AND ASSURANCE SERVICES
FINAL EXAM
INSTRUCTIONS: This is a 100-item exam. For each question, choose the correct
or best answer from among the given options. In your answer sheet, shade
neatly and completely the circle that corresponds to your chosen answer using
PENCIL ONLY. You should not make any unnecessary marks on your answer
sheet. Answer the exam in three (3) hours.
1. The most common type of audit report contains
A. the adverse opinion.
B. the disclaimer of opinion.
C. the qualified opinion.
D. the unqualified opinion.
2. When the auditor knows that the financial statements may be misleading
because they were not prepared in conformity with generally accepted
accounting principles, he or she must issue
A. a qualified opinion.
B. an adverse opinion.
C. a disclaimer of opinion.
D. a qualified or an adverse opinion, depending on the materiality of the item
in question.
3. When a misstatement in the financial statements would affect a user’s
decision but the overall statements are still fairly stated, it would be
appropriate to issue
A. an unqualified opinion.
B. a qualified opinion.
C. an adverse opinion.
D. a disclaimer of opinion.
4. How are management’s responsibility and the auditor’s responsibility
represented in the standard auditor’s report?
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A.
B.
C.
D.
Management’s responsibility Auditor’s responsibility
Explicitly
Explicitly
Implicitly
Implicitly
Implicitly
Explicitly
Explicitly
Implicitly
5. The degree of certainty the practitioner has attained and wishes to convey
is
A. an assertion.
B. assurance.
C. a conveyance.
D. a declaration.
6. The level of assurance that is provided by the CPA on a compilation report is
A. none.
B. low.
C. medium.
D. high.
7. Which of the following accounting changes requires explanatory language
regarding consistency in the auditors’ report?
A. A change in the estimated useful life of a class of fixed assets.
B. A write-off of a patent, because future benefits do not appear to exist.
C. A change from the straight-line method of depreciation to accelerated
method for a class of fixed assets.
D. A change in calculating bad debt expense from 1 percent to 2 percent of
credit sales.
8. A client is presenting comparative (two year) financial statements. You have
audited both years. Which of the following is correct?
A. You should issue one audit report which covers both presented years.
B. You should issue two audit reports, one on each year.
C. You should issue one report, but only on the most current year.
D. You may issue either one audit report on both presented years, or a report
on the most current year.
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9. Which of the following is least likely result in explanatory language being
added to an unqualified auditor’s report on a client that sells jewelry through a
retail store?
A. A decision by the auditor to emphasize that the client is a part of a larger
organization.
B. Reliance placed upon a specialist to evaluate the diamonds.
C. A change from FIFO to specific identification accounting for inventory.
D. A question as to whether the client will be able to remain a going concern.
10. An assertion that is particularly difficult to audit with respect to personal
financial statements is
A. existence.
B. rights.
C. completeness.
D. presentation and disclosure.
11. When a CPA is associated with a forecast, all of the following should be
disclosed except the:
A. sources of information.
B. character of the work performed by the CPA.
C. major assumptions in the preparation of the forecast.
D. probability of achieving estimates.
12. A CPA examines a sample of copies of December and January sales invoices
for the initials of the person who verified the quantitative data. This is an
example of a
A. compliance test.
B. substantive test,
C. cutoff test.
D. statistical test.
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13. Which of the following procedures would ordinarily be expected to best
reveal unrecorded sales at the balance sheet date?
A. Compare shipping documents with sales records.
B. Apply gross profit rates to inventory disposed of during the period.
C. Trace payments received subsequent to the balance sheet date.
D. Send accounts receivable confirmation requests.
14. If the auditor concludes that the controls are effective, the risk of overreliance for substantive tests of transactions can be
A. decreased.
B. held constant.
C. increased.
D. reduced to zero.
15. Which of the following factors would not be a criterion applied in deciding
whether it is acceptable to test at an interim date rather than waiting for yearend.
A. Satisfactory test results in the interim tests.
B. A short interval between interim and balance sheet date.
C. No changes in the internal control structure after the balance sheet date.
D. A relatively small number of transactions after the interim date but most
for large amounts.
