COMPREHENSIVE REVIEWER
AUDITING THEORY
1. In determining the primary responsibility of the external auditor for an audit of a company‟s
financial statements, the auditor owes primary allegiance to:
A. the management of the audit client because the auditor is hired and paid by
management.
B. the audit committee of the audit client because that committee is responsible for
coordinating and reviewing all audit activities within the company.
C. stockholders, creditors, and the investing public.
D. the Auditing and Assurance Standards Council, because it determines auditing
standards and auditor‟s responsibility.
2. Which of the following would not represent one of the primary problems that would lead the
users to demand for independent audits of a company‟s financial statements?
A. Management bias in preparing financial statements.
B. The downsizing of business and financial markets.
C. The complexity of transactions affecting financial statements.
D. The remoteness of the user from the organization and thus the inability of the user to
directly obtain financial information from the company.
3. Assurance services involve all the following except:
A. improving the quality of information for decision purposes.
B. improving the quality of the decision model used.
C. improving the relevance of information.
D. implementing a system that improves the processing of information.
4. Which of the following is the broadest and most inclusive concept?
A. Audits of financial statements.
B. Internal control audit.
C. Assurance services.
D. Compilation services.
5. Which of the following is a correct statement?
A. An audit provides limited assurance by attesting to the fairness of the client‟s
assertions.
B. A review provides positive assurance by attesting the reliability of the client‟s
assertions.
C. Management consulting services provide attestation in all cases.
D. Accounting services do not provide attestation.
6. Unlike consulting services, assurance services:
A. make recommendation to management
B. report on how to use information
C. report on the quality of information
D. are two-party contracts.
7. Financial statements audits:
A. reduce the cost of capital
B. report on compliance with laws and regulations
C. assess management„s efficiency
D. overlook information risk
8. A summary of findings rather than assurance is most likely to be included in a(n):
A.
B.
C.
D.
Agreed-upon procedures report
Compilation report
Examination report
Review report
9. The risk associated with a company's survival and profitability is referred to as:
A. Business Risk
B. Information Risk
C. Detection Risk
D. Control Risk
10. An engagement in which a CPA firm arranges for a critical review of its practices by another
CPA firm is referred to as a(n):
A. Peer Review Engagement
B. Quality Control Engagement
C. Quality Assurance Engagement
D. Attestation Engagement
11. Attestation risk is limited to a low level in which of the following engagement(s)?
A. Both examinations and reviews
B. Examinations, but not reviews
C. Reviews, but not examinations
D. Neither examinations nor reviews
12. .An operational audit differs in many ways from an audit of financial statements. Which of
the following is the best example of one of these differences?
A. The usual audit of financial statements covers the four basic statements, whereas the
operational audit is usually limited to either the balance sheet or the income statement
B. The boundaries of an operational audit are often drawn from an organization chart and
are not limited to a single accounting period
C. Operational audits do not ordinarily result in the preparation of a report
D. The operational audit deals with pre-tax income
13. The review of a company's financial statements by a CPA firm:
A. Is substantially less in scope of procedures than an audit
B. Requires detailed analysis of the major accounts
C. Is of similar scope as an audit and adds similar credibility to the statements
D. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the
statements
14. When performing an engagement to review a nonpublic entity's financial statements, an
accountant most likely would:
A. Obtain an understanding of the entity's internal control.
B. Limit the distribution of the accountant's report.
C. Confirm a sample of significant accounts receivable balances.
D. Ask about actions taken at board of directors' meetings.
15. Which of the following professionals has primary responsibility for the performance of an
audit?
A. The managing partner of the firm
B. The senior assigned to the engagement
C. The manager assigned to the engagement
D. The partner in charge of the engagement
16. Assurance services may include which of the following?
A.
B.
C.
D.
attesting to financial statements
examination of the economy and efficiency of governmental operations
evaluation of a division's performance for management
all of the given choices
17. The auditor of financial statements must make very difficult interpretations regarding
authoritative literature. Additionally, the auditor must
A. proceed beyond PFRS to assess how the economic activity is portrayed in the financial
statements.
B. force management to make certain decisions regarding their financial statements.
C. disregard independence in order to find the underlying truth of the evidence.
D. establish new criteria by which financial statements may be compared.
18. Which one of the following is not a part of the attest process?
A. gathering evidence about assertions
B. proving the accuracy of the books and records
C. evaluating evidence against objective criteria
D. communicating the conclusions reached
19. Which one of the following is not a reason why the users of financial statements desire for an
independent assessment of the financial statement presentation?
A. complexity of transactions affecting the financial statements
B. lack of criteria on which to base information
C. remoteness of the user from the organization
D. all of them are potential reasons
20. Independent professional services that are provided on financial or other information that
improve the quality of decision making are known as
A. internal auditing.
B. financial auditing.
C. assurance services.
D. attestation services.
21. An audit which determines whether organizational policies are being followed and whether
external mandates are being met is known as
A. a financial audit.
B. a compliance audit.
C. an operational audit.
D. none of the above
22.
May a CPA hire for the CPA‟s public accounting firm a non-CPA systems analyst who
specializes in developing computer systems?
A. Yes, provided the CPA is qualified to perform each of the specialist‟s tasks.
B. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist‟s
end product.
C. No, because non-CPA professionals are not permitted to be associated with CPA firms
in public practice.
D. No, because developing computer systems is not recognized as a service performed by
public accountants.
23.
Which of the following services may a CPA perform in carrying out a consulting service
for a client?
I.
Analysis of the client‟s accounting system
II.
III.
A.
B.
C.
D.
Review of the client‟s proposed business plan
Preparation of information for obtaining financing
I and II only
I and III only
II and III only
I, II, and III
24.
Which of the following describes how the objective of a review of financial statements
differs from the objective of a compilation engagement?
A. The primary objective of a review engagement is to test the completeness of the
financial statements prepared, but a compilation tests for reasonableness.
B. The primary objective of a review engagement is to provide positive assurance that the
financial statements are fairly presented, but a compilation provides no such assurance.
C. In a review engagement, accountants provide limited assurance, but a compilation
expresses no assurance.
D. In a review engagement, accountants provide reasonable or positive assurance that the
financial statements are fairly presented, but a compilation provides limited assurance.
25.
Which of the following factors most likely would cause a CPA to decline a new audit
engagement?
A. The CPA does not understand the entity's operations and industry.
B. Management acknowledges that the entity has had recurring operating losses.
C. The CPA is unable to review the predecessor auditor's working papers.
D. Management is unwilling to permit inquiry of its legal counsel.
26. When a firm or a member of the assurance team holds a direct financial interest or a material
indirect financial interest in the assurance client as a trustee, a self-interest threat may be
created by the possible influence of the trust over the assurance client. Accordingly, such an
interest cannot be held when:
A. The member of the assurance team, an immediate family member of the member of
the assurance team, and the firm are beneficiaries of the trust.
B. The interest held by the trust in the assurance client is not material to the trust.
C. The trust is not able to exercise significant influence over the assurance client.
D. The member of the assurance team or the firm does not have significant influence over
any investment decision involving a financial interest in the assurance client.
27. An inadvertent violation of the Independence rules as it relates to a financial interest in an
assurance client would not impair the independence of the firm, the network firm or a
member of the assurance team when:
A. The firm, and the network firm, has established policies and procedures that require all
professionals to report promptly to the firm any breaches resulting from the purchase,
inheritance or other acquisition of a financial interest in the assurance client.
B. The firm, and the network firm, promptly notifies the professional that the financial
interest should be disposed of.
C. The disposal occurs at the earliest practical date after identification of the issue, or the
professional is removed from the assurance team.
D. All of the given choices.
28. If a firm, or a network firm, has a direct financial interest in a financial statement audit client
of the firm, the appropriate safeguard against the self-interest threat created would be:
A. Dispose the entire financial interest.
B. Dispose of a sufficient amount of the financial interest so that the remaining interest is
no longer material.
C. Any of the two is appropriate.
D. None of the two is appropriate.
29. If a firm, or a network firm, has a material financial interest in an entity that has a
controlling interest in a financial statement audit client, the self interest threat created is so
significant. The audit firm can only perform the engagement if it:
I.
Dispose of the entire financial interest.
II. Dispose of a sufficient amount of the financial interest so that the remaining
interest is no longer significant.
A. Either I or II
B. Neither I nor II
C. I only
D. II only
30. Which of the following safeguards is inappropriate if a firm has a material financial interest
in an entity that has a controlling interest in a financial statement audit client?
A. Discuss the presence of self-interest threat with the client‟s board of directors.
B. Dispose of the financial interest in total.
C. Dispose of a sufficient amount of the financial interest.
D. Either dispose of a sufficient amount of the financial interest or the financial interest in
total.
31. The retirement benefit plan of a firm, or a network firm, has a financial interest in a
financial statement audit client. If the self-interest threat that is created by the financial
interest is significant, the firm that intends to continue the engagement should:
A. Reduce the financial interest so that the remaining interest is no longer material.
B. Discuss the matter with the audit committee of the financial statement audit client.
C. Refer the audit of the stockholders‟ equity of the financial statement audit client to
other CPA.
D. Either dispose of the financial interest in total or a sufficient amount so that the
remaining amount is no longer material.
32. The following loans and guarantees would not create a threat to independence, except:
A. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to the firm, provided the loan is made under normal lending procedures,
terms and requirements and the loan is immaterial to both the firm and the assurance
client.
B. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar
institution, to a member of the assurance team or their immediate family, provided the
loan is made under normal lending procedures, terms and requirements.
C. Deposits made by, or brokerage accounts of, a firm or a member of the assurance team
with an assurance client that is a bank, broker or similar institution, provided the
deposit or account is held under normal commercial terms.
D. If the firm, or a member of the assurance team, makes a loan to an assurance client that
is not a bank or similar institution, or guarantees such an assurance client's borrowing.
33. Examples of close business relationships that may create self-interest and intimidation
threat least likely include:
A. Having a material financial interest in a joint venture with the assurance client or a
controlling owner, director, officer or other individual who performs senior managerial
functions for that client.
B. Arrangements to combine one or more services or products of the firm with one or
more services or products of the assurance client and to market the package with
reference to both parties.
C. Distribution or marketing arrangements under which the firm acts as a distributor or
marketer of the assurance client‟s products or services, or the assurance client acts as
the distributor or marketer of the products or services of the firm.
D. The purchase of goods and services from an assurance client by the firm (or from an
audit client by a network firm) or a member of the assurance team, provided the
transaction is in the normal course of business and on an arm‟s length basis.
34. When a firm or a member of the assurance team and the audit client or one of its officers
hold interest in a closely-held entity, a threat to independence is not created, except:
A. The relationship is clearly insignificant to the firm or a member of the assurance team
and the audit client.
B. The relationship is other than insignificant which is acceptable for indirect financial
interest.
C. The interest held is immaterial to the investor or group of investors.
D. The interest does not give the investor, or group of investors, the ability to control the
closely-held entity.
35. When an immediate family member of a member of the assurance team is a director or an
officer of the assurance client in a position to exert direct and significant influence over the
subject matter information of the engagement, the threat to independence can only be
reduced to an acceptable level, aside from withdrawing from the engagement, by:
A. Removing the individual from the assurance team.
B. Reduce the participation of the professional.
C. Discuss the matter with the audit committee of the client entity.
D. Request the audit client management to require the immediate family member of the
professional to go on forced vacation leave.
36. Which of the following relationships is most likely to impair a CPA‟s independence with
respect to a particular audit client on which the CPA works as a member of the engagement
team?
A. A close relative has a material investment in that client of which the CPA is not aware.
B. A cousin has an immaterial investment in that client of which the CPA is not aware.
C. The CPA‟s father is the president of the audit client.
D. The CPA‟s spouse participates in a savings plan sponsored by the client.
37. An inadvertent violation of the rules on family and personal relationships would not impair
the independence of a firm or a member of the assurance team when:
A. The firm has established policies and procedures that require all professionals to report
promptly to the firm any breaches resulting from changes in the employment status of
their immediate or close family members or other personal relationships that create
threats to independence.
