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Auditing Theory C3 Solman
Accountancy (Western Mindanao State University)
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CHAPTER 3
Fraud and Error
1. Material misstatements may emanate from all of the following except
a. Fraud
b. Error
c. Noncompliance with laws and regulations
d. Inadequacy of accounting records
2. Which of the following factors is most important concerning auditor’s responsibility to detect
errors and fraud?
a. The susceptibility of the accounting records to intentional manipulations, alternations, and the
misapplication of accounting principles.
b. The probability that unreasonable accounting estimates results from unintentional bias or
intentional attempts to misstate the financial statements.
c. The possibility that management fraud, defalcations, and the misappropriation of assets may
indicate the existence of illegal acts.
d. The risk that mistakes, falsifications, and omissions may cause the financial statements to
contain material misstatements.
3. An intentional act by one or more individuals among management, employees, or third parties
which results in misrepresentation of financial statements refers to
a. Error
b. Fraud
c. Noncompliance
d. Illegal acts
4. Which of the following statements is correct regarding errors and fraud?
a. An error is unintentional, whereas fraud is intentional.
b. Frauds occur more often than error in financial statements.
c. Error are always fraud and frauds are always errors.
d. Auditors have more responsibility for finding fraud than errors.
5. The primary factor that distinguishes errors from fraud is
a. Whether the underlying cause of misstatement relates to misapplication of accounting
principles or to clerical processing.
b. Whether the misstatement is perpetrated by an employee or by a member of management.
c. Whether the misstatement is concealed.
d. Whether the underlying cause of misstatement is intentional or unintentional
6. In the context of financial statement presentation, fraud occurs when
a. A misstatement is made and there is both knowledge of its falsity and the intent to deceive.
b. A misstatement is made and there is knowledge of its falsity but no intent to deceive.
c. The auditor fails to comply with PSA.
d. The auditor has an absence of reasonable care in the performance of the audit.
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7. Which of the following statements best identifies the two types of fraud?
a. Theft of assets and employee fraud
b. Misappropriation of asset and defalcation
c. Management fraud and employee fraud
d. Fraudulent financial reporting and management fraud.
8. Fraudulent financial reporting is often called
a. Management fraud
b. Defalcation
c. Misappropriation of assets
d. Employee fraud
9. Fraudulent financial reporting is most likely to be committed by whom?
a. Line employees of the company
b. Outside members of the company’s board of directors
c. Company’s management
d. The company’s auditors
10. The auditor has considerable responsibility for notifying users as to whether or not the
statements are properly stated. This impose upon the auditor a duty to
a. Provide reasonable assurance that material misstatements will be detected.
b. Be a guarantor of the fairness in the statements
c. Be equally responsible with management for the preparation of financial statements.
d. Be an insurer of the fairness in the statements
11. Which of the following statements is true?
a. It is usually easier for the auditor to uncover fraud than errors
b. It is usually easier for the auditor to uncover errors than fraud
c. It is usually equally difficult for the auditor to uncover errors or fraud
d. Usually, none of the above statements is true
12. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover
the fraud is
a. Greater for management fraud because managers are inherently smarter than employees
b. Greater for management fraud because of management’s ability to override existing internal
controls
c. Greater for employee fraud because of the higher crime rate among blue collar workers
d. Greater for employee fraud because of the larger number of employees in the organization.
13. If there is fraud involving top management, the probability that the fraud would be uncovered
in a financial statement audit is
a. Zero
b. Unlikely
c. Likely
d. Very high
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14. The term “error” refers to unintentional misrepresentation of financial information. Examples
of errors are when
I. Assets have been misappropriated
II. Transaction without substance have been recorded
III. Records and documents have been manipulated and falsified.
IV. The effect of the transaction have been omitted from the records.
a. All of the above statement are true
b. Only statements I and III are true
c. All of the above statements are false
d. Only statements II and IV are true
15. Which of the following is an example of an error?
a. Defalcation
b. Suppression or omission of the effects of transactions from the records or documents
c. Recording of transactions without substance
d. Misapplication of accounting policies
16. Which of the following is an “error” as distinguished from “fraud”?
a. Embezzlement of company’s fund
b. Window dressing
c. Clerical mistakes in the processing of transactions
d. Lapping
17. Which of the following could be an example of fraud?
a. Mistakes in the application of the accounting principles.
b. Clerical errors in accounting data underlying the financial statements.
c. Misinterpretation of facts that existed when financial statements were prepared.
d. Misappropriation of assets or group of assets.
