St. Columban College
Pagadian City
ACCTG 304
Auditing and Assurance Principles
Practice Questions
Module 6: Considering Internal Control
1. Auditing standards require the auditor to obtain an understanding of the client’s internal
control structure:
A. For every audit.
B. For first time audits.
C. Sufficient to find any frauds which may exist.
D. Whenever it would be appropriate.
2. In assessing control risk, the auditor must, as a minimum:
A. Perform tests of all significant controls.
B. Obtain an understanding of the design and implementation of the client's internal control.
C. Obtain an understanding of the design of the client's internal control.
D. Obtain an understanding of the design, implementation, and operating effectiveness of
the client's internal control.
3. In obtaining an understanding of an entity’s internal control structure, an auditor is required to
obtain knowledge about the:
Operating effectiveness
Design of policies
of policies & procedures
& procedures
A.
Yes
No
B.
Yes
Yes
C.
No
Yes
D.
No
No
4. As part of understanding the internal control structure, an auditor is not required to
A. Consider factors that affect the risk material misstatement.
B. Ascertain whether internal control structure policies and procedures have been placed in
operation.
C. Identify the types of potential misstatements that can occur.
D. Obtain knowledge about the operating effectiveness of the internal control structure.
5. In obtaining an understanding of an entity’s internal control activities that are relevant to audit
planning, an auditor is required to obtain knowledge about the:
A. Design of the activities pertaining to the internal control components.
B. Effectiveness of the activities are currently being applied.
C. Consistency with which the activities are currently being applied.
D. Controls related to each principal transaction class and account balance.
6. During consideration of the internal control structure in a financial statement audit, an auditor
is not obligated to:
A. Search for significant deficiencies in the operation of the internal control structure.
B. Understand the internal control environment and the accounting system.
C. Determine whether the control procedures relevant to audit planning have been placed
in operation.
D. Perform procedures to understand the design of the internal control structure policies.
7. Narratives, flowcharts, and internal control questionnaires are three commonly used methods
of:
A. Documenting the study of internal controls.
B. Testing the internal control structure.
C. Designing the audit manual and procedures.
D. Documenting the auditor’s understanding of the client's organizational structure.
8. The auditor observes client employees while gaining an understanding of the internal control
structure to:
A. Prepare a flowchart.
B. Update information contained in the organization and procedure manuals.
C. Gain knowledge of the design and application of relevant policies, procedures, and
records relating to the control structure.
D. Determine the extent of compliance with quality control standards.
9. In audit of financial statements in accordance with generally accepted auditing standards,
an auditor is required to:
A. Identify specific internal control structure procedures relevant to management’s financial
statement assertions.
B. Perform tests of controls to evaluate the effectiveness of the entity’s accounting system.
C. Determine whether procedures are suitably designed to prevent or detect material
misstatements.
D. Document the auditor’s understanding of the entity’s internal control structure.
10. Which of the following statements regarding auditor documentation of the client’s internal
control structure is correct?
A. Documentation must include flow charts.
B. Documentation must include procedural write-ups.
C. No documentation is necessary although it is desirable.
D. No one particular form of documentation is necessary, and the extent of documentation
may vary.
11. A well-prepared flowchart should make it easier for the auditor to:
A. Prepare audit procedure manuals.
B. Prepare detailed job descriptions.
C. Trace the origin and disposition of documents.
D. Assess the degree of accuracy of financial data.
12. Which of the following best describes the primary reason for the auditor's use of flowcharts
during an audit engagement?
A. To comply with the requirements of generally accepted auditing standards.
B. To classify the client's documents and transactions by major operating functions, e.g., cash
receipts, cash disbursements, etc.
C. To record the auditor's understanding of the client's internal control policies and
procedures.
D. To interpret the operational effectiveness of the client's existing organizational structure.
13. In gaining an understanding of the internal control structure, the auditor may trace several
transactions through the control process. The primary purpose of this task is to:
A. Replace substantive tests.
B. Detect irregularities.
C. Determine the effectiveness of the control procedures.
D. Determine whether the controls have been placed in operation.
14. Procedures directed toward obtaining evidential matter concerning the effectiveness of the
design or operation of an internal control structure policy or procedure are referred to as:
A. Compliance tests.
B. Substantive tests
C. Tests of controls.
D. Test of internal control structure elements
15. The reliance placed on substantive tests in relation to the reliance placed on internal control
varies in a relationship that is ordinarily:
A. Parallel
C. Direct
B. Inverse
D. Equal
16. The conclusion reached a as result of assessing control risk is referred to as the:
A. Assurance provided by internal control structure.
B. Determined level of acceptable detection risk.
C. Product of the understanding of internal control structure.
D. Assessed level of control risk.
17. An auditor uses the knowledge provided by the understanding of internal control and the
assessed level of control risk primarily to:
A. Determine whether procedures and records concerning the safeguarding of assets are
reliable.