B. Either the responsibilities of the assurance team are re-structured so that the
professional does not deal with matters that are within the responsibility of the person
with whom he or she is related or has a personal relationship, or, if this is not possible,
the firm promptly removes the professional from the assurance engagement.
C. Additional care is given to reviewing the work of the professional.
D. All of the given choices.
38. If a member of the assurance team, partner or former partner of the firm has joined the
assurance client, the significance of the self-interest, familiarity or intimidation threats
created is least likely affected by
A. The position the individual has taken at the assurance client.
B. The amount of any involvement the individual will have with the assurance team.
C. The length of time that the individual was a member of the assurance team or firm.
D. The former position of the individual within the assurance team or firm.
39.
Using the same senior personnel on an assurance engagement over a long period of time
may create a familiarity threat. The significance of the threat will least likely depend upon
A. The length of time that the individual has been a member of the assurance team.
B. The role of the individual on the assurance team.
C. The structure of the client.
D. The nature of the assurance engagement.
40. A small CPA firm provides audit services to a large local company. Almost 80 percent of
the CPA firm‟s revenues come from this client. Which statement is most likely to be true?
A. Appearance of independence may be lacking.
B. The small CPA firm does not have proficiency to perform a larger audit.
C. The situation is satisfactory if the auditor exercises due skeptical negative assurance
care in the audit.
D. The auditor should provide an “emphasis of a matter paragraph‟ to his audit report
adequately disclosing this information and then it may issue an unqualified opinion.
41. A professional accountant has been the partner-in-charge of a particular audit client for the
past eight years. This situation could result to the following threat to professional
independence:
A. Self-review
B. Advocacy
C. Intimidation
D. Familiarity
42. Which statement is incorrect regarding long association of senior personnel with audit
clients that are listed entities?
A. Using the same lead engagement partner on an audit over a prolonged period may
create a familiarity threat.
B. The lead engagement partner should be rotated after a pre-defined period, normally no
more than six years.
C. A partner rotating after a pre-defined period should not participate in the audit until a
further period of time, normally two years, has elapsed.
D. When audit client becomes a listed entity the length of time the lead engagement
partner has served the audit client in that capacity should be considered in determining
when the partner should be rotated.
43. The professional accountant who has been the lead engagement partner for an audit
engagement for a prolonged period of time may continue to serve as the lead engagement
partner before rotating off the engagement for how many years after the audit client
becomes a listed entity?
A. One year
B. Three years
C. Two years
D. Four years
44.
While the lead engagement partner should be rotated after such a pre-defined period, some
degree of flexibility over timing of rotation may be necessary in certain circumstances.
Examples of such circumstances include:
A. Situations when the lead engagement partner‟s continuity is especially important to the
audit client, for example, when there will be major changes to the audit client‟s
structure that would otherwise coincide with the rotation of the lead engagement
partner.
B. Situations when, due to the size of the firm, rotation is not possible or does not
constitute an appropriate safeguard.
C. Both choices are correct.
D. Both choices are incorrect.
45. A CPA can continue to be an engagement partner on the audit of financial statements of
listed entities over a prolonged period of engagement. In order to avoid a creation of
familiarity threat, subject to transitional provisions, how many years are prescribed by the
as maximum for the CPA to continue serving as engagement partner for a listed entity?
A. Five years
B. Three years
C. Seven years
D. Ten years
46. An engagement partner who is rotated in the audit of financial statements of listed entity
can only participate in the audit engagement for the same client after a period of:
A. Twelve months
B. Two years
C. Three years
D. Five years
47.
The following activities would generally create self-interest or self-review threats that are
so significant and that only avoidance of the activity or refusal to perform the assurance
engagement would reduce the threats to an acceptable level, except
A. Authorizing, executing or consummating a transaction, or otherwise exercising
authority on behalf of the assurance client, or having the authority to do so.
B. Determining which recommendation of the firm should be implemented.
C. Reporting, in a management role, to those charged with governance.
D. Providing technical assistance and advice on accounting principles for audit clients.
48. Which of the following may not create a self-review threat?
A. Supervising assurance client employees in the performance of their normal recurring
duties.
B. Preparing source documents in electronic or other form evidencing a business
transaction.
C. Prolonged period of assignment as member of engagement team in one particular audit
engagement.
D. Performing corporate financial services for the audit client.
49.
If firm, or network firm, personnel providing such assistance make management decisions,
the self-review threat created could not be reduced to an acceptable level by any
safeguards. Examples of such managerial decisions include the following, except
A. Determining or changing journal entries, or the classifications for accounts or
transactions or other accounting records without obtaining the approval of the audit
clients
B. Authorizing or approving transactions.
C. Preparing source documents or originating data (including decisions on evaluation
assumptions), or making changes to such documents or data.
D. Assisting an audit client in resolving account reconciliation problems.
50.
The following services are considered to be a normal part of the audit process and do not,
under circumstances, threaten independence, except
A. Analyzing and accumulating information for regulatory reporting.
B. Assisting in the preparation of consolidated financial statements.
C. Drafting disclosure items.
D. Having custody of an assurance client‟s assets.
51.
Which of the following will an auditor least likely discuss with the former auditors of a
potential client prior to acceptance of an audit engagement?
A. Integrity of the management
B. Fees charged for the services
C. Disagreements between the predecessor auditor and the management regarding
accounting principles
D. Reasons for changing audit firms
52.
What is the most likely course of action to be taken by an auditor in assessing management
integrity?
A. Tour the plant
B. Review the minutes of the board of directors
C. Research the background and histories of officers
D. Review the bank reconciliation statements
53.
An engagement letter should be written before the start of an audit because
A. it may limit the auditor‟s legal liability by specifying the auditor‟s responsibilities.
B. it specifies the client‟s responsibility for preparing schedules and making the records
available to the auditor.
C. it specifies the basis for billing the audit for the upcoming year.
D. All of the choices given are correct
54.
When a CPA is approached to perform an audit for the first time, the CPA should make
inquiries of the predecessor auditor. This is a necessary procedure because the predecessor
may be able to provide the successor with information that will assist the successor in
determining whether:
A. the predecessor's work should be utilized.
B. the company follows the policy of rotating its auditors.
C. in the predecessor's opinion, internal control of the company is satisfactory.
D. the engagement should be accepted.
55.
A written understanding between the auditor and the client concerning the auditor's
responsibility for the discovery of noncompliance to laws is usually set forth in a(an)
A. client representation letter.
B. letter of audit inquiry.
C. management letter.
D. engagement letter.
56.
Prior to acceptance of an audit engagement with a client who has terminated the services of
the predecessor auditor, the CPA should
A. contact the predecessor auditor without advising the prospective client and request a
complete report of the circumstances leading to the termination of the engagement with
an understanding that all information disclosed will be kept confidential.
B. accept the engagement without contacting the predecessor auditor since the CPA can
include audit procedures to verify the reason given by the client for the termination of
the engagement.
C. not communicate with the predecessor auditor because this would in effect be asking
the auditor to violate the confidential relationship between an auditor and the client.
D. advise the client of the intention to contact the predecessor auditor and request a
permission for the contact.
57.
Before accepting an audit engagement, a successor auditor should make specific inquiries
of the predecessor auditor regarding the predecessor‟s
A. opinion of any subsequent events occurring since the predecessor‟s audit report was
issued.
B. understanding as to the reasons for the change of auditors.
C. awareness of the consistency in the application of PFRS between periods.
D. evaluation of all matters of continuing accounting significance.
58.
A successor auditor would most likely make specific inquiries of the predecessor auditor
regarding
A. specialized accounting principles being used by 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.
59.
Which of the following statements concerning materiality thresholds is incorrect?
A. Aggregate materiality thresholds are a function of the auditor's preliminary judgment
concerning audit risk.
B. In general, the more misstatements the auditor expects, the higher should be the
aggregate materiality threshold.
C. The smallest aggregate level of errors or fraud that could be considered material to any
of the financial statements is referred to as a "materiality threshold."
D. Materiality thresholds may change between the planning and review stages of the audit.
These changes may be due to quantitative and/or qualitative factors.
60.
Which of the following concepts about materiality is incorrect?
A. Materiality is directly related to the acceptable level of detection risk.
B. Materiality does not apply if internal control is highly effective.
C. Materiality is a matter of professional audit judgment.
D. Materiality is more closely related to fieldwork and reporting standards than to general
standards.
61.
Which of the following would not be a source of information about the risk of a potential
new audit client?
A. The predecessor auditor
B. Management
C. The internet
D. The new auditor‟s permanent file
62.
In comparing management fraud with employee fraud, the auditor‟s risk of failing to
discover the fraud is greater for:
A. employee fraud because of the larger number of employees in the organization.
B. employee fraud because of the higher crime rate among blue collar workers.
C. management fraud because of management‟s ability to override existing internal
controls.
D. management fraud because managers are inherently smarter than employees.
63.
Management‟s integrity affects all of the following risks except:
A. enterprise risk
B. financial reporting risk
C. engagement risk
D. all of the above risks are affected
64.
The auditor is most likely to presume that a high risk of irregularities 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 EDP exception reports each month.
65.
Which of the following audit risk components may be assessed in non-quantitative terms?
Inherent Risk
Control Risk
Detection Risk
A.
Yes
Yes
No
B.
Yes
No
Yes
C.
No
Yes
Yes
D.
Yes
Yes
Yes
Which of the following combinations of engagement risk, audit risk, and materiality would
lead the auditor to most audit work?
Engagement Risk
Audit Risk
Materiality
A.
Low
High
High
B.
Moderate
Low
Low
C.
Low
Moderate
Low
D.
High
High
High
66.
67.
Which of the following conditions justifies an auditor‟s decision of raising the materiality
level?
A. Internal control over revenue and receipts cycle is excellent.
B. Application of analytical procedures reveals a significant increase in sales revenue in
December, the last month of the fiscal year.
C. Internal control over shipping, billing, and recording of sales revenue is weak.
D. Study of the business reveals that the client recently acquired a new company in an
unrelated industry.
68.
Which of the following does an auditor least likely perform in assessing audit risk?
A. Gather audit evidence in support of recorded transactions.
B. Obtain an understanding of the client's system of internal control.
C. Understand the economic substance of significant transactions completed by the client.
D. Understand the entity and the industry in which it operates.
69.
Which type of risk does the management of a company have the most control over in the
short term?
A. Inherent risk
B. Control risk
C. Detection risk
D. Sufficiency risk
70.
In which of the following order would the auditors perform the following steps?
A. Determine audit risk; assess control risk; determine detection risk; set materiality.
B. Set materiality; determine audit risk; assess control risk; determine detection risk.
C. Set materiality; assess control risk; determine detection risk; determine audit risk.
D. Determine audit risk; set materiality; assess control risk; determine detection risk.
71.
If the results of the auditor's tests of controls induce the auditor to change the assessed
level of control risk for inventory from 0.2 to 0.4 and audit risk and inherent risk remain
constant, what is the effect on the acceptable level of detection risk?
A. A change in detection risk cannot be calculated because audit risk and inherent risk
values are not given.
B. Detection risk would increase from 0.3 to 0.6.
C. Detection risk would decrease from 0.4 to 0.2.
D. Detection risk would not change since audit risk and inherent risk do not change.
72.
Which of the following may cause the management to intentionally understate profits?
A. Management wants to create "cookie jar" reserves for a rainy day.
B. The company is under scrutiny by tax authorities.
C. The company is suffering a large loss and wants to take a "big bath."
D. All of the given choices
73.
Which of the following is true?
A. Auditors are responsible for detecting all fraudulent financial reporting.
B. Auditors must specifically consider fraud risk from overstating liabilities.
C. Auditors must specifically consider fraud risk from management override of controls.
D. All of them are true
74.