18. Which of the following is an example of fraudulent financial reporting?
a. Company management changes inventory count tags and overstates ending inventory, while
understating cost of goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions by
debiting an expense account, thus overstating expenses.
c. An employee steals small tools from the company and neglects to return them; the cost is
reported as a miscellaneous operating expense.
d. An employee omitted an entry to record a bank transfer to cover a cash shortage.
19. Which one of the following terms relates to the embezzling of receipts?
a. Manipulation
b. Misrepresentation
c. Misappropriation
d. Misapplication
20. Which of the following statements best describes an auditor’s responsibility to detect errors
and fraud?
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a. An auditor should assess the risk that errors and fraud may cause the financial statements to
contain material misstatements and should design the audit to provide reasonable assurance of
detecting errors and fraud that are material to the financial statements.
b. An auditor is responsible to detect material errors, but has no responsibility to detect material
fraud that are concealed through employee collusion or management override of the internal
control structure.
c. An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests
of transaction identify conditional causing a reasonable prudent auditor to suspect tat the financial
statements were materially misstated.
d. An auditor has no responsibility to detect errors and fraud because an auditor is not insurer
and an audit does not constitute a guarantee.
21. The auditor gives an audit opinion on the fair presentation of the financial statements and
associated his or her name with it when, on the basis of adequate evidence, the auditor concludes
that the financial statements are unlikely to mislead
a. Investors
b. Management
c. A prudent user
d. The reader
22. The level of assurance provided by an audit of detecting a material misstatements is
a. Reasonable assurance
b. Moderate assurance
c. Absolute assurance
d. Negative assurance
23. The responsibility for the detection and prevention of errors, fraud and noncompliance with
laws and regulations rests with the
a. External Auditor
b. Client management and those charged with governance
c. Client’s legal counsel
d. Internal auditor
24. The responsibility for adopting sound accounting policies, maintaining adequate internal
control, and making fair representation in the financial statement rests
a. With the management
b. With the independent auditor
c. Equally with management and the auditor
d. With the internal audit department
25. The management responsibility to detect and prevent fraud and error is accomplished by
a. Implementing adequate quality control system.
b. Having an annual audit of financial statements.
c. Implementing adequate accounting and internal control system
d. Issuing a representation letter to auditor
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26. Which of the following statements best describes the auditor’s responsibility regarding the
detection of material errors and frauds?
a. The auditor is responsible for the failure to detect material errors and frauds only when such
failure results from the misapplication of PSA.
b. The audit should be designed to provide reasonable assurance that material errors and frauds
will be detected.
c. The auditor is responsible for the failure to detect material errors and fraud only when the
auditor fails to confirm receivables or observe inventories.
d. Extended auditing procedures are required to detect unrecorded transaction even if these is
no evidence that material errors ad frauds may exist.
27. The auditor’s best defense when material misstatements in the financial statements are not
uncovered in the audit is that
a. The audit was conducted in accordance with general accepted accounting principles
b. Client is guilty of contributory negligence.
c. The audit was conducted in accordance with PSA.
d. The financial statements are client’s responsibility.
28. The following statements relate to the auditor’s responsibility for the detection of errors and
fraud. Identify the correct statements.
I. Due to the inherent limitations of the audit, there is a possibility that material
misstatements in the financial statements may not be detected.
II. The subsequent discover of material misstatement of the financial information resulting
from fraud or error does not, in itself, indicate that the auditor failed to follow the basic principles
and essential procedures of an audit.
a. I only
b. II only
c. Both statements are correct
d. Both statements are incorrect
29. The auditor’s responsibility for failure to detect fraud arises.
a. When the failure clearly results from non-compliance to PSA.
b. Whenever the amounts involved are material.
c. Only when the examination was specifically designated to detect fraud.
d. Only when such failure clearly results from negligence so gross as to sustain in inference of
fraud on the part of the auditor.
