Questions: 1. The auditor’s risk assessment procedures a. By themselves, do not provide sufficient appropriate audit evidence on which to base the audit opinion. b. Should not consider information obtained from the auditor’s previous experience with the entity. c. Are designed to detect material misstatements at the assertion level for classes of transactions, account balances and disclosures. d. Are designed to test effectiveness of the entity’s controls. 2. The existence of audit risk is recognized by the statement in the auditor’s report that the a. Financial statements are presented fairly, in all material respects, in accordance with Philippine Financial Reporting Standards. b. Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. c. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement. d. Auditor is responsible for expressing an opinion on the financial statements, which are management’s responsibility. 3. There is an inverse relationship that exist between the acceptable level of detection risk and the a. Risk of failing to discover material misstatements. b. Assurance provided by substantive tests. c. Preliminary judgments about materiality levels. d. Risk of misapplying audit procedures 4. Which of the following statements is incorrect? a. Regardless of the assessed levels of inherent and control risks, the auditor should always perform some substantive procedures for material account balances and classes of transactions. b. The higher the assessment of inherent and control risks, the more evidence the auditor should obtain from the performance of substantive procedures. c. The assessed level of inherent risk need not be considered in determining the nature, timing, and extent of substantive procedures required to reduce audit risk to an acceptably low level. d. After obtaining an understanding of the accounting and internal control systems, the auditor should make a preliminary assessment of control risk, at the assertion level, for each material account balance or class of transactions. 5. Because the concepts of audit risk and materiality are interrelated, they must be considered together by the auditor. Which of the following statements is correct? a. The phrase in the auditor’s report “present fairly, in all material respects, in accordance with Philippine Financial Reporting Standards” indicates the 6. 7. 8. 9. auditor’ s belief that the financial statements taken as a whole are not materially misstated. b. If misstatements are not individually material, but are material when aggregated with other misstatements, the concept of materiality does not apply. c. Audit risk is the risk that an auditor may unknowingly modify his/her opinion when, in fact, the financial statements are fairly presented. d. Only material errors cause financial statements to be materially misstated. Which of the following statements is false? a. There is an inverse relationship between detection risk and the combined level of inherent and control risk. b. When inherent and control risks are high, the acceptable level of detection risk needs to be low to reduce audit risk to an acceptably low level. c. When inherent and control risk are low, an auditor can accept a higher detection risk and still reduce audit risk to an acceptably low level. d. The assessed level of inherent and control risk can be sufficiently low to eliminate the need for the auditor to perform any substantive procedures Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would a. Increase materiality levels. b. Decrease detection risk c. Decrease substantive testing d. Increase inherent risk An auditor obtains an understanding of the nature of the entity to a. Make constructive suggestions concerning improvements in the client’s internal control. b. Understand the account balances, transactions, and the disclosures in the financial statements. c. Develop an attitude of professional skepticism concerning management’s financial statement assertions. d. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. Which of the following statements is incorrect? a. Planning is a discrete phase of an audit. b. Planning is a continual and iterative process. c. In a recurring audit, planning often begins shortly after the completion of the previous audit and continues until the completion of the current audit engagement. d. In planning an audit, the auditor considers the timing of certain planning activities and audit procedures that are to be completed prior to the performance of further audit procedures. 10. Audit programs are modified to suit the circumstances of particular engagements. A complete audit program usually should be developed a. When the engagement letter is prepared. b. After obtaining an understanding of the control environment and control activities component of the entity’s internal control. c. After the auditor has obtained an understanding of the entity and its environment, including its internal control and assessed the risks of material misstatements. d. Prior to beginning the actual audit work. 11. An entity’s accounting records generally include the records of initial entries and supporting records including a. Confirmation from third parties b. Information obtained by the auditor from such audit procedures as inquiry, observation, and inspection. c. Worksheets and spreadsheets supporting cost allocations. d. Other information developed by, or available to the auditor to permit him/her to reach conclusions through valid reasoning. 