Why should the auditor plan more work on individual accounts as lower acceptable levels
of both audit risk and materiality are established?
A. To find smaller errors
B. To find larger errors
C. To increase the tolerable error in the accounts
D. To decrease the risk of overreliance
75.
With respect to errors and fraud, the auditor should plan to
A. search for errors or fraud that would have a material effect on the financial statements.
B. discover errors or fraud that would have a material effect on the financial statements.
C. search for errors that would have a material effect and for fraud that would have either
material or immaterial effects on the financial statements.
D. search for fraud that would have a material effect and for errors that would have either
material or immaterial effects on the financial statements.
76.
The auditor‟s responsibility for identifying "direct-effect" non-compliance to laws and
regulations differs from their responsibility for detecting
A. errors.
B. indirect-effect non-compliance to laws and regulations.
C. fraud.
D. management fraud.
77.
The element of the audit planning process most likely to be agreed upon with the client
before the implementation of the audit strategy is the determination of the
A. timing of inventory observation procedures to be performed.
B. evidence to be gathered to provide a sufficient basis for the auditor's opinion.
C. procedures to be undertaken to discover litigation, claims, and assessments.
D. pending legal matters to be included in the inquiry of the client's attorney.
78.
Which of the following concepts is most useful in assessing the scope of an auditor's
program relating to various accounts?
A. Attribute sampling
B. Materiality
C. The reliability of information
D. Management fraud
79.
With respect to the auditor's planning of a year-end examination, which of the following
statements is always true?
A. An engagement proposed after the fiscal year ends should not be accepted.
B. An inventory count must be observed at the balance sheet date.
C. The client's audit committee should not be told of the specific audit procedures that
will be performed.
D. It is an acceptable practice to carry out substantial parts of the examination at interim
dates.
80.
Which of the following is not a consideration in the development of audit programs?
A. Internal control over the recording of plant asset additions and repairs and maintenance
expenditures is found to be weak.
B. The client constructed a major addition to its central manufacturing facility during the
year under audit.
C. The client is a private university located in Southern Philippines.
D. The members of the board of directors are elected by the stockholders during the
annual meeting.
81.
An audit program provides a proof that
A. sufficient competent evidential matter is obtained.
B. the work is adequately planned.
C. there is compliance with generally accepted standards of reporting.
D. there is a proper study and evaluation of internal control.
82.
The principal reason for developing a written audit program is to help assure that the
A. audit work is properly supervised.
B. audit work is properly planned and documented.
C. audit report contains only significant findings.
D. work of different auditors is properly coordinated.
83.
One of the primary uses of an audit program is to
A. serve as a tool for planning, directing, and controlling the audit work.
B. document an auditor's understanding of the internal control.
C. provide for a standardized approach to the audit engagement.
D. delineate the audit risk accepted by the auditor .
84. Which of the following questions would an auditor most likely include in an internal control
questionnaire for notes payable?
A. Are assets that collateralize notes payable critically needed for the entity‟s continued
existence?
B. Are two or more authorized signatures required on checks that repay notes payable?
C. Are the proceeds from notes payable used for the purchase of noncurrent assets?
D. Are direct borrowings on notes payable authorized by the board of directors?
85.
In an auditor‟s consideration of internal control, the completion of a questionnaire is most
closely associated with which of the following?
A. Separation of duties
B. Flowchart accuracy
C. Understanding the system
D. Tests of controls
86.
During the review of the client‟s system of internal control, the auditor observes the client
employees as they apply the operating controls in order to
A. prepare a flowchart.
B. update information contained in the organization and procedure manuals.
C. corroborate the information obtained during the initial review of the system.
D. determine the extent of compliance with quality control standards.
87.
An auditor‟s flowchart of a client‟s internal controls is a diagram depicting the auditor‟s
A. understanding of the internal controls.
B. program for tests of controls.
C. documentation of consideration of internal controls.
D. understanding of the types of irregularities that are probable.
88.
Which of the following statements regarding the auditor‟s 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.
89.
Which of the following is the auditor‟s purpose of further testing the internal control
procedures?
A. Provide a basis for reducing the assessed level of control risk.
B. Reduce the risk that error or fraud that has not been prevented or detected by the
internal control system is not detected by the independent audit.
C. Provide assurance that transactions are executed in accordance with management's
authorization and access to assets is limited by a segregation of functions.
D. Provide assurance that transactions are recorded as necessary to permit the preparation
of the financial statements in conformity with PFRS.
90.
Tests of controls are concerned primarily with each of the following questions except:
A. How were the controls applied?
B. Why were the controls applied?
C. Were the necessary controls consistently performed?
D. By whom were the controls applied?
91.
The objective of tests of details of transactions that are being performed as tests of controls
procedures is to
A. monitor the design and use of entity documents such as pre-numbered shipping form.
B. determine whether controls have been placed in operation.
C. detect material misstatements in the account balances in the financial statements.
D. evaluate whether controls operate effectively.
92.
Which of the following is ordinarily considered a test of internal control procedures?
A. Send confirmation letters to banks.
B. Count and list cash on hand.
C. Examine signatures on checks.
D. Obtain or prepare reconciliation of bank accounts as of the balance sheet date.
Auditors can use several types of audit procedures to test controls. Which of the following
type of audit procedures is least likely to be used during tests of controls?
A. Physical examination of assets
93.
B. Inquiries of client personnel
C. Examination of documents, records, and reports
D. Observation of control-related activities.
94.
The objective of dual-purpose tests is to:
A. Evaluate whether internal controls are operating effectively.
B. Detect material misstatements in the financial statements.
C. Identify unusual trends or patterns in comparative financial statements.
D. Test internal controls as well as transactions and balances using the same test
procedures.
95.
Which of the following types of evidence will be gathered in order to test internal controls?
A. Confirmations of accounts receivable with customers.
B. Observation of client personnel receiving inventory shipments.
C. Observation of inventory counts.
D. Inquiry of management regarding significant litigation.
96.
Tests of controls least likely include:
A. Inquiries of appropriate client vendors.
B. Reperformance of a control.
C. Observation of the application of an accounting procedure.
D. Inspection of documents.
97.
A procedure that would most likely be used by an auditor in performing tests of control
regarding segregation of functions on which no audit trail is available:
A. inspection.
B. observation.
C. reprocessing.
D. reconciliation.
The primary purpose of performing further control tests is to provide
A. a basis for reducing the assessed level of control risk below the maximum level.
B. a basis for understanding the flow of transactions through the accounting system.
C. assurance that transactions are properly recorded.
D. all accounting control procedures leave visible evidence.
98.
99.
Which of the following procedures most likely would be included as part of an auditor's
tests of control procedures?
A. Inspection
B. Reconciliation
C. Confirmation
D. Analytical procedures
100. Which of the following audit tests would be a test of controls?
A. Tests of the specific items making up the balance in a financial statement account.
B. Comparing inventory prices to vendors‟ invoices.
C. Tracing signatures on canceled checks to board of directors‟ authorizations.
D. Tests of the additions to property, plant, and equipment by physical inspections.
101. For a particular assertion, control risk is the risk that
A. controls will not detect a material misstatement that occurs.
B. audit procedures will fail to detect a weak control system.
C. the prescribed control procedures will not be applied uniformly.
D. a material misstatement will occur in the accounting process.
102. Which of the following is an incorrect statement?
A. An example of a completeness assertion would be that notes payable in the balance
sheet includes all such obligations of the entity.
B. An example of an occurrence assertion would be that sales in the income statement
represent exchanges of goods or services that actually take place.
C. An example of a rights/obligations assertion would be that amounts capitalized for
leases in the balance sheet represent the cost of the entity‟s rights to leased property.
D. An example of a valuation/allocation assertion would be that property, plant, and
equipment are recorded at market value.
103. A distinction must be made between general audit objectives and specific audit objectives
for each account balance. Which of the following is an incorrect statement?
A. The general audit objectives are applicable to every account
balance on the
financial statements.
B. The specific audit objectives are applicable to every account balance on the financial
statements.
C. The general audit objectives are tailored to the engagement.
D. The specific audit objectives are tailored to the engagement.
104. Which of the following “general transaction-related audit objectives” is not part of the
valuation or allocation assertion?
A. Completeness
B. Accuracy
C. Classification
D. Timing
105. Only three of the following management assertions are associated with transaction-related
audit objectives. Which one of the following is not?
A. Existence or occurrence
B. Completeness
C. Valuation or allocation
D. Presentation and disclosure
106. Which of the following statements is incorrectly stated?
A. Balance-related audit objectives are applied to account balance.
B. Transaction-related audit objectives are applied to classes of transactions.
C. Balance-related audit objectives are applied to the ending balance in balance sheet
accounts.
D. Balance-related audit objectives are applied to both beginning and ending balances in
the balance sheet accounts.
107. The detail tie-in objective is not concerned that the details in the account balance
A. agree with related subsidiary ledger accounts.
B. are properly disclosed, in accordance with PFRS.
C. foot to the total in the account balance.
D. agree with the total in the general ledger.
108. The disclosure objective is concerned that
A. the account balance is properly presented in the financial statements.
B. disclosure requirements are properly presented in the financial statements and in the
footnotes.
C. both responses are correct.
D. both responses are incorrect.
109. If a long-term note receivable is included in the account receivable listing, there is a
violation of the
A. existence objective.
B. completeness objective.
C. classification objective.
D. timing objective.
110. After the general objectives are understood, specific objectives for each account balance on
the financial statements can be developed. Which of the following statements is true?
A. There should be at least one specific objective for each relevant general objective.
B. There will be only one specific objective for each relevant general objective.
C. There will be many specific objectives developed for each relevant general objective.
D. There must be one specific objective for each general objective.
111. Which of the following is not a proper matching of auditor‟s objective with management‟s
assertion?
A. Validity matches with existence or occurrence
B. Completeness matches with completeness
C. Ownership matches with rights and obligations
D. Classification matches with presentation/disclosure
112. An audit process is a well-defined methodology for organizing an audit to ensure that
A. the evidence gathered is both sufficient and competent.
B. all appropriate audit objectives are specified.
C. all appropriate audit objectives are met.
D. All of the responses are correct
113. Which of the following is correct?
A. The evidence that the auditor accumulates remains the same from audit to audit, but the
general objectives vary, depending on the circumstances.
B. The general audit objectives remain the same from audit to audit, but the evidence
varies, depending on the circumstances.
C. The circumstances may vary from audit to audit, but the evidence accumulated remains
the same.
D. The general audit objectives may vary from audit to audit, but the circumstances
remain the same.
114. Auditing standards require the auditor to accumulate sufficient competent evidence to
support the opinion issued. Because of the nature of audit evidence, it is
A. unlikely that the auditor will be completely convinced that the opinion is correct.
B. likely that the auditor will be completely convinced that the opinion is correct.
C. unlikely that the auditor will arrive at a conclusion.
D. likely that the auditor would change his/her mind about the opinion if he/she takes the
time to gather additional evidence.
115. Which of the following ultimately determines the specific audit procedures necessary to
provide an independent auditor with a reasonable basis for the expression of an opinion?
A. The audit program
B. The auditor's judgment
C. Philippine Standards on Auditing
D. The auditor's working papers
116. In the final analysis, the amount and kinds of evidential matter that are required to support
the auditor‟s opinion should be determined by
A. the audit committee.
B. auditor‟s judgment.
C. professional standards.
D. standards of auditing.
117. To adequately plan the extent of the audit evidence to gather, the generally accepted
auditing standards require the auditor to gain an understanding of
A. the internal control structure.
B. client‟s organization charts.
C. client‟s procedural manuals.
D. All of these
118. When unable to obtain sufficient competent evidential matter to determine whether certain
client management‟s acts are non-compliance to laws and regulations, the auditor would
most likely issue
A. an unqualified opinion with a separate explanatory paragraph.
B. either a qualified opinion or an adverse opinion.
C. either a disclaimer of opinion or a qualified opinion.
D. either an adverse opinion or a disclaimer of opinion.
119. An audit evidence is generally considered relevant when it is
A. derived through valid statistical sampling.
B. objective and unbiased.
C. factual, adequate, and convincing.
D. consistent with the audit objectives.
120. Two overriding considerations that affect an auditor‟s judgment in accumulating evidence
are:
1. Sufficient competent evidence must be accumulated to meet the auditor‟s
professional responsibility.