30. In connection with the audit of financial statements, an independent auditor could be
responsible for failure to detect a material fraud if:
a. Statistical sampling techniques were not used on the audit engagement.
b. The auditor planned the audit in a negligent manner.
c. Accountants performing important parts of the work failed to discover a close relationship
between the treasurer and the cashier.
d. The fraud was perpetrated by one employee who circumvented the existing internal controls.
31. An auditor should recognize that the application of auditing procedures may produce
evidential matter indication the possibility of errors or fraud and therefore should
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a. Plan and perform the engagement with an attitude of professional skepticism.
b. Not depend on internal accounting control features that are designed to precent or detect
errors or fraud.
c. Design audit tests to detect unrecorded transactions.
d. Extend the work to audit most recorded transactions and records of an entity.
32. “The auditor should not assume that management is dishonest, but the possibility of
dishonesty must be considered.” This is an example of
a. Unprofessional behavior
b. An attitude of professional skepticism
c. Due diligence
d. Reasonable assurance
33. Professional skepticism requires auditors to posses a ________ mind.
a. Introspective
b. Questioning
c. Intelligent
d. Unbelieving
34. Professional skepticism dictated that when management makes statements to the auditors,
the auditors should
a. Require that the statement be out in writing.
b. Disregard the statement because it ranks low of the evidence quality scale.
c. Corroborate the evidence with other supporting documentation whenever possible.
d. Believe on the statement in order to maintain the professional client-auditor relationship.
35. Which of the following statements is not true?
a. It is usually easier for the auditor to uncover fraud than errors.
b. It is usually easier for the auditor to uncover errors than fraud.
c. The auditor’s responsibility for the detection of fraud or error ordinarily the same.
d. Usually, the auditor designs procedures to uncover fraud or error that could materially affect
the financial statements.
36. In comparing management fraud with employee fraud, the auditor’s risk of falling to discover
the fraud is:
a. Greater for management fraud because managers are inherently more deceptive than
employees
b. Greater for management fraud because of management’s ability to override existing internal
controls
c. Greater for employee fraud because of the higher crime rate among blue collar workers
d. Greater for employee fraud because of the larger number of employees in the organization
37. The most difficult type of misstatement to detect is fraud based on
a. The overrecording of transactions
b. The nonrecording of transactions
c. Recording transactions in subsidiaries
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d. Related party receivable
38. If several employees collude to falsify documents, the chance a normal audit would uncover
such acts is:
a. Very low
b. Very high
c. Zero
d. None of the above
39. If an auditor conducted an audit in accordance with auditing standards, which of the following
would the auditor likely detect?
a. Unrecorded transactions
b. Errors in posting or recorded transactions
c. Counterfeit signatures on paid checks
d. Fraud involving collusion
40. If an auditor was engaged to discover errors and fraud and the auditor performed extensive
detail work, the auditor is expected to detect:
a. Omitted transactions
b. Misclassification of account
c. Non-compliance with laws and regulations
d. Misappropriation of assets
41. Which of the following statements is incorrect?
a. The responsibility for the prevention and detection of fraud and error rests with management
b. The auditor is not and cannot be held responsible for the detection of fraud or error
c. In planning an audit, the auditor should assess the risk that fraud or error may cause the
financial statements to contain material misstatements.
d. The risk of not detecting material fraud is higher than the risk of not detecting a material
misstatement arising from error.
42. Which of the following statement about fraud or error is incorrect?
a. The auditor is not and cannot be held responsible for the prevention of fraud and error
b. The responsibility for the prevention and detection of fraud and error rests with management
c. The auditor should plan and perform the audit with an attitude of professional skepticism,
recognizing that conditions or events may be found that fraud or error may exist.
d. The likelihood of detecting fraud is ordinarily higher than that of detecting error.