B. Ascertain whether the opportunities to allow any person to both perpetrate and conceal
irregularities are minimized.
C. Modify the initial assessments of inherent risk and preliminary judgments about materiality
levels.
D. Determine the nature, timing, and extent of substantive tests for financial statement
assertions.
18. After obtaining a sufficient understanding of the internal control structure by performing
procedures to understand the design of policies and procedures relevant to audit planning
and whether they have been placed in operation, the auditor assesses:
A. The need to apply GAAS.
B. Detection risk to determine the acceptable level of inherent risk.
C. Detection risk and inherent risk to determine the acceptable level of control risk.
D. Control risk to determine the acceptable level of detection risk.
19. An auditor uses the assessed level of control risk to:
A. Evaluate the effectiveness of the entity’s internal control policies.
B. Identify transactions and account balances where inherent risk is at the maximum.
C. Indicate whether materiality thresholds for planning and evaluation purposes are
sufficiently high.
D. Determine the acceptable level of detection risk for financial statement assertions.
20. An auditor assesses control risk because it:
A. Is relevant to the auditor’s understanding of the control environment.
B. Provides assurance that the auditor’s materiality levels are appropriate.
C. Indicates to the auditor where inherent risk may be the greatest.
D. Affects the level of detection risk that the auditor may accept.
21. Which of the following statements concerning control risk is correct?
A. Assessing control risk and obtaining an understanding of an entity’s internal control
structure may be performed concurrently.
B. When control risk is at the maximum level, an auditor is required to document the basis for
that assessment.
C. Control risk may be assessed sufficiently low to eliminate substantive testing for significant
transaction classes.
D. When assessing control risk an auditor should not consider evidence obtained in prior
audits about the operation of control procedures.
22. An auditor may decide to assess control risk at the maximum level for certain assertions
because the auditor believes:
A. Control policies and procedures are unlikely to pertain to the assertions.
B. The entity’s control environment, accounting system, and control procedures are
interrelated.
C. Sufficient evidential matter to support the assertions is likely to be available .
D. More emphasis on tests of controls than substantive tests is warranted.
23. When an auditor assesses control risk below the maximum level, the auditor is required to
document the auditor’s
Basis for concluding that control risk
Understanding of the entity’s internal
is below the maximum level
control structure elements
A.
No
No
B.
Yes
Yes
C.
Yes
No
D.
No
Yes
24. After gaining an understanding of the control structure, the auditor may attempt to assess
control risk at less than the maximum. For this purpose, the auditor should (1) identify specific
control structure policies and procedures that are likely to prevent or detect material
misstatements in the relevant financial statements assertions and (2) perform tests of controls.
The purpose of these tests is to:
A. Assure that the auditor has an adequate understanding of the control structure.
B. Evaluate the effectiveness of such policies and procedures.
C. Provide recommendations to management to improve the control structure.
D. To evaluate inherent risk.
25. When control risk is assessed at the maximum level for all financial statement assertions, an
auditor should document the auditor’s:
Basis for concluding that
Understanding of the
Conclusion that the
control risk is at the
entity’s internal control
control risk is at
maximum level
structure elements
maximum level
A.
No
Yes
No
B.
No
Yes
Yes
C.
Yes
No
Yes
D.
Yes
Yes
Yes
26. After obtaining an understanding of a client’s EDP controls, an auditor may decide not to
perform tests of controls related to the control procedures within the EDP portion of the client's
internal control system. Which of the following would not be a valid reason for choosing to
omit tests of controls?
A. There appear to be major weaknesses that would preclude assessment of control risk on
the stated procedure.
B. The time and peso costs of testing controls exceed the time and peso savings in
substantive testing if the tests of controls show the controls to be operative.
C. The controls duplicate operative controls existing elsewhere in the system.
D. The controls appear adequate.
27. After obtaining an understanding of the internal control structure and assessing control risk ,
an auditor decided to perform tests of controls. The auditor most likely decided that:
A. It would be efficient to perform tests of controls that would result in a reduction in planned
substantive tests.