12. Which of the following statements concerning the management’s expert’s competence, capabilities, and objectivity is correct? a. Objectivity relates to the ability of the management’s expert to exercise the competence in the circumstances. b. Competence relates to the possible effects that bias, conflict of interest or the influence of others may have on the professional or business judgment of the management’s expert. c. Capability related to the nature and level of expertise of the management’s expert. d. The management’s expert’s competence, capabilities, and objectivity are important factors in relation to the reliability of any information prepared by the management’s expert 13. Audit evidence is information used to draw reasonable conclusions on which to base the auditor’s opinion. Audit evidence is obtained by performing a. I only b. II only c. Either I or II d. Both I and II 14. Which of the following statement is correct? a. Appropriateness is the measure of the quantity of audit evidence. b. Sufficiency is the measure of the quality of audit evidence, that is, its relevance and reliability. c. The quantity of audit evidence needed is affected by its quality and the risk of misstatement. d. The sufficiency and appropriateness of audit evidence are not interrelated. 15. Which of the following statements concerning audit evidence is correct? a. An audit usually involves the authentication of documentation. b. A given set of procedures may provide audit evidence that is relevant to certain assertions, but not to others. c. Audit evidence obtained from an independent external source is always reliable. d. An entity’s accounting records can be sufficient audit evidence to support the financial statements. 16. The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement addresses verification of a. Cutoffs b. Authorizations c. Transactions d. Costs 17. In testing the existence assertion for an asset, an auditor ordinarily works from the a. Potentially unrecorded items to the financial statements. b. Financial statements to the potentially unrecorded items. c. Supporting evidence to the accounting records. d. Accounting records to the supporting evidence. 18. In determining whether transactions have been recorded, the direction of the audit testing should be from a. General journal entries b. Original source documents c. General ledger balances d. Adjusted trial balance 19. The auditor should apply analytical procedures I As risk assessment procedures II As substantive procedures III In the overall review at the end of the audit. a. I and II only b. II and III only c. I and III only d. I, II and III 20. Analytical procedures include the consideration of comparisons of the entity’s financial information with I Comparable information for prior periods II Anticipated results of the entity III. Similar industry information a. I and II only b. II and III only c. I and III only d. I, II and III 21. The following statements relate to the use of analytical procedures as substantive procedures. Which is false? a. Substantive analytical procedures are applicable when there is only a small volume of transactions. b. The application of substantive analytical procedures is based on the expectation that relationships among data exist and continue in the absence of known conditions to the contrary. c. The presence of relationships among data provides evidence as to the completeness, accuracy, and occurrence of transactions captured in the information produced by the entity’s information system. d. Reliance on the results of substantive analytical procedures will depend on the auditor’s assessment of the risk that the analytical procedures may identify relationships as expected when, in fact, a material misstatements exist. 22. The following are the auditor’s principal objectives in the audit if revenues, except a. To determine whether all cash owned by the entity at the balance sheet date is included on the balance sheet. b. To determine whether earned revenue has been recorded and recorded revenue has been earned. c. To determine whether revenues are reported in the income statement at the appropriate amounts. d. To determine whether revenues are properly classified, described, and disclosed in the financial statements, including notes, in conformity with an applicable finacial reporting framework. 23. In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate? a. Bank charges b. Equipment c. Bonds payable d. Sales 24. If the objective of a test of details of transaction is to detect overstatement of sales, the auditor’s direction of testing should be from the a. Cash receipts journal to the sales journal b. Accounting records to the source documents c. Source documents to the accounting records. d. Sales journal to the cash receipts journal. 25. The conformation of customer’s accounts receivable rarely provides reliable evidence about the valuation assertion because a. Customers may not be inclined to report understatement errors in their accounts. b. Auditors typically select many accounts with low recorded balances to be confirmed. c. It is not practicable to ask the customer to confirm detailed information rating to its reliability to its ability to pay the account d. Recipients usually respond only if they disagree with the information on the request.