43. In performing a financial statement audit, which of the following would an auditor least likely
consider?
a. Internal control
b. Compliance with the applicable financial reporting framework
c. Quality of management’ business decisions
d. Fairness of the financial statement amounts
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44. Which of the following is not an assurance that the auditors give to the parties who rely on the
financial statements?
a. Auditors know how the amounts and disclosures in the financial statements were produced
b. Auditors give assurance that the financial statements are accurate
c. Auditors gathered enough evidence to provide a reasonable basis for forming an opinion
d. If the evidence allows the auditors to do so, auditors give assurance in the form of opinion, as
to whether the financial statements taken as a whole are fairly presented in conformity with
PFRS
45. The risk of not detecting material misstatement resulting from fraud is greater than the risk of
not detecting a material misstatement arising from error, because:
a. The auditor designs only procedures to detect material error but no procedures are designed
to detect material fraud
b. Fraud ordinarily involves acts designed conceal it, such as collusion, forgery, or deliberate
failure to record transactions
c. The professional standards do not require the auditor to discover information that is indicative
of fraud
d. It is the responsibility of the management to detect fraud and auditor’s responsibility is
confined only to the detection of material errors
46. When performing a financial statement audit, auditors are required to explicitly assess the risk
of material misstatement due to
a. Errors
b. Fraud
c. Noncompliance
d. Business risk
47. Audits of financial statements are designed to obtain assurance of detecting misstatement
due to
Errors
Management Fraud
Employee Fraud
a. Yes
Yes
Yes
b. Yes
No
No
c. No
Yes
Yes
d. Yes
Yes
No
48. Which of the following best describes what is meant by the term “fraud risk factor”
a. Factor whose presence indicates that the risk of fraud is high
b. Factor whose presence often has been observed in circumstances where fraud has occurred
c. Factor whose presence requires modification of planned audit procedures
d. Factor that indicates internal control weaknesses
49. Which of the following is a category of risk factors that should be considered when assessing
risk of misstatements arising from misappropriation of assets?
a. Condition of internal control
b. Management characteristics
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c. Financial stability of the entity
d. industry condition
50. When considering fraud risk factors relating to management’s characteristics, which of the
following is least likely to indicate a risk of possible misstatements due to fraud?
a. Failure to correct known material internal control weaknesses on timely basis
b. Nonfinancial management’s preoccupation with the selection of accounting principles
c. significant portion of management’s compensation represented by bonuses based upon
achieving unduly aggressive operating results
d. Use of unusually conservative accounting practices
51. Which of the following is most likely to be a response to the auditor’s assessment that the risk
of material misstatement due to fraud for the existence of inventory is high?
a. Observe test counts of inventory at certain locations on an unannounced basis
b. Perform analytical procedures rather than taking test counts.
c. Request that inventories be counted prior to year-end.
d. Request that inventory counts at the various locations be counted on different dates so as to
allow the same auditor to be present at every count
52. Which of the following characteristics most likely would heighten an auditor’s concern about
the risk of intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low
b. Insiders recently purchased additional shares of the entity’s stock
c. Management places substantial emphasis on meeting earnings projections
d. The rate of change in the entity’s industry is slow
53. Individuals who commit fraud are ordinarily able to rationalize the act and also have an
Incentive
Opportunity
a. Yes
Yes
b. Yes
No
c. No
Yes
d. No
No
54. Which of the following most likely to be considered a risk factor relating to fraudulent financial
reporting?
a. Domination of management by top executives
b. Large amount of cash processed
c. Negative cash flows from operations
d. Small high-peso inventory items
55. Which of the following is most likely to be presumed to represent fraud risk on an audit?
a. Capitalization of repairs and maintenance into the property, plant and equipment asset
account
b. Improper revenue recognition
c. Improper interest expense accrual
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d. Introduction of significant new products
56. Which of the following conditions or events would least likely increase the risk of fraud or
error?
a. Questions with respect to competence or integrity of management
b. Unusual pressures within the entity
c. Unusual transactions
d. Lack of transaction trail
57. Which of the following conditions identified during fieldwork of an audit is most likely to affect
the auditor’s assessment of the risk of misstatement due to fraud?