B. Additional evidence to support further reduction in control risk is not available.
C. An increase in the assessed level of control risk is justified for certain financial statement
assertions.
D. There were many internal control weaknesses that could allow errors to enter the
accounting system.
28. If, after obtaining an initial understanding of a client's internal control, the auditor wishes to
further reduce the assessed level of control risk relating to plant asset transactions, the auditor
should next:
A.
B.
C.
D.
Make extensive substantive tests of plant asset balances.
Establish the physical existence of current year additions.
Complete the plant asset section of the internal accounting control questionnaire.
Further test those internal control procedures relating to processing and recording plant
asset transactions.
29. Which of the following is the correct order of performing the auditing procedures A through C
below?
A=
Tests of internal control procedures.
B=
Preparation of a flowchart depicting the client's internal control system.
C=
Substantive tests.
A. ABC
B. BAC
C. ACB
D. BCA
30. To obtain evidential matter about control risk, an auditor select tests from a variety of
techniques including:
A. Inquiry.
C. Analytical procedures.
B. Calculation.
D. Confirmation.
31. For certain controls, such as segregation of duties, documentary evidence may not exist. An
auditor would most likely test the procedures by:
A. Reperformance and corroboration.
B. Observation and inquiry.
C. Inspection and vouching.
D. Confirmation and recomputation.
32. Which of the following types of evidence would an auditor most likely examine to determine
whether internal control structure policies and procedures are operating as designed?
A. Confirmations of receivables verifying account balances.
B. Letters of representations corroborating inventory pricing.
C. Attorney’s responses to the auditor’s inquiries.
D. Client records documenting the use of EDP programs.
33. Which of the following is least likely to be evidence the auditor examines to determine whether
operations are in compliance with the internal control structure?
A. Records documenting usage of EDP programs.
B. Canceled supporting documents.
C. Confirmations of accounts receivable.
D. Signatures on authorization forms.
34. The objective of tests of details of transactions performed as tests of controls is to:
A. Monitor the design and use of entity documents such as prenumbered shipping forms.
B. Determine whether internal control structure policies and procedures have been placed
in operation.
C. Detect material misstatements in the account balances of the financial statements.
D. Evaluate whether internal control structure procedures operated effectively.
35. Tests of controls are least likely to be omitted with regard to:
A. Accounts believed to be subject to ineffective control activities.
B. Accounts representing few transactions.
C. Accounts representing many transactions.
D. Subsequent events.
36. After the auditor has prepared a flowchart of the internal accounting controls surrounding
sales and evaluated the design of the system, the auditor would perform tests of controls on
all control procedures:
A. Documented in the flowchart.
B. Considered to be weaknesses that might allow errors to enter the accounting system.
C. That the auditor plans to rely on.
D. That would aid in preventing irregularities.
37. The development of constructive suggestions to clients for improvements in internal control is:
A. A requirement of the auditor’s consideration of internal control.
B. A desirable by-product of an audit engagement.
C. Addressed by the auditor only during a special engagement.
D. As important as establishing a basis for reliance upon the internal control structure.
38. The auditor is most likely to presume that a high risk of defalcation exists if:
A. The client is a multinational company that does business in numerous foreign countries.
B. The client does business with several related parties.
C. Inadequate segregation of duties places an employee in a position to perpetrate and
conceal thefts.
D. Inadequate employee training results in lengthy CBIS exception reports each month.
39. With respect to the client's system of internal control, the auditor is concerned that the existing
policies and procedures provide reasonable assurance that
A. Operational efficiency has been achieved in accordance with management plans.
B. Errors and fraud have been prevented or detected.
C. Controls have not been circumvented by collusion.
D. Management cannot override the internal controls.
40. The primary responsibility for establishing and maintaining an internal control system rests with:
A. The external auditors.
B. The internal auditors.
C. Management and those charged with governance.
D. The controller or the treasurer.
41. 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.
42. Two key concepts that underlie management’s design and implementation of internal control
are:
A. Costs and materiality.
B. Absolute assurance and costs.
C. Inherent limitations and reasonable assurance.
D. Collusion and materiality.
43. When considering the effectiveness of a system of internal accounting control, the auditor
should recognize that inherent limitations do exist. Which of the following is an example of an
inherent limitation in a system of internal accounting control?