2. Cost of accumulating evidence should be minimized.
In evaluating these conditions,
A. the first is more important than the second.
B. the second is more important than the first.
C. they are equally important.
D. it is impossible to prioritize one.
121. Most of the independent auditor's work in formulating an opinion on the financial
statements consists of
A. studying and evaluating internal control.
B. obtaining and examining evidential matter.
C. examining cash transactions.
D. comparing recorded accountability with assets.
122. There are four subcategories of decisions that the auditors must make in accumulating audit
evidence. Which of the following is not one of those subcategories?
A. Audit procedures to be used
B. Reasons for deciding not to test controls
C. Sample size
D. Timing of the audit procedures
123. Evidential matter supporting the financial statements consists of the underlying accounting
data and all corroborating information available to the auditor. Which of the following is an
example of corroborating information?
A. Minutes of meetings of the board of directors
B. General and subsidiary ledgers
C. Accounting manuals
D. Worksheets supporting cost allocations
124. Which of the following is not one of the major phases in anaudit process?
A. Plan and design an audit approach
B. Test controls and transactions
C. Inform client of any adjustments or corrections to be made in the financial statements
D. Complete the audit and issue the report
125. Evidential matter is generally considered sufficient when
A. it is competent.
B. there is enough of it to afford a reasonable basis for an opinion on the financial
statements.
C. it has the qualities of being relevant, objective, and free from known bias.
D. it has been obtained through random selection.
126. In making decisions about evidence for a given audit, the auditor‟s goal is to obtain a
sufficient amount of timely, reliable evidence that is relevant to the information being
verified, and to do so
A. no matter what the cost involved in obtaining such evidence.
B. only if the cost is reasonable.
C. at the lowest possible total cost.
D. at any cost because the costs are billed to the client.
127. Which of the following is not a distinguishing feature of risk-based auditing?
A. Identifying areas posing the highest risk of financial statement errors
B. Analysis of internal control
C. Collecting and evaluating evidence
D. Concentrating audit resources in those areas presenting the highest risk of financial
statement errors
128. The competence of evidence available to an auditor is least likely affected by
A. the relevance of such evidence to the financial statement assertion being investigated.
B. the relationship of the source of such an evidence to the entity being audited.
C. the timeliness of the audit evidence obtained.
D. the sampling method employed by the auditor to obtain a number of samples as
evidence.
129. Which of the following procedures would provide the auditor 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.
130. The most reliable forms of documentary evidence are those documents that are
A. prenumbered.
B. easily duplicated.
C. internally generated.
D. authorized by a responsible official.
131. 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.
132. Before applying substantive tests to the details of asset accounts at an interim date, an
auditor should assess
A. control risk at below the maximum level.
B. inherent risk at the maximum level.
C. the difficulty in controlling the incremental audit risk.
D. materiality for the accounts tested as insignificant.
133. Before applying principal substantive tests to the details of accounts at an interim date, an
auditor should
A. assess control risk as below the maximum for the assertions embodied in the accounts
selected for interim testing.
B. determine that the accounts selected for interim testing are not material to the financial
statements taken as a whole.
C. consider whether the amounts of the year-end balances selected for interim testing are
reasonably predictable.
D. obtain written representations from management that all financial records and related
data will be made available.
134. 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
B. Forgery
C. Unrecorded transactions
D. Collusive fraud
135. Which of the following best explains the difference 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.
136. In gathering audit evidence in the performance of substantive tests, the auditor
A. should use the test month approach.
B. relies on persuasive rather than convincing evidence in the majority of cases.
C. would consider the client‟s documentary evidence more competent than evidence
gathered from observation and physical inspection.
D. would express an adverse opinion if he has substantial doubt as to any significant
assertion.
137. The auditor will not ordinarily initiate discussion with the audit committee concerning the
A. extent to which the work of internal auditors will affect the scope of the examination.
B. extent to which a change in the company‟s organization will influence the scope of the
examination.
C. details of potential problems that the auditor believes might cause a qualified opinion.
D. details of the procedures that the auditor intends to apply.
138. The objective of dual-purpose tests is to
A. evaluate whether internal controls are operating effectively.
B. detect material misstatements in the financial statements.
C. identify unusual trends or patterns in comparative financial statements.
D. test internal controls as well as transactions and balances using the same test
procedures.
139. To test for unsupported entries in the ledger, the direction of audit testing should be from
the
A. ledger entries.
B. journal entries.
C. externally generated documents.
D. original source documents.
140. The least costly form of testing is usually
A. tests of controls.
B. tests of details of balances.
C. tests of details of transactions.
D. analytical procedures.
141. Tracing from source documents to journals most directly addresses which financial
statement assertion?
A. Valuation
B. Completeness
C. Existence
D. Rights
142. An auditor is examining the detailed debit and credit entries in an account. The auditor is
most likely performing
A. analytical procedures.
B. tests of details of balances.
C. tests of details of transactions.
D. tests of controls.
143. Choices about audit evidence are influenced by all of the following except:
A. The auditor‟s understanding of the business and industry
B. Assessment of inherent and control risk
C. Comparisons of the auditor‟s expectation of the financial statements with the client‟s
books and records
D. Decisions about immaterial risk factors
144. The auditor is performing substantive tests several months before the end of the year. This
most likely means that
A. inherent risk is set at moderate to high.
B. detection risk is set at moderate to high.
C. control risk is set at maximum.
D. detection risk is set at low to very low.
145. In testing the existence assertion for an asset, an auditor ordinarily works from the
A. financial statements to the potentially unrecorded items.
B. potentially unrecorded items to the financial statements.
C. accounting records to the supporting evidence.
D. supporting evidence to the accounting records.
146. WB Industries 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 be used as basis of assessing
control risk related to those assertions.
147. The decision on the part of the auditor to perform substantive tests during the interim
period will be based upon
A. audit risk control and cost effectiveness.
B. the approach followed in the past.
C. the auditor‟s time convenience.
D. the cooperation extended by the client staff.
148. Choose the best illustration of objective audit evidence from the following:
A. The paid invoice file containing invoices matched with receiving reports and purchase
orders.
B. Management's assertion that payment procedure requires matching of invoice with
receiving report and purchase order.
C. Clerical staff assurances that management policy regarding payment of invoices-matching of invoice with receiving report and purchase order--is always followed.
D. The treasurer's statement of not remembering any exceptions in which an invoice was
submitted for payment that is not accompanied by a covering receiving report and
purchase order.
149. Which of the following audit procedures best supports the valuation objective?
A.
B.
C.
D.
Performing a lower of cost or market test of the client's inventories
Reviewing a contingent liability disclosure for proper wording
Searching for unrecorded liabilities
Observing the client's year-end physical inventory taking
150. Which of the following is not an appropriate auditing procedure supporting the fairness of
financial-statement presentation?
A. Inspecting plant asset additions for existence
B. Recalculating accrued interest on notes payable
C. Examining invoices in support of legal fees recorded during the fiscal year
D. Reviewing the client's production quality control program
151. Audit procedures are normally performed
A. early in the accounting period being examined.
B. throughout the accounting period being examined, but with emphasis on the
transactions near the end.
C. within one to three months after the close of the accounting period.
D. During all three of the above periods
152. The auditor would unlikely perform early substantive testing of account balances when:
A. A number of significant deviations from control policies and procedures were detected
during tests of controls.
B. Due to economic factors, the fourth quarter activity this year is expected to be
somewhat sluggish.
C. The client uses a natural business year.
D. The taking of the client‟s inventory is performed at an early date.
153. As the acceptable level of detection risk decreases, an auditor may change the
A. timing of substantive tests by performing them at an interim date rather than at yearend.
B. nature of substantive tests from a less effective to a more effective procedure.
C. timing of tests of controls by performing them at several dates rather than at one time.
D. assessed level of inherent risk to a higher amount.
154. The auditor is concerned that a client usually fails to bill customers for shipments. An audit
procedure that would gather relevant evidence would be to
A. select a sample of duplicate sales invoices and trace each to related shipping
documents.
B. trace a sample of shipping documents to related duplicate sales invoices.
C. trace a sample of Sales Journal entries to Accounts Receivable subsidiary ledger.
D. compare the total of the Schedule of Accounts Receivable with the balance of the
Accounts Receivable account in the general ledger.
155. The extent of testing normally applies
A. exclusively to the number of items to be tested.
B. to both the number of items tested and the number of tests performed.
C. exclusively to the number of substantive tests performed.
D. to both the nature of items tested and the number of tests performed.
156. Which of the following, when performed by the auditor, is not a test of mechanical
accuracy?
A. Extending sales invoices
B. Adding journals and ledgers
C. Tracing amounts from journals to ledgers
D. Calculating the current ratio
157. In the examination of the financial statements of Delta Company, the auditor determines
that in performing a test of internal control effectiveness, the rate of error in the sample does
not support the auditor's preconceived notion of a tolerable occurrence rate when, in fact, the
actual error rate in the population does meet the auditor's notion of effectiveness. This
situation illustrates the risk of
A. underassessment of control risk.
B. overassessment of control risk.
C. incorrect rejection.
D. incorrect acceptance.
158. Several risks are inherent in the evaluation of audit evidence which has been obtained
through the use of statistical sampling. Which of the following risks is an example of the risk
of underassessment of control risk?
A. Failure to properly define the population to be sampled.
B. Failure to draw a random sample from the population.
C. Failure to accept the statistical hypothesis that internal control is unreliable when, in
fact, it is.
D. Failure to accept the statistical hypothesis that a book value is not materially misstated
when the true book value is not materially misstated.
159. As a result of tests of controls, an auditor underassessed control risk and decreased
substantive testing. This underassessment occurred because the true occurrence rate in the
population was
A. Less than the risk of underassessment in the auditor's sample.
B. Less than the occurrence rate in the auditor's sample.
C. More than the risk of underassessment in the auditor's sample.
D. More than the occurrence rate in the auditor's sample.
160. Which of the following sampling plans would be designed to
measurement of a population, such as a peso value?
A. Numerical sampling.
B. Discovery sampling.
C. Sampling for attributes.
D. Sampling for variables.
161.
estimate a numerical
Which of the following statements is an advantage of classical variables sampling?
A. If no errors are expected, classical variables sampling will result in a smaller sample
size than probability-proportional-to-size sampling.
B. A classical variables sampling plan can begin before the completed population is
available.
C. Classical variables sampling may result in a smaller sample size than probabilityproportional-to-size sampling if there are many differences between recorded and
audited amounts.
D. Classical variables sampling does not require recorded values for individual sampling
units.
162.
What is the primary objective of using stratification as a sampling method in auditing?
A. To increase the confidence level at which a decision will be reached from the results of
the sample selected.
B. To determine the occurrence rate for a given characteristic in the population being
studied.
C. To decrease the effect of variance in the total population.
D. To determine the precision range of the sample selected.
163. An auditor is applying PPS sampling. In determining the sample size, which of the
following is not necessary?
A. a reliability factor for overstatement errors
B. a reliability factor for understatement errors
C. tolerable error
D. anticipated error
164. In a variable sampling plan, an auditor must generally consider each of the following
except
A. variation within the population.
B. acceptable risk of incorrect acceptance.
C. tolerable error.
D. Population.
165. When sampling methods are used in a substantive test, all of the following factors must
be considered in determining an optimum sample size, except the
A. variation in the population.
B. risk levels that the auditor is willing to accept.
C. deviation occurrence rate that the auditor expects to exist in the sample.
D. tolerable misstatement.
166. PPS sampling is most appropriate when the auditor
A. anticipates understatement errors.
B. anticipates overstatement errors.
C. expects no errors.
D. has assessed control risk at the maximum.
167. The mean-per-unit estimation method calculates the estimated total audited value of a
population of accounts receivable as:
A. A summation of the total individual accounts values in the population.
B. The sample mean audited value multiplied by the number of items in the population.
C. The estimated total audited value of the population multiplied by the number of items
in the sample.