a. Checks for significant amounts outstanding at year end
b. Computer generated documents
c. Missing documents
d. Year-end adjusting journal entries
58. Which of the following would be least likely to suggest to an auditor that the client’s statements
are materially misstated?
a. There are numerous delays in preparing timely internal financial reports
b. Management does not correct material internal control weakness that it knows about
c. Differences are reflected in the customers’ confirmation replies
d. There have been two new controllers this year
59. Which of the following circumstances would least likely cause an auditor to consider whether
material misstatement exist in an entity’s financial statements?
a. Management is dominated by several individuals
b. The industry in which the entity operates is declining
c. There is inadequate working capital due to declining profit
d. Supporting records that should be readily available are frequently not produced when
requested
60. Which of the following circumstances would least likely cause an auditor to consider whether
a material misstatement exists?
a. The turnover of senior accounting personnel is exceptionally low
b. Management places substantial emphasis on meeting earning projections
c. There are significant unusual transactions near year-end
d. Operating and financing decisions are dominated by one person
61. Which of the following circumstances most likely would cause an auditor to believe that
material misstatements exist in an entity’s financial statement?
a. Operating and financing decisions are dominated by top management
b. Audit trials of computer-generated transactions exist only for a short period of time
c. The chief financial officer does not sign the management representation letter until the last
day of the
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a. auditor’s fieldwork
d. There were substantial payments for services that appear excessive in relation to services
provided
62. Which of the following conditions would not normally cause the auditor to question whether
material errors or possible fraud exists?
a. The accounting department is overstaffed
b. Differences exist between control accounts and supporting subsidiary records
c. Transactions are not supported by proper documentation
d. There are frequent changes of auditors and lawyers
63. Which of the following characteristics most likely would heighten an auditor’s concern about
the risk of material misstatements in an auditor’s financial statements?
a. The entity’s industry is experiencing declining customer demand
b. The rate of change in the entity’s industry is slow
c. Bank reconciliation statements usually include in-transit deposits
d. Equipment is often sold at a loss before being fully depreciated
64. Which of the following conditions or events increase the risk of error or fraud?
a. Management is dominated by several individuals
b. There are frequent changes of auditors or legal counsel
c. There is a significantly low turnover of senior accounting personnel
d. The entity does not correct internal control deficiencies that it knows about
65. All of the following conditions are indicators of possible pressures on an entity except
a. The industry in which the entity operates is declining
b. There is inadequate working capital due to declining profits or too rapid expansion
c. The client is heavily dependent on one or a few products or customers
d. There is a significant and prolonged understaffing of the accounting department
66. Which of the following is most likely to be an overall response to fraud risk identified in an
audit?
a. Supervise members of the audit team less closely and rely more upon judgment
b. Use less predictable audit procedures
c. Only use certified public accountants on the engagement
d. Place increased emphasis on the audit of objective transactions rather than subjective
transactions
67. During the course of an audit engagement, the CPA discovers specific circumstances that led
him to the belief that employee fraud that has a material effect on the financial statements may
have occurred. In such a case the CPA should
a. Tract fully approach the suspected employee and attempt to resolve the matter with him
b. Ascertain that the client understand that the ordinary examination is not primarily designed to
disclose fraud or defalcations
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c. Perform appropriate modified or additional procedures to confirm or dispel the auditor’s
suspicion
d. After advising the client of his findings suggest that an investigation be made to discover
whether fraud has in fact occurred
68. If an auditor believes that material errors or fraud exist, the auditor should
a. Consider the implications and discuss the matter with appropriate levels of management
b. Make the investigation necessary to determine whether errors or fraud have in fact occurred
c. Request that management investigate whether errors or fraud have in fact occurred
d. Consider whether errors or fraud were the result of employee’s failure to comply with specific
controls
69. When the auditor believes a misstatement is or may be the result of the fraud but that the
effect of the misstatements is not material to the financial statements, which of the following steps
is required?