A. The effectiveness of procedures depends on the segregation of employee duties.
B. Procedures are designed to assure the execution and recording of transactions in
accordance with management’s authorization.
C. In the performance of most control procedures, there are possibilities of errors arising from
mistakes in judgment.
D. Procedures for handling large numbers of transactions are processed by electronic date
processing equipment.
44. Which of the following is correct about internal control?
A. Accounting and internal control systems provide management with conclusive evidence
that objectives are reached.
B. One of the inherent limitations of accounting and internal control systems is the possibility
that the procedures may become inadequate due to changes in conditions, and
compliance with procedures may deteriorate.
C. Most internal controls tend to be directed at non-routine transactions.
D. Management does not consider costs of the accounting and internal control systems.
45. Which of the following is not one of the components of an entity’s internal control?
A. Control risk.
C. Control activities
B. Information and communication.
D. The control environment.
46. It is important for the auditor to consider the competence of the audit client’s employees,
because their competence bears directly and importantly upon the:
A. Cost-benefit relationship of internal control.
B. Achievement of the objectives of internal control.
C. Comparison of recorded accountability with assets.
D. Timing of the tests to be performed.
47. 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 maintaining custody of an asset is entitled to access the accounting records
for the asset.
D. An individual recording a transaction does not compare the accounting record of the
asset with the asset itself.
48. Which of the following statements is correct with respect to separation of duties?
A. Employees should not have temporary and permanent custody of assets.
B. It is desirable to prevent employees who authorize transactions from having custody of
related assets.
C. It is permissible to allow an employee to open cash receipts and record those receipts.
D. None of the above is correct.
49. The policies and procedures that help ensure that management directives are carried out are
referred to as the:
A. Control environment.
C. Monitoring of controls.
B. Control activities.
D. Information system.
50. A small entity may use less formal means to ensure that internal control objectives are
achieved. For example, extensive accounting procedures, sophisticated accounting records,
or formal controls are least likely to be needed if:
A. Management is closely involved in the operation.
B. The entity is involved in complex transactions.
C. The entity is subject to legal or regulatory requirements also found in larger entities.
D. Financial reporting objectives have been established.
Module 8: Substantive Tests
51. Accounting records least likely include:
A. The records of initial entries and supporting records.
B. The general and subsidiary ledgers.
C. Worksheets and spreadsheets supporting cost allocations.
D. Comparable data about competitors (benchmarking).
52. Other information that the auditor may use as audit evidence least likely includes:
A. Minutes of meetings.
B. Confirmations from third parties.
C. Information obtained by the auditor from such audit procedures as inquiry, observation,
and inspection.
D. Adjustments to the financial statements that are not reflected in formal journal entries.
53. Which statement is correct regarding the sufficiency and appropriateness of audit evidence?
A. Sufficiency is the measure of the quality of audit evidence.
B. Appropriateness is the measure of the quantity of audit evidence; that is, its relevance and
its reliability in providing support for, or detecting misstatements in, the classes of
transactions, account balances, and disclosures and related assertions.
C. The quantity of audit evidence needed is affected by the risk of misstatement (the greater
the risk, the more audit evidence is likely to be required) and also by the quality of such
audit evidence (the higher the quality, the less may be required).
D. Merely obtaining more audit evidence may compensate for its poor quality.
54. Which of the following statements is incorrect regarding relevance of audit evidence?
A. A given set of audit procedures may provide audit evidence that is relevant to certain
assertions, but not others.
B. The auditor often obtains audit evidence from different sources or of a different nature
that is relevant to the same assertion.
C. Obtaining audit evidence relating to a particular assertion is a substitute for obtaining audit
evidence regarding another assertion.
D. None of the above.
55. Which of the following generalizations in assessing the reliability of audit evidence is incorrect?
A. Audit evidence is more reliable when it is obtained from independent sources outside the
entity.
B. Audit evidence that is generated internally is not affected by the effectiveness of the
controls imposed by the entity.
C. Audit evidence obtained directly by the auditor is more reliable than audit evidence
obtained indirectly or by inference.
D. Audit evidence is more reliable when it exists in documentary form.
56. Which statement is incorrect regarding audit evidence?
A. The auditor should obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the audit opinion.
B. Accounting records alone do not provide sufficient audit evidence.
C. The auditor uses professional judgment and exercises professional skepticism in evaluating
the quantity and quality of audit evidence, and thus its sufficiency and appropriateness,
to support the audit opinion.