16. Analytical procedures for the accounts receivable audit objectives are
normally performed
A. during the planning phase.
B. at any time after the balance sheet date.
C. after the balance sheet date but before the tests of details of balances.
D. last.
17. Which of the following audit procedures would usually not uncover the fact
that receivables are not owned by client (factoring)?
A. Confirmation with customer
B. A review of minutes of board meetings.
C. Discussions with client.
D. Examination of correspondence files regarding receivables.
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18. Confirmations are less effective than tests of transactions for discovering
A. omitted accounts.
B. disputed amounts.
C. invalid accounts.
D. uncollected amounts where the debtor has moved and left no forwarding
address.
19. A positive confirmation is more reliable evidence than a negative
confirmation because
A. the auditor has a document which can be used in court.
B. follow-up procedures can be performed if a response is not received from
the debtor.
C. the debtor’s lack of response indicates agreement with the stated balance.
D. fewer confirmations can be sent out.
20. Which of the following is not an important considerations in determining
sample size of confirmations?
A. Total annual credit sales.
B. The materiality of total accounts receivable relative to the other asset
balances.
C. The type of confirmations being used, i.e., positive or negative.
D. The results of related analytical procedures.
21. After the items for confirmation have been selected, the auditor must
maintain control of the confirmations until
A. the names are provided to client’s personnel to type the envelopes.
B. the sealed envelopes are provided to client’s personnel to be mailed.
C. the responses are received by the client with the return mail. D. they are
returned by customer to the auditor.
22. An auditor should perform alternative procedures to substantiate the
existence of accounts receivable when
A. no reply to a positive confirmation request is received.
B. no reply to a negative confirmative request is received.
C. collectability of the receivables is in doubt.
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D. pledging of the receivables is probable.
23. Return of positive confirmation requests for accounts receivable were very
poor. As an alternative procedure, the auditor decided to check subsequent
collections. The auditor had satisfied himself that the client satisfactorily listed
the customer name next to each check listed on the deposit slip; hence, he
decided that for each customer for which a confirmation was not received that
he would add all amounts shown for that customer on each validated deposit
slip for the two months following the balance sheet date. The major fallacy in
the auditor’s procedure is that
A. checking of subsequent collections is not a accepted alternative auditing
procedure for confirmation of accounts receivable.
B. by looking only at the deposit slip the auditor would know if the payment
was for the receivable at the balance sheet date or a subsequent
transaction.
C. the deposit slip would not be received directly by the auditor as a
conformation would be.
D. a customer may not have made a payment during the two month period.
24. Which of the following is a test of controls?
A. Review the payroll journal, general ledger, and payroll earnings records for
large or unusual amounts.
B. Examine time cards for indications of supervisor approval.
C. Compare canceled check with payroll for name, amount, and date.
D. Examine canceled checks for proper endorsement.
25. Which of the following is a substantive test of transactions.
A. Review personnel policies.
B. Account for a sequence of payroll checks.
C. Reconcile the disbursements in the payroll journal with the disbursements
on the payroll bank statement.
D. Examine printouts of transactions rejected by the computer as having invalid
employee numbers.
26. A CPA’s client maintains perpetual inventory records. In the past, all
inventory items have been counted on a cycle basis at least once during the
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year. Physical count and perpetual record differences have been minor. Now,
the client wishes to minimize the cost of physically counting the inventory by
changing to a sampling method in which many inventory items will not be
counted during a given year. For purposes of expressing an opinion on his
client’s financial statements, the CPA will accept the sampling method only if
A. the sampling method has statistical validity.
B. a stratified sampling plan is used.
C. the client is willing to accept an opinion qualification in the auditor’s report.
D. the client is willing to accept a scope qualification in the auditor’s report.
27. Production thefts created by a dishonest inspector who labels good
production as defective on scrap and then removes it could be prevented by
all of the following except
A. sound system of accounting controls.
B. production quality and efficiency reports.
C. control of scrap sales and rework operations.
D. fraudulent understatement of inventories.
28. The auditor is required to communicate all irregularities and illegal acts to
the audit committee
A. if the act is slightly material.
B. if the act is material.
C. if the act is highly material.
D. regardless of materiality.
29. If the auditor becomes aware after the audited financial statements have
been released that some information included in the statements is materially
misleading, he or she has
A. no obligation to disclose it since he/she acted in good faith and without
negligence in arriving at the audit opinion.