D. The summation of the sample multiplied by the number of discrete samples in the
population.
168.
What is the best description of "tolerable misstatement" for mean-per-unit estimation?
A. The maximum misstatement that may exist without causing an account to be materially
misstated.
B. The "bounds" around the sample mean that we would expect the value to fall within to
be correct.
C. The "projected" misstatement in the population based upon the sample chosen.
D. The upper limit (or lower limit for liabilities) of asset values for which the book value
may exceed that sample mean without being materially misstated.
169. When are the ratio estimation and difference estimation techniques most likely to be
preferable to the mean-per-unit estimation method?
A. The choice between any of the methods is irrelevant, since they all provide similar
results.
B. When differences between book and audited values are infrequent.
C. When differences between book and audited values are frequent.
D. When differences between book and projected misstatement is estimated to be small.
170. What is one of the main advantages of the probability-proportional-to-size sampling
technique over the classical variables approach?
A. It provides a more accurate estimation of the sample mean.
B. It provides a wider range for acceptance so that less substantive testing needs to be
done.
C. It provides a smaller range for acceptance so that more errors are discovered.
D. It often requires a smaller sample size to be selected.
171. Probability-proportional-to-size sampling will result in what type of sample items being
selected?
A. Highly representative of the population because it is wholly randomized.
B. A higher proportion of small value items then large value items because of the
sampling interval used.
C. A higher proportion of large value items than small value items because of the
sampling interval used.
D. A biased sample means that may not be representative of the population.
172. While performing a substantive test of details during an audit, the auditor determined that
the sample results supported the conclusion that the recorded account balance was materially
misstated. It was, in fact, not materially misstated. This situation illustrates the risk of
A. alpha risk.
B. assessing control risk too low.
C. beta risk.
D. assessing control risk too high.
173.
The risk of incorrect acceptance relates to the:
A. Effectiveness of the audit.
B. Efficiency of the audit.
C. Preliminary estimate of materiality.
D. Allowable risk of tolerable error.
174. Sample results support the conclusion that a recorded account balance is materially
misstated but, unknown to the auditor, the account is not misstated, suggesting the risk of
A. incorrect rejection.
B. assessing control risk too high.
C. incorrect acceptance.
D. assessing control risk too low.
175. Which of the following business functions is associated with the revenue/receipt cycle?
A. Obligations are paid to vendors and employees.
B. Resources are distributed to outsiders in exchange for promises of future payments.
C. Resources are used, held, or transformed.
D. Capital funds are received from investors and creditors.
176. Which of the following is not a common activity in the revenue/receipt cycle?
A. Order entry
B. Receiving
C. Inventory control
D. cash collection
177. The cash account is involved in which cycle?
A. Revenue and collection.
B. Acquisition and expenditure.
C. Production and conversion.
D. All of the given choices.
178. Which of the following is an appropriate audit procedure to test cancelled checks for
authorized signatures?
A. Compare the check date with the first cancellation date.
B. Determine that all checks are to be signed by individual officers who are authorized by
the board.
C. Examine a representative sample of signed checks and trace their signatures to the
specimen signature book of authorized signatories.
D. Confirm the signatures from a sample of checks directly with the bank.
179. Which of the following is not likely a source of information about the accounting system in
the revenue area?
A. Direct inquiry of customers.
B. Prior experience with the client.
C. Systems flowcharts prepared by the EDP department.
D. Financial reporting manuals.
180. Which of the following gives an indication of a potential fraudulent activity?
A. Numerous credit memoranda have been issued to the company's biggest customer.
B. Internal auditor cannot locate several credit memoranda to support reductions of
customers' balances.
C. The year-end bank reconciliation has no outstanding checks or deposits older than 15
days.
D. No one was absent the day the auditors handed out the paychecks.
181. Which of the following control procedures could prevent or detect errors or frauds arising
from shipments made to unauthorized parties?
A. Document policies and procedures for scheduling the shipments of goods.
B. Establish procedures for reviewing and approving the prices and sales terms before
sale.
C. Prenumber the bills of lading and assure that the related billings are made on a
periodic basis.
D. Prepare and periodically update the lists of authorized customers.
182. Which of the following control procedures would most likely assure that access to
shipping, billing, inventory control, and accounting records is restricted to personnel
authorized by management?
A. Segregate the responsibilities for authorization, execution, and recording, and
prenumber and control the custody of documents.
B. Establish the cash receipts function in a centralized location and require a daily
reconciliation of cash receipts records with deposit slips.
C. Establish policy and procedures manuals, organization charts, and supporting
documentation.
D. Periodically substantiate and evaluate the recorded account balances.
183. An entity has implemented a control procedure which requires that authorized personnel
reconcile the total of individual customer accounts receivable with control totals. This
control relates to which of the following control objectives?
A. Sales, cash receipts, and related transactions should be recorded at the correct
amounts, in the proper period, and should be properly classified.
B. Recorded accounts receivable balances should reflect underlying transactions and
events.
C. Billings, collections, and related adjustments transactions should be posted accurately
to individual customer accounts.
D. Access to cash and cash-related records should be restricted to personnel authorized
by management.
184. Which of the following internal control procedures most likely would deter lapping of
collections from customers?
A. Independent internal verification of dates of entry in the cash receipts journal with
dates of daily cash summaries.
B. Authorization of writeoffs of uncollectible accounts by a supervisor who is
independent of credit approval.
C. Segregation of duties between receiving cash and posting collections to the accounts
receivable ledger.
D. Supervisor‟s comparison of the daily cash summary with the sum of the cash receipts
journal entries.
185. What sequence of steps does an auditor undertake when identifying control procedures that
are potentially reliable in assessing control risk below the maximum?
A. Consider the errors or frauds that might occur, determine control procedures, identify
control objectives, and design tests of controls.
B. Determine control procedures, design tests of controls, consider the errors or frauds
that might occur, and identify control objectives.
C. Identify control objectives, consider the errors or frauds that might occur, determine
control procedures, and design tests of controls.
D. Design tests of controls, determine control procedures, consider the errors or frauds
that might occur, and identify control objectives.
186. Assuming cash receipts from credit sales have been misappropriated, which of the
following is likely to conceal the misappropriation and unlikely to be detected?
A. Understating the sales journal.
B. Overstating the accounts receivable control account.
C. Overstating the accounts receivable subsidiary ledger.
D. Overstating the cash receipts journal.
187. Which of the following is most likely to provide management with incentives to overstate
earnings?
A. Projected quarterly dividends.
B. Issuance of preferred stock.
C. Unbudgeted increase in materials prices.
D. A projected stock split.
188. Under which of the following circumstances does management have some discretion in
timing the recognition of revenue?
A. The timing of revenue is not reasonably determinable and the earnings process is not
complete.
B. The amount and timing of revenue is reasonably determinable.
C. The earning process is complete or reasonably complete.
D. The transaction is at arm‟s length.
189. After preparing a flowchart of internal control for sales and cash receipts transactions and
evaluating the design of the system, the auditor would perform tests of controls on all
control procedures
A. That are documented in the flowchart.
B. that are considered to be deficiencies that might allow errors to enter the accounting
system.
C. that are considered to be strengths that the auditor plans to rely on in assessing control
risk.
D. that would help in preventing irregularities.
190. Which of the following would the auditor consider to be an incompatible operation if the
cashier receives remittances from the mail room?
A. The cashier posts the receipts to the accounts receivable subsidiary ledger.
B. The cashier makes the daily deposit at a local bank.
C. The cashier makes the daily deposit of cash collections.
D. The cashier endorses the checks.
191. Which of the following is not a universal rule for achieving control over cash?
A. Separate the cash-handling and record-keeping functions.
B. Decentralize the receiving of cash as much as possible.
C. Deposit each day‟s cash receipts by the end of the day.
D. Have bank reconciliation prepared by employees who do not handle cash.
192. On conducting an audit in which point in an ordinary sales transaction of a wholesaling
business is a lack of specific authorization of least concern to the auditor?
A. Granting of credit.
B. Shipment of goods.
C. Determination of discounts.
D. Selling of goods for cash.
193. An auditor who examines check disbursements discovers a missing check number. Upon
inquiry to the person responsible for disbursements and reconciliation of the cash account,
he is told that the check number is missing because the check was voided. What is the
auditor's next step?
A. Prepare a bank transfer schedule to identify the check.
B. Examine the bank confirmation to determine whether the check cleared.
C. Since the person responsible for disbursements also reconciles the account, no
additional procedures are necessary.
D. Examine the voided checks file to determine whether the check is in the file.
194. Of the following, which procedure or document is most effective for detecting kiting?
A. A bank cut-off statement.
B. A bank statement.
C. A bank kiting statement.
D. Confirmation of bank balance.
195. Which of the following is confirmed on the standard form used for cash balances at
financial institution?
A. Factored accounts receivable.
B. Loss contingencies.
C. Loans payable.
D. Safe deposit boxes controlled by the entity.
196. When counting cash on hand, the auditor must exercise control over all cash and other
negotiable assets to prevent
A. theft.
B. irregular endorsement.
C. substitution.
D. deposits in transit.
197. Which of the following is not a primary objective of the auditor in the tests of accounts
receivable?
A. Determining the approximate realizable value.
B. Determining the adequacy of internal control.
C. Establishing the validity of the receivables.
D. Determining the approximate time of collectibility of the receivables.
198. The negative form of accounts receivable confirmation request is particularly useful except
when
A. control procedures surrounding accounts receivable are considered to be effective.
B. a large number of small balances are involved.
C. the auditor has reason to believe the persons receiving the requests are likely to give
them consideration.
D. individual account balances are relatively large.
199. A sales cutoff test complements tests of
A. sales returns.
B. Cash
C. accounts receivable
D. sales allowances
200. Most part of the audit of sales and collection cycle
A. cannot be performed until the audit of cash is completed.
B. can be performed independently of the audit of other cycles.
C. must be performed simultaneously with the audit of the purchases and disbursements
cycle.
D. must be performed first so that the audit of the other cycles can rely on the data.
201. The audit objective: “The accounts receivable balance represents gross claims on
customers and agrees with the sum of the accounts receivable subsidiary ledger” is derived
from the assertion of
A. presentation and disclosure.
B. completeness.
C. valuation or allocation.
D. existence.
202. A shipping document used in vouching will primarily meet the:
A.
B.
C.
D.
completeness assertion.
valuation or allocation assertion.
rights and obligations assertion.
occurrence assertion.
203. A shipping document used in tracing will primarily meet the:
A. completeness assertion.
B. valuation or allocation assertion.
C. rights and obligations assertion.
D. occurrence assertion.
204. An auditor is examining accounts receivable. Which one is the most competent type of
evidence in this situation?
A. Interviewing the personnel who records accounts receivable.
B. Verifying that postings to the receivable account from journals have been made.
C. Receipt by the auditor of a positive confirmation.
D. No response received for a request for a negative confirmation.
205. Negative confirmation of accounts receivable is less effective than positive confirmation of
accounts receivable because
A. a majority of recipients usually lack the willingness to respond objectively.
B. some recipients may report incorrect balances that require extensive follow-up.
C. the auditor can not infer that all nonrespondents have verified their account
information.
D. negative confirmations do not produce evidential matter that is statistically
quantifiable.
206. Although most substantive testing is performed during the final audit, some substantive
tests may be done during the interim period. Which of the following statements
concerning the timing of substantive tests is true?
A. When internal control is weak, extensive substantive testing should be performed
during the interim audit.