D. The matter of difficulty or expense involved is a valid basis for omitting an audit procedure
for which there is no alternative.
57. The auditor uses assertions in assessing risks by considering the different types of potential
misstatements that may occur, and thereby designing audit procedures that are responsive
to the assessed risks. Assertions used by the auditor fall into the following categories:
I.
Assertions about classes of transactions and events for the period under audit.
II.
Assertions about account balances at the period end.
III.
Assertions about presentation and disclosure.
A.
B.
I, II and III
II and III only
C. I and II only
D. II only
58. Assertions about classes of transactions and events for the period under audit least likely
include:
A. Transactions and events that have been recorded have occurred and pertain to the
entity.
B. All transactions and events that should have been recorded have been recorded.
C. Transactions and events have been recorded in the correct accounting period.
D. All assets, liabilities and equity interests that should have been recorded have been
recorded.
59. Assertion about account balances at period end which means assets, liabilities, and equity
interests are included in the financial statements at appropriate amounts is
A. Existence
C. Completeness
B. Rights and obligations
D. Valuation and allocation
60. Accuracy and valuation assertions about presentation and disclosure means:
A. Disclosed events, transactions, and other matters have occurred and pertain to the entity.
B. All disclosures that should have been included in the financial statements have been
included.
C. Financial information is appropriately presented and described, and disclosures are clearly
expressed.
D. Financial and other information are disclosed fairly and at appropriate amounts.
61. The auditor obtains audit evidence to draw reasonable conclusions on which to base the
audit opinion by performing audit procedures to:
A. Obtain an understanding of the entity and its environment, including its internal control, to
assess the risks of material misstatement at the financial statement and assertion levels.
B. Test the operating effectiveness of controls in preventing, or detecting and correcting,
material misstatements at the assertion level.
C. Detect material misstatements at the assertion level.
D. All of the above.
62. Tests of controls are necessary:
A. When the auditor’s risk assessment includes an expectation of the operating effectiveness
of controls.
B. When substantive procedures alone provide sufficient appropriate audit evidence.
C. When risk assessment procedures by themselves do not provide sufficient appropriate
audit evidence.
D. Under no circumstances.
63. Which statement is incorrect regarding Inspection as an audit procedure?
A. Inspection consists of examining records or documents or physical examination of assets.
B. Inspection of tangible assets may provide reliable audit evidence with respect to their
existence and about the entity’s rights and obligations on the assets.
C. Inspection of individual inventory items ordinarily accompanies the observation of
inventory counting.
D. Some documents represent direct audit evidence of the existence of an asset.
64. Which of the following audit procedures is used extensively throughout the audit and often is
complementary to performing other audit procedures?
A. Inspection
C. Observation
B. Inquiry
D. Confirmation
65. Which statement is incorrect regarding Inquiry?
A. Responses to inquiries may provide the auditor with information not previously possessed
or with corroborative audit evidence.
B. Responses to inquiries might provide information that differs significantly from other
information that the auditor has obtained.
C. Responses to inquiries may provide a basis for the auditor to modify or perform additional
audit procedures.
D. Inquiry alone is sufficient to test the operating effectiveness of controls.
66. This consists of checking the mathematical accuracy of documents or records.
A. Reperformance
C. Recalculation
B. Confirmation
D. Inspection
67. Which of the following is a false statement about audit objectives?
A. Audit objectives should be developed in light of management assertions about the
financial statement components.
B. Selection of tests to meet audit objectives should depend upon the understanding of
internal control.
C. The auditor should resolve any substantial doubt about any of management’s material
financial statement assertions
D. There should be a one-to-one relationship between audit objectives and procedures.
68. Which of the following is the best explanation of the difference, if any, between audit
objectives and audit procedures?
A. Audit procedures establish broad general goals, audit objectives specify the detailed work
to be performed.
B. Audit objectives are tailor-made for each assignment, audit procedures are generic in
application.
C. Audit objectives define specific desired accomplishments; audit procedures provide the
means of achieving audit objectives.
D. Audit procedures and audit objectives are essentially the same.
69. Honkai Inc. has significant information that is transmitted, processed, maintained, and
accessed electronically. The auditor has concluded that it is not possible to reduce detection
risk to an acceptable level by performing only substantive tests for a number of financial
statement assertions. The auditor’s alternative strategy is to:
A. Increase the acceptable audit risk.
B. Focus audit tests on other assertions for which substantive tests prove to be effective.
C. Require management to change its information system to provide appropriate evidence.
D. Perform tests of controls to gather evidential matter to use in assessing control risk related
to those assertions.