B. an obligation to inform the board of directors of the misleading statements.
C. an obligation to inform all users who are relying on the financial statements.
D. an obligation to make certain that users who are relying on the financial
statements are informed.
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30. The primary objective of analytical procedures used in the final review
stage of an audit is to
A. obtain evidence from details tested to corroborate particular assertions.
B. identify areas that represent specific risks relevant to the audit.
C. assist the auditor in assessing the validity of the conclusions reached.
D. satisfy doubts when questions arise about a client’s ability to continue in
existence.
31. The permanent (continuing) file of an auditor’s working papers most likely
would include copies of the
A. bank statements.
B. debt agreements.
C. lead schedules.
D. attorney’s letters.
32. The primary source of information to be reported about litigation, claims,
and assessments is the
A. client’s lawyer.
B. court records.
C. client’s management.
D. independent auditor.
33. In auditing accounts payable, an auditor’s procedures most likely would
focus primarily on management’s assertion of
A. existence or occurrence.
B. presentation and disclosure.
C. completeness.
D. valuation and allocation.
34. Which of the following statements concerning audit evidence is correct?
A. To be competent, audit evidence should be either persuasive or relevant, but
need not be both.
B. The measure of the validity of audit evidence lies in the auditor’s
judgment.
C. The difficulty and expense of obtaining audit evidence concerning an
account balance is a valid basis for omitting the test.
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D. A client’s accounting data can be sufficient audit evidence to support the
financial statements.
35. A purpose of a management representation letter is to reduce
A. audit risk to an aggregate level of misstatement that could be considered
material.
B. an auditor’s responsibility to detect material misstatements only to the
extent of the letter is relied on.
C. the possibility of a misunderstanding concerning management’s
responsibility for the financial statements.
D. the scope of an auditor’s procedures concerning related party transactions
and subsequent events.
36. Which of the following procedures would provide the most reliable audit
evidence?
A. Inquiries of the client’s internal audit staff held in private.
B. Inspection of prenumbered client purchase orders filed in the vouchers
payable department.
C. Analytical procedures performed by the auditor on the entity’s trial balance.
D. Inspection of bank statements obtained directly from the client’s financial
institution.
37. A governmental audit may extend beyond an examination leading to the
expression of an opinion on the fairness of financial presentation to include
Program results
Compliance Economy & efficiency
A.
Yes
Yes
No
B.
C.
D.
Yes
No
Yes
Yes
Yes
No
Yes
Yes
Yes
38. Operational auditing is primarily oriented toward
A. future improvements to accomplish the goals of management.
B. the accuracy of data reflected in management’s financial records.
C. the verification that a company’s financial statements are fairly presented.
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D. past protection provided by existing internal control.
39. Six months after issuing an unqualified opinion on audited financial
statements, an auditor discovered that the engagement personnel failed to
confirm several of the client’s material accounts receivable balances. The
auditor should first
A. request the permission of the client to undertake the confirmation of
accounts receivable.
B. perform alternative procedures to provide a satisfactory basis for the
unqualified opinion.
C. assess the importance of the omitted procedures to the auditor’s ability to
support the previously expressed opinion.
D. inquire whether there are persons currently relying, or likely to rely, on the
unqualified opinion.
40. Which of the following is not a specialist upon whose work an auditor may
rely?
A. Actuary.
B. Appraiser.
C. Internal auditor.
D. Engineer.
41. An auditor should perform alternative procedures to substantiate the
existence of accounts receivable when
A. no reply to a positive confirmative request is received.
B. no reply to a negative confirmation request is received.
C. collectability of the receivables is in doubt.
D. pledging of the receivables is probable.
42. Confirmation is most likely to be relevant form of evidence with regard to
assertions about accounts receivable when the auditor has concerns about
the receivables’
A. valuation.
B. classification.
C. existence.
D. completeness.
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43. To gather evidence regarding the balance per bank in a bank reconciliation,
an auditor would examine all of the following except
A. cutoff bank statement.
B. year-end bank statement.
C. bank confirmation.
D. general ledger.
44. The permanent file section of the working papers that is kept for each audit
client most likely contains
A. review notes pertaining to questions and comments regarding the audit
work performed.