B. Substantive testing should be performed during the interim audit only under conditions
of excellent internal control.
C. As a general rule, the auditor performs substantive tests of balances as of the balance
sheet date and tests of transactions during the interim as well as the year-end audit.
D. If internal control is weak, the auditor should confirm accounts receivable as of a point
in time at least one month prior to the client's fiscal year-end.
207. Before applying principal substantive tests to the details of asset and liability accounts at
an interim date, the auditor should
A. assess the difficulty in controlling incremental audit risk.
B. investigate significant fluctuations that have occurred in the asset and liability
accounts since the previous balance sheet date.
C. select only those accounts which can effectively be sampled during year-end audit
work.
D. consider the control tests that must be applied at balance sheet date to extend the audit
conclusions reached at the interim date.
208. Confirming accounts receivable is required whenever:
A. they are material and it is practicable and reasonable to do so.
B. they are material in amount.
C. it is practicable to do so.
D. it is reasonable to do so.
209. In the processing of accounts receivable confirmations, the auditor would not normally be
expected to:
A. reconcile the information to the corresponding customer‟s account.
B. personally deposit the requests in the mail.
C. include his own return address envelope.
D. personally prepare the confirmation letter.
210. The auditor should ordinarily mail confirmation requests to all banks with which the client
has conducted any business during the year, regardless of the year-end balance, since
A. the confirmation form also seeks information about indebtedness to the bank.
B. this procedure will detect kiting activities which would otherwise not be detected.
C. the mailing of confirmation forms to all the client‟s depository banks is required by
Philippine standards on auditing.
D. this procedure relieves the auditor of any responsibility with respect to non-detection
of forged checks.
211. An analysis of the aged accounts receivables is most directly related to which substantive
test objective?
A. Existence and occurrence.
B. Presentation and disclosure.
C. Rights and obligations.
D. Valuation.
212. The tests of balances to evaluate the adequacy of the allowance for uncollectible accounts
do not involve which of the following?
A. Considering the evidence concerning the collectibility of past due amounts.
B. Testing the aging of the amounts shown in the aging categories on the aged trial
balance.
C. Considering the evidence concerning the collectibility of current amounts.
D. Assessing the reasonableness of the percentages used to compute the allowance
component required for each aging category and the adequacy of the overall
allowance.
213. When scheduling audit work, the auditors are most likely to confirm accounts receivable
balances at an interim date if:
A. negative confirmations are being used.
B. internal control is weak.
C. internal control is strong.
D. there is a simultaneous examination of cash and accounts payable.
214. Which of the following is the best argument against the use of negative accounts receivable
confirmations?
A. The cost-per-response is excessively high.
B. There is no way of knowing if the intended recipients actually receive them.
C. The recipients are likely to feel that in reality the confirmation is a subtle request for
payment.
D. The inference drawn from receiving no reply may not be correct.
215. Which of the following procedures least likely helps the auditors to assess the adequacy of
management's accounting estimate of the allowance for doubtful accounts?
A. Investigate confirmation exceptions for any indication of amounts in dispute.
B. Review the accounts which have been written off as uncollectible prior to year-end.
C. Investigate credit ratings for large accounts receivable.
D. Discuss with the credit manager the current status of doubtful accounts.
216. Which of the following is a proper alternative audit procedure for no responses to positive
accounts receivable confirmation requests?
A. Examination of subsequent cash receipts in payment of the receivable.
B. Mailing of negative confirmation requests to nonrespondents.
C. Expansion of the sample by the number of nonrespondents.
D. Reduction of accounts receivable by the amount of the no responses.
217. Which of the following might be detected by an auditor's review of the client's sales cutoff?
A. Excessive goods returned for credit.
B. Unrecorded sales discounts.
C. Lapping of year end accounts receivable.
D. Inflated sales for the year.
218. During the process of confirming receivables as of December 31, 2009, a positive
confirmation was returned indicating that the "balance owed as of December 31 was paid
by a customer on January 9, 2010." The auditor would most likely
A. determine whether there were any changes in the account between January 1 and
January 9, 2010.
B. determine whether a customary trade discount was taken by the customer.
C. reconfirm the zero balance as of January 10, 2010.
D. verify that the amount was received.
219. Which of the following analytical audit findings would most likely indicate a possible
problem?
A. A material decrease in the receivables turnover.
B. A material increase in inventory turnover.
C. A material decrease in days' sales outstanding.
D. A material increase in the acid test ratio.
220. When the objective of the auditor is to evaluate the appropriateness of adjustments to sales,
the best available evidence would normally be
A. oral evidence obtained by discussing adjustment-related procedures with controller
personnel.
B. analytical evidence obtained by comparing sales adjustments to gross sales for a
period of time.
C. physical evidence obtained by inspection of goods returned for credit.
D. documentary evidence obtained by inspecting documents supporting entries to
adjustment accounts.
221. Two types of accounts receivable confirmation requests are used in practice - positive and
negative. Negative confirmations may be used
A. when internal control over sales and accounts receivable is weak.
B. only when the auditor has assessed inherent risk and control risk as low, the auditor
believes that the recipients will review the request, and a large number of small
balances are involved.
C. only when internal control over sales and accounts receivable is strong.
D. only when the auditor has assessed inherent risk and control risk as low, the auditor
believes that the recipients will review the request, and a small number of large
balances are involved.
222. An auditor has found many new assets on the plant floor, which coincides with an increase
in the equipment subsidiary ledger. However, the auditor has noticed that lease payments
are being made to an equipment leasing company. The auditor should primarily be
concerned with which financial statement assertion?
A. Rights and obligations.
B. Relevance.
C. Clerical accuracy.
D. Completeness.
223. The accuracy of perpetual inventory records may be established in part by comparing
perpetual inventory records with
a. purchase requisitions.
b. receiving reports.
c. purchase orders.
d. vendor payments.
224. When auditing merchandise inventory at year end, the auditor performs a purchase cutoff
test to obtain evidence that
a. all goods purchased before year end are received before the physical inventory count.
b. no goods held on consignment for customers are included in the inventory balance.
c. no goods observed during the physical count are pledged or sold.
d. all goods owned at year end are included in the inventory balance.
225. A client's physical count of inventories was higher than the inventory quantities per the
perpetual records. This situation could be the result of the failure to record:
A. sales.
B. sales discounts.
C. purchases.
D. purchase returns.
226. Which of the following audit procedures is not appropriate for addressing the assertion of
valuation?
A. verifying accounts payable trial balance
B. confirming with creditors
C. testing for unrecorded liabilities
D. performing analytical procedures.
227. When there are few property and equipment transactions during the year, the continuing
auditor usually makes a
a. complete review of the related internal controls and assesses control risk relative to
them.
b. complete review of the related internal controls and performs analytical review tests to
verify current year additions to property and equipment.
c. preliminary review of the related internal controls and performs a thorough examination
of the balances at the beginning of the year.
d. preliminary review of the related internal controls and performs extensive tests of
current year property and equipment transactions.
228. In analyzing the plant assets account, why is the examination of repairs and maintenance
records important?
A. Rights.
B. Existence.
C. Valuation.
D. Presentation and disclosure.
229. In examining the miscellaneous revenue account, an auditor discovers income from plant
assets. What should be a primary audit concern?
A. That such assets have been removed from the ledger of property owned.
B. That such assets are not available for physical examination.
C. That the assets sold were fully depreciated prior to the decision to sell them.
D. That such assets have been replaced by comparable equipment.
230. Which of the following statements is not correct concerning intangible assets?
A. Auditors review the reasonableness of the client's amortization program.
B. A lack of physical substance.
C. Valuation is a primary audit concern.
D. Proper presentation as current assets.
231. When performing an audit of the property, plant, and equipment accounts, an auditor
should expect which of the following to be most likely to indicate a departure from
generally accepted accounting principles?
A. A gain was recognized when a new asset was acquired at a price lower than its listed
retail price.
B. Interest has been capitalized for self-constructed equipment.
C. Assets have been acquired from affiliated corporations with the related transactions
recorded and described in the financial statements.
D. The cost of freight-in on an acquisition has been capitalized.
232. The auditors are least likely to learn of retirements of equipment through which of the
following?
A. Review of the purchase returns and allowances account.
B. Review of depreciation.
C. Analysis of the debits to the accumulated depreciation account.
D. Review of insurance policy riders.
233. A weakness in internal accounting control over the recording of retirements of equipment
may cause the auditor to
a. inspect certain items of equipment in the plant and trace those items to the accounting
records.
b. review the subsidiary ledger to ascertain whether depreciation was taken on each item
of equipment during the year.
c. trace additions to the "other assets" account to search for equipment that is still on hand
but no longer being used.
d. select certain items of equipment from the accounting records and locate them in the
plant.
234. When auditing inventories of raw materials, purchased parts, and/or merchandise
inventory, the auditor's most effective means for evaluating the valuation assertion is to
a. examine recent invoices from vendors, along with freight bills and compare with
client's unit costs, as adjusted for freight and discount.
b. compare purchases with prior year and with industry averages and account for
significant fluctuations.
c. trace quantities from tags or count sheets to final inventory listings.
d. scan inventory listings for large extended amounts, and trace related quantities to
auditor's copy of the inventory tag or listing.
235. The auditor tests the quantity of materials charged to work in process by tracing these
quantities to
a. cost ledgers.
b. perpetual inventory records.
c. receiving reports.
d. material requisitions.
236. Which of the following accounts would most likely be reviewed by the auditor to gain
reasonable assurance that additions to the equipment account are not understated?
a. Repairs and maintenance expense.
b. Depreciation expense.
c. Gain on disposal of equipment.
d. Accounts payable.
237. The most significant audit step in substantiating additions to the office furniture account
balance is
a. examination of vendors' invoices and receiving reports for current year's acquisitions.
b. review of transactions near the balance sheet date for proper period cutoff.
c. calculation of ratio of depreciation expense to gross office equipment cost.
d. comparison to prior year's acquisitions.
238. Instead of taking a physical inventory count on the balance sheet date, the client may take
physical counts prior to the year end if internal controls are adequate and
a. computerized records of perpetual inventory are maintained.
b. inventory is slow moving.
c. CBIS error reports are generated for missing pre-numbered inventory tickets.
d. obsolete inventory items are segregated and excluded.
239. Which of the following matters do auditors need not communicate to the audit committee
of a public company?
A. All critical accounting policies
B. Compensation arrangements related to the chief executive officer
C. Schedule of unadjusted differences
D. Management letter comments
240. Analytical procedures are required to be performed during the:
A. planning and substantive test stages.
B. substantive test and overall review stages.
C. planning and overall review stages.
D. planning stage only.
241. Which of the following factors would least influence an auditor‟s consideration of the
reliability of data for purposes of analytical procedures?
A. Whether the data are processed in a computer system or in a manual accounting system
B. Whether sources within the entity are independent of those who are responsible for the
amount being audited
C. Whether the data are subjected to audit testing in the current or prior year
D. Whether the data are obtained from independent sources outside the entity or from
sources within the entity
242. Analytical procedures are
A. substantive tests designed to evaluate a system of
internal control.
B. tests of control procedures designed to evaluate the validity of management's
representation letter.
C. substantive tests designed to evaluate the reasonableness of financial information.
D. tests of control procedures designed to detect errors in reported financial information.
243. The auditor notices significant fluctuations in key elements of the company's financial
statements. If management is unable to provide an acceptable explanation, the auditor
should
A. consider the matter as a scope limitation.
B. perform additional audit procedures to investigate the matter further.
C. intensify the examination with the expectation of detecting management fraud.
D. withdraw from the engagement.
244. Who is responsible for establishing the process and controls for preparing accounting
estimates?
E. The independent auditor
F. The internal auditor
G. The management
H. The controller
245. The auditor should adopt one or a combination of the following approaches in the audit of
an accounting estimate:
I.
II.
III.
I.
J.
K.
L.
Review and test the process used by management to develop the estimate.