70. The competence of evidence available to an auditor is least likely to be affected by
A. The relevance of such evidence to the financial statement assertion being investigated.
B. The relationship of the preparer of such evidence to the entity being audited.
C. The timeliness of such audit evidence.
D. The sampling method employed by the auditor to obtain a sample of such evidence.
71. 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.
72. The most reliable form of documentary evidence are those documents that are:
A. Prenumbered.
C. Easily duplicated.
B. Internally generated.
D. Authorized by a responsible official.
73. Which of the following presumptions does not relate to the competence of audit evidence?
A. The more effective internal control, the more assurance it provides about the accounting
data and financial statements.
B. An auditor’s opinion, to be economically useful, is formed within a reasonable time and
based on evidence obtained at a reasonable cost.
C. Evidence obtained from independent sources outside the entity is more reliable than
evidence secured solely within the entity.
D. The independent auditor’s direct personal knowledge, obtained through observation and
inspection, is more persuasive than information obtained indirectly.
74. Assuming a low assessed level of control risk, which of the following audit procedures is least
likely to be performed?
A. Physical inspection of a sample of inventory.
B. Search for unrecorded cash receipts.
C. Obtaining a client representation letter.
D. Confirmation of accounts receivable.
75. You have been assigned to audit the maintenance department of an organization. Which of
the following is likely to produce the least reliable audit evidence?
A. Notes on discussions with mechanics in the maintenance operation.
B. A schedule comparing actual maintenance expenses with budgeted expenses and those
of the prior period and disclosing important differences.
C. A narrative covering review of user reports on maintenance service.
D. An analysis of changes in certain maintenance department ratios.
76. Which of the following auditing procedures is ordinarily performed last?
A. Reading of the minutes of the directors’ meetings.
B. Confirming accounts payable.
C. Obtaining a management representation letter.
D. Testing of the purchasing function.
77. If an auditor conducts an audit of financial statements in accordance with generally
accepted auditing standards, which of the following will the auditor most likely detect?
A. Misposting of recorded transactions.
C. Forgery.
B. Unrecorded transactions.
D. Collusive fraud.
78. It means the materials prepared by and for, or obtained and retained by the auditor in
connection with the performance of the audit.
A. Documentation
C. Engagement letter
B. Audit evidence
D. Audit report
79. Why does an auditor document audit evidence?
A. To comply with the requirements of gathering all available evidence.
B. To provide client reference for all account balances and correcting entries.
C. To support audit opinion and to provide evidence that the audit was carried out in
accordance with PSA.
D. To document all records of misstatements noted in the financial statements.
80. Working papers that record the procedures used by the auditor to gather evidence should
be:
A. Considered the primary support for the financial statements being audited.
B. Viewed as the connecting link between the books of accounts and the financial
statements.
C. Designed to meet the circumstances of the particular engagement.
D. Destroyed when the audited entity ceases to be a client.
81. Which of the following conditions constitutes inappropriate working paper preparation?
A. Flowcharts are included in the working papers.
B. Findings are cross-referenced to supporting documentation.
C. Tick marks are explained in working papers.
D. All forms and directives used by the auditee department are included in the working
papers.
82. An auditor’s working papers will ordinarily be least likely to include documentation showing
how the:
A. Client’s schedules were prepared.
B. Engagement was planned.
C. Understanding of the client’s internal control was obtained and control risk was assessed.
D. Unusual matters were resolved.
83. Which of the following is usually included or shown in the auditor’s working papers?
A. The procedures used by the auditor to verify the personal financial status of members of
the client’s management team.
B. Analyses that are designed to be a part of, or a substitute for, the client’s accounting
records.
C. Excerpts from authoritative pronouncements that support the underlying generally
accepted accounting principles used in preparing the financial statements.
D. The manner in which exceptions and unusual matters disclosed by the auditor’s
procedures were resolved or treated.
84. The form and content of working papers are affected by matters such as the:
I.
II.
III.
IV.
V.
VI.
Nature of the engagement.
Form of the auditor’s report.
Nature and complexity of the business.
Nature and condition of the entity’s accounting and internal control systems.
Needs in the particular circumstances for direction, supervision and review of work
performed by assistants.
Specific audit methodology and technology used in the course of the audit.