B. a schedule of time spent on the engagement by each individual auditor.
C. correspondence with the client’s legal counsel concerning pending litigation.
D. narrative descriptions of the client’s accounting procedures and internal
controls.
45. An auditor concludes that a substantive auditing procedure considered
necessary during the prior period’s audit was omitted. Which of the following
factors would most likely cause the auditor promptly to apply the omitted
procedure?
A. there are no alternative procedures available to provide the same evidences
as the omitted procedures.
B. the omission of the procedures impairs the auditor’s present ability to
support the previously expressed opinion.
C. the source documents needed to perform the omitted procedure are still
available.
D. the auditor’s opinion on the prior period’s financial statements was
unqualified.
46. Which of the following is required documentation in an audit in accordance
with generally accepted auditing standards?
A. A written engagement letter formalizing the level of service to be rendered.
B. A flowchart depicting the segregation of duties and authorization of
transactions.
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C. A written audit program describing the necessary procedures to be
performed.
D. A memorandum setting forth the scope of the audit.
47. Which of the following factors most likely would affect an auditor’s
judgement about the quantity, type, and content of the auditor’s working
papers?
A. The assessed level of control risk.
B. The likelihood of a review by a concurring (second) partner.
C. The number of personnel assigned to the audit.
D. The content of the management representation letter.
48. An independent auditor gathers evidence to
A. appraise management.
B. assess and evaluate internal control.
c. form an opinion on the financial statements.
D. discover fraud.
49. The third standard of fieldwork states that sufficient competent evidential
matter may in part be obtained through inspection, observation, inquiries, and
confirmations to afford a reasonable basis for an opinion regarding the
financial statements under examination. The evidential matter required by this
standard may in part obtained through
A. analytical review procedures.
B. proper planning of the audit engagement.
C. auditor working papers.
D. review of the system of internal control.
50. Inquiries of the predecessor auditor prior to acceptance of the engagement
should include specific questions regarding:
I. disagreements with management as to accounting principles and auditing
procedures
II. the integrity of management
A. I only
B. II only
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C. Both I and II
D. Neither I nor II
51. A CPA should decide NOT to accept a new client for an audit engagement if:
I. the CPA lacks an understanding of the client’s industry and accounting
principles prior to acceptance
II. the client’s management has unusually high turnover
A. I only
B. II only
C. Both I and II
D. Neither I nor II
52. Which of the following procedures would an auditor likely perform in the
planning stage of a financial statement audit?
I. Obtaining a signed engagement letter from the client’s management
II. Examining documents to detect violations of laws and regulations having a
material effect on the financial statements
A. I only
B. II only
C. Both I and II
D. Neither I nor II
53. All of the following are correct regarding an auditor’s understanding with a
potential client prior to beginning an audit EXCEPT:
A. the understanding should cover the responsibilities of the independent
auditor.
B. the understanding should cover the limitations of the engagement.
C. the understanding should be in the form of an engagement letter in order
to be in conformity with
auditing standards.
D. the understanding should list the audit fees and frequency of billing.
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54. Management’s responsibilities in the engagement letter include which of
the following?