a. Consider the implications for other aspects of the audit
b. Resign from the audit
c. Commence a fraud examination
d. Contact regulatory authorities
70. Which of the following is an incorrect statement?
a. The auditor cannot assume that fraud or error is an isolated occurrence unless there is an
evidence to the contrary
b. If the auditor suspects that error may exist, he should immediately communicate it to the
management even if the potential effect on financial statements is immaterial
a. Fraud and error should be reported to a level of management at least one level above those
involved
b. Normally, the CPA does not have any responsibility confidential information noted during the
audit to the regulatory authorities
71. If the auditor believes that the fraud or error has a material effect on the financial statements
but the client is not willing to correct the misstatement, the auditor would most likely issue a(n)
a. Unmodified report
b. Qualified or adverse opinion
c. Qualified or disclaimer of opinion
d. Unmodified opinion with emphasis of matter paragraph
72. If the auditor is precluded by the entity from obtaining evidence to evaluate whether fraud or
error that may be material to the financial statements has occurred, the auditor should issue a
report that contains
a. An adverse opinion
b. An unmodified opinion
c. Either qualified or adverse opinion
d. Either qualified opinion or a disclaimer of opinion
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73. When a user sees that an unmodified opinion has been expressed by an external auditor,
he or she may correctly infer that:
a. No material errors were found during the engagement.
b. No embezzlements remain undetected
c. Any system defects encountered during the engagement have been corrected to the auditor's
satisfaction.
d. Any differences between management and the auditor on accounting matters have been
resolved to the auditor's satisfaction.
74. When comparing the auditor's responsibility for detecting employee fraud and for detecting
errors, the profession has placed the responsibility
a. More on discovering errors than employee fraud.
b. More on discovering employee fraud than errors.
c. Equally on discovering either one.
d. On the senior auditor for detecting errors and on the manager for detecting employee fraud.
75. Judgments about the increased risk of misstatement of the financial statements due to fraud
may influence the auditor's professional judgments in the following ways except:
a. The auditor’s ability to assess control risk below the maximum may be reduced and the
auditor should be sensitive to the ability of management to override controls.
b. The audit team may be selected in ways that ensure that the knowledge, skill, and ability of
personnel assigned significant engagement responsibilities are commensurate with the auditor’s
assessment of the level risk.
c. The auditor should plan and audit to provide a guarantee that the financial statements are
free of material misstatements, whether due to fraud or error.
d. The audit team any approach the audit with a heightened level of professional skepticism.
76. What is an auditor’s responsibility who discovers that management is involved in a
potentially immaterial fraud?
a. Report the fraud to the audit committee.
b. Report the fraud to SEC
c. Report the fraud to the level of management at least one level below those involved in the
fraud.
d. Determine that the amounts involved are immaterial, and if so, there is no reporting
77. Which of the following statements best describes the auditor’s responsibility regarding the
detection of fraud?
a. The auditor is responsible for the failure to detect fraud only when such failure clearly results
from non performance of audit procedures specifically described in the engagement letter.
b. The auditor is required to provide reasonable assurance that the both material errors and
fraud are detected.
c. The auditor is not and cannot be held responsible for the detection of fraud or error.
d. The auditor is responsible for the failure to detect fraud only when reg d. an unmodified
opinion is issued.
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78. The auditor's evaluation of the likelihood of material employee fraud is normally done initially
as a part of:
a. Tests of controls.
b. Tests of transactions.
c. Understanding the entity's internal control.
d. The assessment of whether to accept the audit engagement.
79. When is the auditor responsible for detecting fraud?
a. When the fraud did not result from collusion
b. When third parties are likely to rely on the client's financial statements
c. When the client’s system of internal control is judged by the auditor to be inadequate
d. When the application of PSA would have uncovered the fraud
Noncompliance with laws and regulations
80. These are acts of omission or commission by the entity being audited either intentional or
unintentional, which are contrary to the prevailing commission by the entity being laws and
regulations.
a. Fraud
b. Misappropriation
c. Noncompliance
d. Defalcation
81. Most noncompliance affect the financial statements
a. Directly
b. Only indirectly
c. Both directly and indirectly
d. Materially if direct, immaterially if indirect
82. When then auditor knows that a noncompliance with laws and regulation has occurred, the
auditor must
a. Issue an adverse opinion.
b. Withdraw from the engagement.
c. Consider the effects on the financial statements, including the adequacy of disclosure.
d. Report the matter to the proper government authorities.