A. All of the above
B. All except V and VI
C. I, II and III only
D. All except VI
85. Which of the following is not generally included in the working papers file?
A. An indication as to who performed the audit procedures and when they were performed.
B. Documentation of the auditor’s understanding of the accounting and internal control
systems.
C. Copy of the internal audit’s audit program.
D. Analyses of significant ratios and trends.
86. Although the quantity and content of audit working papers vary with each particular
engagement, an auditor’s permanent files most likely include:
A. Schedules that support the current year’s adjusting entries.
B. Prior years’ accounts receivable confirmations that were classified as exceptions.
C. Documentation indicating that the audit work was adequately planned and supervised.
D. Analyses of capital stock and other owners’ equity accounts.
87. The audit working paper that reflects the major components of an amount reported in the
financial statements is the
A. Interbank transfer schedule
C. Supporting schedule
B. Carryforward schedule
D. Lead schedule
88. An auditor ordinarily uses a working trial balance resembling the financial statements without
footnotes, but containing columns for:
A. Cash flow increases and decreases
C. Reclassifications and adjustments
B. Audit objectives and assertions
D. Reconciliations and tick marks
89. In the course of the audit of financial statements for the purpose of expressing an opinion
thereon, the auditor will normally prepare a schedule of unadjusted differences for which he
did not propose adjustment when they were uncovered. The primary purpose served by this
schedule is to:
A. Point out to the responsible client officials the errors made by various company personnel.
B. Summarize the adjustments that must be made before the company can prepare and
submit its income tax returns.
C. Identify the potential financial statement effects of errors or disputed items that were
considered immaterial when discovered.
D. Summarize the errors made by the company so that corrections can be made after the
audited financial statements are released.
90. Which of the following analyses appearing in a predecessor’s working papers is the successor
auditor least likely to be interested in reviewing?
A. Analysis of noncurrent balance sheet accounts.
B. Analysis of income statement accounts.
C. Analysis of current balance sheet accounts.
D. Analysis of contingencies.
91. In an internal audit, the audit supervisor determines that working papers are complete:
A. When satisfied that the audit objectives have been met and the working papers support
the conclusions.
B. When working papers refer to the steps outlined in the audit program.
C. Only after the auditor who prepared the working papers has signed and dated them.
D. When proper cross-references to other working papers are noted.
92. Standardized working papers are often used, chiefly because they allow working papers to
be prepared more:
A. Efficiently
C. Professionally
B. Neatly
D. Accurately
93. Ordinarily, the audit may use schedules, analyses and other documentation prepared by
entity personnel in order to:
A. Lessen auditor’s responsibility.
B. Eliminate the need to apply any audit procedures on verifying their correctness.
C. Emphasize that the responsibility on financial statements rests with the client management.
D. Improve audit efficiency.
94. Working papers which contain information relating primarily to the audit of a single period.
A. Current audit files
C. Financial reporting files
B. Permanent audit files
D. Correspondence files
95. Which of the following is the least required of the audit working papers?
A. Substitute for the entity’s accounting records.
B. Confidentiality of information included in the working papers.
C. Safe custody of the working papers.
D. Retention for a period sufficient to meet the needs of the practice.
96. It means an approximation of the amount of an item in the absence of a precise means of
measurement.
A. Accounting estimate
C. Accounting error
B. Accounting policy
D. Accounting change
97. 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 confirm the estimate made.
A. Any of the above
B. None of the above
C. Either I or II
D. I only
98. Which statement is incorrect regarding the auditor's responsibilities and audit procedures
regarding related parties and transactions with such parties?
A. The auditor should perform audit procedures designed to obtain sufficient appropriate
audit evidence regarding the identification and disclosure by management of related
parties and the effect of related party transactions that are material to the financial
statements.
B. An audit cannot be expected to detect all related party transactions.
C. The auditor is responsible for the identification and disclosure of related parties and
transactions with such parties.
D. The auditor needs to have a level of knowledge of the entity's business and industry that
will enable identification of the events, transactions and practices that may have a
material effect on the financial statements.
99. When auditing related-party transactions, an auditor places primary emphasis on:
A. Confirming the existence of the related parties.
B. Verifying the valuation of the related-party transactions.
C. Evaluating the disclosure of the related-party transactions.
D. Ascertaining the rights and obligations of the related parties.
100.