I. Adjusting the financial statements to correct material misstatements
II. Identifying and ensuring that the entity complies with laws and regulations
III. Selecting and applying accounting policies
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
55. Which of the following will cause the auditor to assess inherent risk as high?
I. Complex transactions with third parties are discovered.
II. No related-party transactions are discovered.
III. Management relies heavily on estimates in the financial statements.
A. I and II only
B. I, II, and III
C. I and III only
D. III only
56. Inherent risk:
I. would not be present if the company were not being audited
II. is assessed by the auditor, but this assessment has no bearing on the actual
amount of inherent risk present
A. I only
B. II only
C. Both I and II
D. Neither I nor II
57. Which of the following risks is assessed by the auditor in the planning stage?
I. Inherent risk
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II. Control risk
A. I only
B. II only
C. Both I and II
D. Neither I nor II
58. Which of the following is a component of audit risk?
I. Detection risk
II. Inherent risk
A. I only
B. II only
C. Both I and II
D. Neither I nor II
59. An auditor can lower overall audit risk by reducing:
A. inherent risk
B. control risk
C. detection risk
D. all of the above
60. Management’s ability to foresee problems and take steps in advance to
prevent problems is known as:
I. control environment
II. control activities
A. I only
B. II only
C. Both I and II
D. Neither I nor II
61. Internal controls of all of a reporting entity’s operating units and business
functions is a primary concern of:
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I. the entity’s independent auditor
II. the entity’s management and those charged with governance
A. I only
B. II only
C. Both I and II
D. Neither I nor II
62. An auditor generally tests the segregation of duties by:
I. personal inquiry and observation
II. analytical procedures
III. inspecting and recalculating
A. I only
B. II and III only
C. I and III only
D. I and II only
63. Which of the following is NOT one of the five components of internal control?
I. Control activities
II. Control group
III. Control risk
A. II only
B. II and III only
C. III only
D. I and II only
64. In an audit in accordance with GAAS, as part of understanding internal
control, an auditor is required to:
I. obtain knowledge about the operating effectiveness of internal control
II. ascertain whether internal controls have been implemented
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A. I only
B. II only
C. Both I and II
D. Neither I nor II
65. An auditor’s flowchart of the accounting system is a diagrammatic
representation that shows the auditor’s:
I. understanding of the system
II. assessment of control risk
A. I only
B. II only
C. Both I and II
D. Neither I nor II
66. To obtain audit evidence about control risk, an auditor seeks to test controls
and test for segregation of duties. The auditor will likely test for segregation of
duties by:
A. inquiry
B. observation
C. confirmations
D. preparing a questionnaire or flowchart
67. An auditor maintains a current file within the audit documentation. This file
should:
I. contain all of the evidential material gathered to support the opinion
rendered by the auditor
II. contain a working trial balance
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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68. Which of the following would be maintained in the permanent file?
I. Copies of documents such as the reporting company’s organization chart
and long-term contracts
II. The audit plan and management representation letter
A. I only
B. II only
C. Both I and II
D. Neither I nor II
69. Which of the following is an assertion under the category of classes of
transactions?
I. Cutoff
II. Completeness
III. Occurrence
A. II and III only
B. I only
C. I and III only
D. I, II, and III
70. Which of the following is a financial statement assertion regarding account
balances?
I. Rights and obligations
II. Valuation
III. Existence
A. I and II only
B. I, II, and III
C. II and III only
D. III only
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71. Completeness is an assertion found under the category of:
I. classes of transactions
II. account balances
A. I only
B. II only
C. Both I and II
D. Neither I nor II
72. Rights and obligations is an assertion found under the category of:
I. classes of transactions and events
II. account balances
A. I only
B. II only
C. Both I and II
D. Neither I nor II
73. When an independent auditor uses professional judgment to make
decisions about the <nature, extent, and timing= of audit procedures, what does
the term nature refer to?
I. The amount of testing to be performed
II. The type of test to be performed
A. I only
B. II only
C. Both I and II
D. Neither I nor II
74. Tracing from inventory tags to the inventory listing schedule verifies the:
I. completeness of the schedule
II. existence of the items
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A. I only
B. II only
C. Both I and II
D. Neither I nor II
75. An auditor is sampling for attributes, that is, testing controls. Which of the
following is correct regarding sample size when the auditor determines that
the expected error rate is different from that originally expected?
A. If the expected error rate has risen, the sample size will be reduced.
B. If the expected error rate has fallen, the sample size will be increased.
C. If the expected error rate has risen, the sample size will be increased.
D. Both A and B
Case
The auditors wish to test the valuation of accounts receivable in an audit of
Moira Pinaubaya Enterprises. The client has P500,000 of total recorded
receivables, composed of 850 accounts. The auditors have determined the
following:
Tolerable misstatement
P25,000
Risk of incorrect acceptance
5%
Expected misstatement
P 2,000
The auditors have decided to use probability-proportional-to-size sampling.
Required:
For planning the sample, calculate:
1. Required sample size (3 points)
2. Sampling interval (2 points)
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