83. Generally the decision to notify parties outside the client's organization regarding
noncompliance with laws and regulations is the responsibility of the
a. Independent auditor
b. Client’s legal counsel
c. Management
d. Internal auditors
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84. Which of the following is the auditor least likely to do when aware of a noncompliance?
a. Discuss the matter with the client's legal counsel.
b. Obtain evidence about the potential effect of the noncompliance on the financial statements.
c. Contact the local law enforcement officials regarding potential criminal wrongdoing
d. Consider the impact of the noncompliance on the relationship with the company's
management.
85. Which of the following statements about noncompliance is incorrect?
a. An audit in accordance with PSA cannot be expected to detect all noncompliance with laws
and regulations.
b. It is management's responsibility to ensure that entity's operations are conducted in
accordance with laws and regulations.
c. An auditor cannot be held responsible for preventing noncompliance
d. The determination of whether a particular act noncompliance is ultimately based on the
judgment of the auditor.
86. Which of the following circumstances is not an indication of possible noncompliance?
a. Payment of fines or penalties
b. Payment for unspecified services to consultants, related parties, or instance government
employees.
c. Purchasing at prices significantly above or below market price.
d. Payment for goods or services to the country from which the goods or services originated
87. Which of the following conditions would least likely indicate the occurrence of
noncompliance?
a. Investigation by government agencies.
b. Payments without proper documentation
c. Purchasing a real property for a price that is significantly higher than the seller's book value.
d. Existence of an accounting system which fails to provide an adequate audit trail or sufficient
evidence.
88. Which of the following conditions would most likely indicate a possible noncompliance with
laws and regulations?
a. Media comment
b. Purchasing land for a price significantly different from the seller recorded amount.
c. Payment of commission to sales agent.
d. Payment for specified services to consultant.
89. According to PSA 250, the risk of not detecting material misstatement due to noncompliance
is high. This can be attributed to all of the following factors, except:
a. There are many laws and regulations, relating principally to the a. operating aspects of the
entity, that typically do not have a material effect on the financial statements.
b. Auditors usually rely on lawyers’ representations to detect noncompliance.
c. The effectiveness of audit procedures may be affected by the limitations of the audit.
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d. Noncompliance may involve conduct designed to conceal it.
90. When the auditor becomes aware of information concerning a possible instance of
noncompliance, the auditor should
a. Notify the regulatory agencies
b. Determine who was responsible for the act
c. Obtain understanding of the nature of the act, and the circumstances in which it has occurred
and sufficient other information to evaluate the possible effect on the financial statements.
d. Modify the opinion on the client's financial statements.
91. An auditor who discovers that client has not complied with laws and regulations that has a
material effect on the financial statements most likely would withdraw from the engagement if
the
a. Noncompliance was a violation of PFRS.
b. Client does not take remedial action that the auditor considers necessary.
c. Noncompliance was committed last year when financial statements were not audited.
d. Auditor has already assessed control risk at the maximum level.
92. If specific information comes to an auditor's attention that implies an existence of
noncompliance with laws that could result in a material, but indirect effect on the financial
statements, the auditor should next
a. Apply audit procedures specifically directed to the ascertaining whether noncompliance has
occurred.
b. Seek the advice of an informed expert qualitied to practice law as contingent liabilities.
c. Report the matter to an appropriate level of management at least one level above those
involved
d. Discuss the evidence with the client's audit committee, or others with equivalent authority and
responsibility
93. Which of the following does not properly describe a procedure that the auditor normally
performs in connection with noncompliance?
a. The auditor should obtain a general understanding of legal and regulatory framework
applicable to the entity.
b. The auditor should perform procedures to identify instances of noncompliance with laws and
regulations.
c. The auditor should obtain oral representation that management has disclosed to the auditor
all known actual or possible noncompliance with laws and regulations.
d. The auditor should obtain sufficient appropriate evidence about compliance with laws and
regulations.