Use an independent estimate for comparison with what the management prepares.
Review subsequent events which confirm the estimate made.
Any of them
None of them
Either I or II
I only
246. Which of the following is not one of the primary approaches that the auditors may use
when evaluating the reasonableness of accounting estimates?
A. Review and test management's process of developing estimates.
B. Confirm estimates directly with outsiders.
C. Independently develop an estimate of the amount to be compared to management's
estimate.
D. Review subsequent events or transactions that have bearing on the estimate.
247. The auditor should normally concentrate on the key factors and assumptions used by
management including all of the following except those that are
M. insignificant to the accounting estimates.
N. sensitive to variations.
O. deviations from historical patterns.
P. susceptible to misstatements and biases.
248. In evaluating the assumptions on which the estimate is based, the auditor would need to
pay particular attention to assumptions which are
Q. reasonable in light of actual results in prior periods.
R. consistent with those used for other accounting estimates.
S. consistent with management‟s plans which appear appropriate.
T. subjective or susceptible to material misstatement.
249. Subsequent events refer to
A. only significant events that occur between the balance sheet date and the date of the
auditor‟s report which have been discovered by the auditor during the same period.
B. only significant events that occur between the balance sheet date and the date of the
auditor‟s report irrespective of the date they have been discovered by the auditor.
C. only significant events that occur between the balance sheet date and the date the
audited financial statements have been released to the client, irrespective of the date of
their discovery by the auditor.
D. all significant events that occur after balance sheet date.
250. Which of the following is not correct concerning a type I and a type II subsequent event?
A. A type I may require adjustment to financial statements while a type II would not.
B. Both a type I and a type II subsequent event may require note disclosure.
C. A type I is an event that occurred prior to year end, but was discovered after, while a
type II is one that arises subsequent to year end.
D. A type II event may require adjustment to the financial statements and a type I may
require note disclosure.
251. Which of the following statements that relates to subsequent events is inappropriately
described?
A. The auditor is expected to conduct a continuing review of all matters to which
previously applied procedures have provided satisfactory conclusions.
B. The auditor should consider the effect of subsequent events on the financial statements
and on the auditor‟s report.
C. 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.
D. The procedures that are designed to obtain sufficiently appropriate audit evidence that
all events up to the date of the audit report that may require adjustment of, or disclosure
in, the financial statements are in addition to routine procedures which may be applied
to specific transactions.
252. The auditor's formal review of subsequent events normally should be extended through the
date of the
U. auditor's report.
V. next formal interim financial statements.
W. delivery of the audit report to the client.
X. mailing of the financial statements to the stockholders.
253. Which of the following appropriately describes the auditor‟s procedures with respect to
subsequent events?
A. The procedures to identity events that may require adjustments of, or disclosure in, the
financial statements would be performed as early as practicable.
B. Those routine procedures that are applied to specific transactions occurring after the
period ends are designed to obtain sufficient appropriate audit evidence that all events
up to the date of the audit report have been identified.
C. When a component is audited by another CPA, the auditor would consider the other
auditor‟s procedures regarding events after period end and the need to inform the other
auditor of the planned date of the audit report.
D. The auditor is responsible to inquire regarding the financial statements after the date of
the auditor‟s report.
254. Which of the following is least likely a procedure that would be performed by the auditor
near the auditor‟s report date?
A. Reading the minutes of the meetings of shareholders, the board of directors and audit
executive committees held throughout the audit year.
B. Reading the entity‟s latest available interim financial statements.
C. Inquiring of the client‟s legal counsel concerning litigations and claims.
D. Reviewing the procedures that management has established to ensure that subsequent
events are identified.
255. Which of the following procedures would an auditor most likely perform to obtain
evidence about the occurrence of subsequent events?
A. Confirming a sample of material accounts receivable established after year-end.
B. Comparing the financial statements being reported on with those of the prior period.
C. Investigating personnel changes in the accounting department occurring after year-end.
D. Inquiring as to whether any unusual adjustments were made after year-end.
256. Which of the following should the auditor do the least when, after the financial statements
have been issued, the auditor becomes aware of a fact that existed at the date of the
auditor‟s report?
A. Consider whether the financial statements need revisions.
B. Discuss the matter with the management.
C. Take the action appropriate in the circumstance.
D. Inform those users who are currently relying on the financial statements about the fact
that has been discovered.
257. If subsequent to the issuance of the audited financial statements, the auditor becomes
aware of material misstatements in the financial statements that exist prior to the date of
the audit report, the auditor should
Y. notify the parties who are currently relying on the financial statements.
Z. discuss the matter with the management, and should take the action appropriate in the
circumstances.
AA.
document such information in the audit plan for succeeding audit.
BB.
submit a revised copies of the financial statements and audit report to the
stockholders.
258. If, after the audited financial statements have been issued, the auditor becomes aware that
some information included in the statements is materially misleading, he or she has
CC.
no obligation to disclose it, assuming he or she acted in good faith and without
negligence in arriving at the audit opinion.
DD.
an obligation to inform the board of directors of the misleading statements.
EE.an obligation to inform all users who are relying on the financial statements.
FF. an obligation to make certain that users who are relying on the financial statements are
informed.
259. When a new audit report is issued on financial statements because of subsequent discovery
of material misstatements on previously issued financial statements, the audit report should
include
A. no modification.
B. qualified opinion because of scope limitation.
C. qualified opinion because of inadequate disclosure.
D. emphasis of a matter paragraph that refers to a note to the financial statements that
more extensively discusses the reason for the revision of the previously issued financial
statements.
260. When a fact, that existed before the date of the report is discovered and the management
revises the previously issued audited financial statements, the following are appropriate
except the:
A. new auditor‟s report should include an emphasis of a matter paragraph that refers to a
note to the financial statements that discusses the reason for the revision of the
financial statements and to the earlier report issued by the auditor.
B. new auditor‟s report should contain the original date.
C. performance of the procedures that are designed to obtain sufficient evidence as to
subsequent events would ordinarily be extended to the date the revised financial
statements are approved by the entity‟s management.
D. auditor is permitted to restrict the audit procedures regarding the financial statements to
the effects of the subsequent event that necessitated the revision.
261. The management should assess those events that may cast significant doubt about the
entity‟s ability to continue as a going concern for at least
A. two years from the balance sheet date.
B. two years from the date of the audit report.
C. one year from the balance sheet date.
D. one year from the date of the audit report.
262. Which of the following is incorrect about the management‟s responsibility to make an
assessment of an entity‟s ability to continue as a going concern?
A. In assessing whether the going concern assumption is appropriate, the management
takes into account all the available information for the foreseeable future, which should
be at least twelve months from the balance sheet date.
B. Though there is a history of profitable operations and a ready access to financial
resources, management must make its assessment with detailed analysis.
C. Management‟s assessment of the going concern assumption involves making a
judgment, at a particular point of time, about the future outcomes of events or
conditions which are inherently uncertain.
D. Management should make explicit assessment of its ability to continue as a goingconcern entity.
263. Which of the following least likely indicate a potential going-concern problem of an
entity?
A. Historical negative operating cash flows
B. Failure to comply with loan covenants
C. Refinancing of large short-term obligation with a medium-term loan
D. Pending regulatory proceedings against the entity
264. Which of the following is correct about the auditor‟s responsibility with respect to the
entity‟s ability to continue as a going concern?
A. The auditor is responsible to make an assessment of the entity‟s ability to continue as a
going concern.
B. The auditor‟s responsibility is to consider the appropriateness of the management‟s use
of the going concern assumption in the preparation of the financial statements.
C. The auditor can predict future events or conditions that may cause an entity to
discontinue as a going concern.
D. The auditor may allow the management to make an assessment of its ability to continue
as a going concern if the management is believed to be objective in doing such an
assessment.
265. In evaluating the management‟s assessment of the entity‟s ability to continue as a going
concern, he should consider the following, except:
A. the independence of the management.
B. the process that the management has followed to make its assessment.
C. the assumptions on which the assessment is based and management‟s plan for future
action.
D. whether the assessment has taken into account all relevant information of which the
auditor is aware of as a result of the audit procedures.
266. Which of the following is an appropriate procedure to test for an indication of events or
conditions that cast significant doubt on the entity‟s ability to continue as a going concern
beyond the period assessed by management?
A. Inspection
B. Inquiry
C. Observing
D. Analysis
267. When events or conditions have been identified to cast significant doubt on the entity‟s
ability to continue as a going concern, the auditor should
A. consider reassessing control risk at the maximum.
B. consider the issuance of disclaimer of opinion due to scope limitation.
C. review management plans for future actions based on its going-concern assessments.
D. report the matter to the board of directors and stockholders.
268. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate that there could be substantial doubt about an
entity‟s ability to continue as a going concern?
A. Review compliance with the terms of debt agreements
B. Confirm accounts receivable from principal customers
C. Reconcile interest expense with debt outstanding
D. Confirm bank balances
269. The auditor relies on the client representation letter to:
A. confirm written representations given to the auditor.
B. document the continuing materiality of client representations.
C. guarantee the absence of management fraud.
D. reduce the possibility of misunderstanding concerning management‟s representations.
270. The auditors are required to obtain a letter of representation from their clients. Which of
the following statements regarding the letter of representation is correct?
GG.
A letter of representation should impress upon management its responsibility for
the assertions in the financial statements.
HH.
A letter of representation should be signed by a company‟s financial officials and
attorneys.
II. A letter of representation documents the responses from the management to inquiries
about various aspects of the audit.
JJ. A letter of representation is a written statement from a non-independent party and as
such should not be regarded as a valid evidence.
271. 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 that 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.
272. Which of the following statements is true with respect to management representations?
A. Management representations are dated as of the balance sheet date.
B. Management representations may serve as a substitute for various types of substantive
procedures.
C. Management representations are signed by the auditor and delivered to the client's
officers.
D. Management representations are used to corroborate information obtained during the
audit.
273. When considering the use of management‟s written representations as audit evidence about
the completeness assertion, an auditor should understand that such representations
A. complement, but do not replace, substantive tests designed to support the assertion.
B. constitute sufficient evidence to support the assertion when considered in combination
with a sufficiently low assessed level of control risk.
C. are not part of the evidence considered to support the assertion.
D. replace a low assessed level of control risk as evidence to support the assertion.
274. The auditor should obtain evidence that the management acknowledges its responsibility
for the fair presentation of the financial statements in accordance with PFRS, and has
approved the financial statements. The auditor can obtain evidence of management's
acknowledgment of such responsibility and approval
I.
II.
III.
From relevant minutes of meetings of the board of directors or similar body.
By obtaining a written representation from the management.
By obtaining a signed copy of the financial statements.
KK.
Any of the given procedures
LL. Either I or II
MM.
I only
NN.
None of the procedures given
275. A management representation letter would ordinarily be dated as of the
A. date the report is delivered to the entity audited.
B. date the financial statements were approved by the client management.
C. balance sheet date of the latest period reported on.
D. date a letter of audit inquiry is received from the entity‟s attorney of record.
276. A written representation from a client‟s management that, among other matters,
acknowledges its responsibility for the fair presentation of the financial statements, should
normally be signed by the
A. chief executive officer and the chief financial officer.
B. chief financial officer and the chair of the board of directors.
C. chair of the audit committee of the board of directors.
D. chief executive officer, the chair of the board of directors, and the client‟s lawyer.
277. If the management refuses to furnish certain written representations that the auditor
believes are essential, which of the following is appropriate?
A. The auditor can rely on oral evidence relating to the matter as a basis for an
unqualified opinion.
B. The client‟s refusal does not constitute a scope limitation that may lead to a
modification of the opinion.
C. The client‟s refusal may have an effect on the auditor‟s ability to rely on other
representations of the management.
D. The auditor should express an adverse opinion because of management‟s refusal.
278. For which of the following matters should an auditor obtain written management
representations?
A. Management‟s cost-benefit justifications for not correcting internal control
weaknesses.