After determining that a related-party transaction has, in fact, occurred, and auditor
should:
A. Add a separate paragraph to the auditor’s standard report to explain the transaction.
B. Perform analytical procedures to verify whether similar transactions occurred, but were
not recorded.
C. Obtain an understanding of the business purpose of the transaction.
D. Substantiate that the transaction was consummated on terms equivalent to an arm’slength transaction.
101.
Which statement is incorrect regarding the auditor’s use of the work of an expert?
A. When using the work performed by an expert, the auditor should obtain sufficient
appropriate audit evidence that such work is adequate for the purposes of the audit.
B. “Expert” means a person or firm possessing special skill, knowledge and experience in a
particular field other than accounting and auditing.
C. The auditor's education and experience enable the auditor to be knowledgeable about
business matters in general, but the auditor is not expected to have the expertise of a
person trained for or qualified to engage in the practice of another profession or
occupation.
D. When the auditor uses the work of an expert employed by the auditor, that work is used in
the employee's capacity as an assistant on the audit.
102.
An expert may be:
Engaged by the entity
Engaged by the auditor
Employed by the entity
Employed by the auditor
103.
A.
B.
C.
D.
A
Yes
No
Yes
No
B
No
Yes
No
Yes
C
Yes
Yes
No
No
D
Yes
Yes
Yes
Yes
Which of the following least likely requires the services of an expert?
Valuations of certain types of assets like land and buildings.
Legal opinions concerning interpretations of engagements, statutes and regulations.
Determination of amounts using specialized techniques.
Application of accounting methods in computing inventory balances.
104.
When the auditor has to determine the need to use the work of an expert, he would least
likely consider:
A. The cost of using the services of an expert.
B. The quantity and quality of other audit evidence available.
C. The materiality of the financial statement item being considered.
D. The risk of misstatement based on the nature and complexity of the matter being
considered.
105.
In using the work of a specialist, an auditor referred to the specialist’s findings in the
auditor’s report. This is an appropriate reporting practice if the:
A. Auditor is not familiar with the professional certification, personal reputation, or particular
competence of the specialist.
B. Auditor, as a result of the specialist’s findings, adds an explanatory paragraph emphasizing
a matter regarding the financial statements.
C. Specialist is aware that his/her work will be used to evaluate the assertions in the financial
statements.
D. Auditor, as a result of the specialist’s findings, decides to indicate a division of responsibility
with the specialist.
106.
The independent auditor should acquire an understanding of the internal audit function
as it relates to the independent auditor’s study and evaluation of internal control because the:
A. Audit programs, working papers, and reports of internal auditors can often be used as a
substitute for the work of the independent auditor’s staff.
B. Procedures performed by the internal audit staff may eliminate the independent auditor’s
need for an extensive study and evaluation of internal control.
C. Work performed by internal auditors may be a factor in determining the nature, timing and
extent of the independent auditor’s procedures.
D. Understanding of the internal audit function is an important substantive test to be
performed by the independent auditor.
107.
Which of the following statements about the internal auditor and the external auditor is
not correct?
A. The role of internal auditing is determined by management and its objectives differ from
those of the external auditor who is appointed to report independently on the financial
statements.
B. The external auditor has the sole responsibility for the audit opinion expressed and that
responsibility is not reduced by any use made of internal auditing.
C. Internal auditors should exercise the same degree of independence as required of the
external auditor.
D. All judgments relating to the audit of the financial statements are those of the external
auditor.
108.
When obtaining an understanding and performing a preliminary assessment of the internal
audit function, the important criteria includes organization status, scope of function, technical
function and due professional care. Which of the following statements relates to the criteria of
due professional care?
A. The internal auditor should be free to communicate fully with the external auditors.
B. The management should act on internal audit recommendations.
C. There should be appropriate policies for hiring and training the internal auditing staff.
D. There should be adequate audit manuals, work programs and working papers.
109.
An independent auditor might consider the procedures performed by the internal auditors
because:
A. They are employees whose work must be reviewed during substantive testing.
B. Their works affect the cost benefit trade-off.
C. They are employees whose work may affect the nature, timing, and extent of audit
procedures.
D. Their degree of independence may be inferred from the nature of their work.
110.
When obtaining an understanding and performing a preliminary assessment of the internal
audit function, the auditor should consider the internal auditor’s:
Organizational status
Scope of functions
Technical competence
and due care
A.
Yes
Yes
Yes
B.
Yes
No
Yes
C.
Yes
No
No
D.
No
Yes
No