B. Management‟s knowledge of future plans that may affect the price of the entity‟s
stock.
C. Management‟s compliance with contractual agreements that may affect the financial
statements.
D. Management‟s acknowledgment of its responsibility for employee‟s violations of
laws.
279. A written management representation letter is most likely to be an auditor‟s best source of
corroborative information of a client‟s intention to
A. terminate an employee pension plan.
B. make a public offering of its common stock.
C. settle an outstanding lawsuit for an amount less than the accrued loss contingency.
D. discontinue a line of business.
280. Which of the following matters would an auditor most likely include in a management
representation letter?
A. Communications with the audit committee concerning weaknesses in the internal
control structure.
B. The completeness and availability of minutes of stockholders‟ and directors‟ meetings.
C. Plans to acquire or merge with other entities in the subsequent year.
D. Management‟s acknowledgment of its responsibility for the detection of employee
fraud.
281. How are other reporting responsibilities addressed within the auditor‟s report?
a. They should be addressed in a separate section that follows the opinion paragraph.
b. They should be addressed within the introductory paragraph.
c. They should be addressed within the scope paragraph.
d. They should be addressed within the scope paragraph and separately described in a
separate paragraph.
282. Which of the following is incorrect regarding the auditor‟s signature?
A. The auditor‟s signature is either in the name of the audit firm, the personal name of the
auditor, or both, as appropriate.
B. The auditor‟s signature is either in the name of the audit firm or the personal name of
the auditor, but not both.
C. In addition to the auditor‟s signature, the auditor may be required to declare the
auditor‟s professional accountancy designation.
D. The auditor‟s report filed with the Securities and Exchange Commission (SEC) must be
manually signed.
283. Which of the following information is(are) required when an auditor‟s report is issued on
financial statements to be filed with the Securities and Exchange Commission?
1.
2.
3.
4.
5.
A.
B.
C.
D.
Audit report is manually signed.
Certifying partner to sign his name.
Partner‟s Tax Identification Number.
PRC registration number
Accreditation with SEC
1, 2, 3, 4, 5
2, 4, 5
1, 3, 4, 5
2, 3, 4, 5
284. An audit report should be dated as of the
A. date the stockholders approve the audited financial statements.
B. date of management approving the audited financial statements.
C. balance sheet date of the latest period reported on.
D. date a letter of audit inquiry is received from the entity‟s attorney.
285. Why is the date of the auditor‟s report important?
a. To have a basis of determining the audit fees to be paid to the auditor.
b. The date of the auditor‟s report informs the readers that the auditor has considered the
effect of events and transactions of which the auditor became aware and that occurred up
to that date.
c. To emphasize completeness assertion.
d. To inform the users of the financial statements that the auditor complied with the
applicable Philippine Standards on Auditing.
286. How is the auditor‟s report on the financial statements that require final approval by
stockholders before such financial statements are issued publicly dated?
A. The auditor‟s report should be dated coinciding the date of approval of the financial
statements by the stockholders.
B. The auditor‟s report should be dated after the approval of the financial statements by
the stockholders.
C. The date of the auditor‟s report coincides the date of approval of the financial
statements by the board of directors.
D. The audit report should be dual dated, the first date coinciding the approval by the
board of directors and the second date to coincide with the approval by the
stockholders.
287. The auditor‟s address is indicated in the auditor‟s report by:
A. naming the location in the country where the auditor practices his profession.
B. including the complete mailing address of the auditor.
C. identifying the country from where the auditor had secured his professional license.
D. the auditor‟s address is omitted in the report.
288. Which of the following is ordinarily true of a modification of the audit report by adding an
emphasis of matter paragraph?
A. The modification by adding an emphasis of matter paragraph is an “except for”
qualification of opinion.
B. The emphasis of matter paragraph is a “subject to” qualification of opinion.
C. The emphasis of matter paragraph would ordinarily refer to the fact that the auditor‟s
opinion is not qualified.
D. The emphasis of matter paragraph is presented before the opinion paragraph.
289. When additional language is added to the auditor's report without modifying the opinion,
the additional language should be included in:
A. the introductory paragraph.
B. the scope paragraph.
C. the opinion paragraph.
D. one or more additional paragraphs that follow the opinion paragraph.
290. Which of the following statements is not true?
A. A one-paragraph report is generally used when the auditor is not independent.
B. A modification of the audit report that involves modified wordings may contain an
unqualified opinion.
C. An addition of another paragraph to an otherwise standard audit report always requires
a modification of an unqualified opinion.
D. An unqualified opinion may be issued though the audit report requires an additional
explanatory paragraph.
291. An auditor includes a separate paragraph in an otherwise unmodified report to emphasize
that the entity being reported on had significant transactions with related parties. The inclusion
of this separate paragraph
A. is considered an “except for” qualification of the opinion.
B. violates generally accepted auditing standards if this information is already disclosed in
the footnotes to the financial statements.
C. necessitates a revision of the opinion paragraph to include the phrase “with the
foregoing explanation.”
D. is appropriate and would not negate the unqualified opinion.
292. An auditor concludes that there is substantial doubt about an entity‟s ability to continue
as a going concern for a reasonable period of time. If the entity‟s disclosures concerning this
matter are adequate, the audit report should include a(an)
A.
Adverse opinion
Yes
“Except for” qualified opinion
Yes
B.
C.
D.
No
No
Yes
No
Yes
No
293. Under certain circumstances, the CPA may wish to emphasize specific matters regarding
the financial statements even though he or she intends to express an unqualified opinion.
Normally, such an explanatory information should be included in
A. the introductory paragraph.
B. a separate paragraph following the opinion paragraph in the report.
C. the opinion paragraph.
D. A separate paragraph preceding the opinion paragraph.
294. Salmon Company‟s financial statements adequately disclose uncertainties that concern
future events, the outcome of which cannot reasonably be estimated. The auditor‟s report
should include a(an)
A. unqualified opinion
B. “except for” qualified opinion
C. “subject to” qualified opinion
D. adverse opinion
295. The paragraphs of the report which is modified for uncertainties are the same as the
standard unqualified report. The explanatory paragraph as a form of the modification to
describe the uncertainty is added as the
A. first paragraph
B. last paragraph
C. third paragraph with the opinion paragraph last
D. second paragraph with the opinion paragraph last
296. An explanatory paragraph following an opinion paragraph that describes an uncertainty is
as follows:
As discussed in Note X to the financial statements, the company is a defendant in a
lawsuit alleging infringement of certain patent rights and claiming damages. Discovery
proceedings are in progress. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result upon
adjudication has been made in the accompanying financial statements.
What type of opinion should the auditor express in this circumstance?
A. Unqualified
B. Disclaimer
C. Qualified
D. adverse
297. The audit report issued by Lozano and Co., CPAs, included the following paragraph that
followed the opinion paragraph:
Without qualifying our opinion we draw attention to Note 11 to the financial statements.
The Company is the defendant in a lawsuit alleging infringement of certain patent rights
...
This paragraph is considered:
A. an inappropriate reporting practice
B. an additional information to be a part of the notes to financial statements.
C. an emphasis of matter regarding uncertainty which is considered an acceptable
reporting practice
D. inappropriate because it contradicts the unqualified opinion issued by the auditor
298. In extreme cases such as situations involving multiple uncertainties that are significant to
the financial statements, the auditor
A. may consider to express a disclaimer of opinion
B. may qualify his opinion instead of issuing an unqualified opinion with emphasis of
matter paragraph
C. may issue an adverse opinion because of their significance
D. may issue a “subject to” opinion because the situations related to uncertainties
299. A client company has issues that cause substantial doubt regarding the entity's ability to
continue as a going concern. If this is the only major audit issue, which type of opinion will
the auditor usually refrain from issuing?
A. Adverse
B. Unqualified with explanatory language
C. Clean opinion
D. Disclaimer of opinion
300. Which of the following situations, the effect of which is significant, least likely require a
decision of whether to issue a qualified or adverse opinion?
A. Any disagreement with entity management regarding the acceptability of the
accounting policies selected by the management.
B. Limitation on the scope of the auditor‟s work.
C. Inadequate disclosures of financial information.
D. Unjustified changes in accounting policies.
301. The auditor may continue to express unqualified opinion though there are modifications
made in the audit report. Which of the following situations, would the auditor likely modify
his opinion?
A. The existence of multiple uncertainties that are adequately described in the notes to
financial statements.
B. The prior year‟s financial statements were audited by other CPAs.
C. An important subsidiary whose financial statements were included in the consolidated
financial statements were audited by other CPAs.
D. A substantial doubt about the client‟s ability to continue as a going concern that is
adequately disclosed in the financial statements.
302.
In which of the following situations would qualified opinion be inappropriate?
A. Financial statements are materially misstated.
B. A doubt that is more than substantial about the ability of the company to continue as a
going concern.
C. A significant scope limitation.
D. The management insisted of not attaching the statement of cash flows.
303. Which of the following is not a reason to issue a modified audit report with opinion other
than unqualified opinion?
A. The scope of the auditor‟s work is restricted by the client.
B. The amount of inventories at cost as presented in the balance sheet significantly
exceeded their market values.
C. Certain significant matter is omitted from either the financial statements or notes to
financial statements.
D. An adequately disclosed significant uncertainty, the resolution of which is dependent
upon future events and which may affect the financial statements.
304. Which of the following situations may likely require a modified audit report with modified
wordings or an emphasis of matter paragraph?
A. A significant uncertainty, not adequately disclosed in the financial statements.
B. An audit of inventory is restricted by the client. The auditor was satisfied about the
balance of the inventory by doing alternative audit procedures.
C. A change in the application of generally accepted accounting principle that is justified.
D. A less than substantial doubt regarding the ability of the entity to continue as a going
concern.
305. Which of the following circumstances may not result to a disclaimer of opinion?
A. A significant scope limitation in auditing the existence of inventories. The inventory
amount comprises 75 percent of the total assets of the client.
B. The auditor believes that there are multiple uncertainties that are significant to the
financial statements.
C. The accounts receivable of the client comprises 80 percent of the total assets. The
auditor was instructed by the client not to confirm account balances. The auditor,
however, was satisfied by the results of alternative audit procedures.
D. The auditor‟s wife owns very a few number of common shares of the client.
306. An auditor may express a qualified opinion because of
A.
B.
C.
D.
Departure from
PFRS
YES
NO
YES
NO
Lack of
Consistency
YES
YES
NO
YES
Scope
Limitation
YES
NO
NO
YES
307. Whenever an auditor issues a qualified report, he or she
A. must use the term “subject to” in the opinion paragraph.
B. may use either the terms “subject to” or “ except for” in the opinion paragraph,
depending on the nature of the qualification.
C. must use the term “except for” in the opinion paragraph.
D. must not use the terms “subject to” or “except for” in the opinion paragraph.
308. An explanatory paragraph may be added to the audit report while at the same time issuing
an unqualified opinion in all cases except when:
A. the client has changed an accounting principle with the agreement of the auditor.
B. there is an immaterial departure from GAAP to ensure fair presentation with the
agreement of the auditor.
C. the audit opinion is partly based on the work of another auditor.
D. the audit work has been significantly limited by management.
309. Under which of the following sets of circumstances might an auditor disclaim an opinion?
A. The financial statements contain a departure from PFRS, the effect of which is
material.
B. The principal auditor decides to make reference to the report of another auditor who
audited a subsidiary.
C. There has been a material change between periods in the method of the application of
accounting principles.
D. There were significant limitations on the scope of the audit.
310. If an auditor is engaged to audit a client‟s financial statements after the annual physical
inventory count was made and the accounting records are not sufficiently reliable to enable
the auditor to become satisfied as to the year-end inventory balances, the opinion to be
expressed is
A. either an “except for” qualified opinion or an adverse opinion.
B. either a disclaimer or opinion or an “except for” qualified opinion.
C. either an adverse opinion or disclaimer of opinion.
D. an unqualified opinion.