94. Which of the following procedures would an auditor be unlikely to perform when obtaining
general understanding about the law's and regulations affecting the client’s business?
a. Inquire of management concerning the entity's procedures regarding compliance with laws
and regulations.
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b. Inquire of management as to the laws or regulations that may be expected to have a
fundamental effect on the operations of entity.
c. Discuss with management the policies or procedures adopted for identifying, evaluating and
accounting for litigation claims or procedures adopt assessments.
d. Obtain representation letter from the client’s legal counsel.
95. After obtaining sufficient level of understanding about the client's legal and regulatory
framework, the auditor should
a. Develop a code of conduct and ensure that these employees comply with such code.
b. Perform procedures to help identify instances of noncompliance with laws and regulations
c. Monitor entity’s legal requirements and ensure that operating procedures are designed to
meet these requirements.
d. Inquire of management as to the laws or regulations that may be expected to have a
fundamental effect on the operations of the entity.
96. Which of the following procedures would assist the auditor in Identifying noncompliance with
laws and regulations?
a. Inquiring from the client’s lawyers.
b. Inspecting correspondence with relevant regulatory agencies.
c. Inquire of management concerning entity's policies and procedures regarding compliance
with laws and regulations.
d. Discuss with the client management the policies or procedures adopted for identifying,
evaluating, and accounting for litigation, claims and assessments.
97. If the client refuses to accept an audit report that is qualified due to noncompliance with laws
and regulations, the auditor should:
a. Withdraw from the engagement and indicate the reasons to the audit committee in writing.
b. Issue an adverse opinion if management agrees to fully disclose the matter.
c. Withdraw from the engagement and indicate the reasons to the SEC or other regulatory body
in writing
d. Issue a disclaimer of opinion instead.
98. During the annual audit of Joax Cop, a publicly held company, Joy, CPA, a continuing
auditor, determined that illegal political contributions had been made during each of the past
seven years, including the year under audit. Joy notified the board of directors about the illegal
contributions, but they refused to take any action because the amount involved were immaterial
to the financial statements. Joy should reconsider the intended degree of reliance to be placed
on the
a. Letter of audit inquiry to the client's attorney.
b. Prior years' audit programs
c. Management representation letter
d. Preliminary judgment about materiality levels.
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99. An auditor who discovers that a client's employees have paid small bribes to public officials
most likely would withdraw from the engagement if the
a. Client receives financial assistance from various government agencies.
b. Evidence that is necessary to prove that the illegal acts were committed does not exist
c. Employees actions affect the auditor's ability to rely on management’s representations
d. Notes to the financial statements fail to disclose the employee actions.
100. When planning the audit, if the auditor has no reason to believe that non-compliance
exists, the auditor should
a. Include audit procedures which have a strong probability of detecting non-compliance.
b. Still include some audit procedures designed specifically to uncover non-compliance.
c. Ignore the topic
d. Make inquiries of management regarding their policies specifically to detecting and
knowledge of violations, and then rely on normal audit pro preventing non-compliance and
regarding to detect errors, fraud, and illegalities.
NOTES CHAPTERS 1-3
CHAPTER 1
Audit- is a systemic process of objectively obtaining and evaluating evidence regarding assertions and
communicating the results to interested users.
Assertions- are representations made by an entity about economic actions and events.
Objectivity- requires the auditor to make an impartial assessment of all the relevant circumstances in
forming a conclusion.
Established Criteria – are needed to judge the validity of the assertions.
Assertions – The auditor evaluates the fair presentation of the financial statements by comparing these
financial statements with the requirements of the applicable financial reporting framework (Criteria).
Financial statement audit- The financial statement audit is conducted to determine whether the
financial statement of an entity are fairly presented in accordance with the applicable financial reporting
framework.
Compliance audit- A compliance audit involved a review of an organization’s procedures to determine
whether the organization has adhered to specific procedures, rules, or regulations.
Operational Audit- a study of a specific unit of an organization for the purpose of measuring its
performance. The main objective of this type of audit is to assess entity’s performance. This type of
audit is also known as performance audit or management audit.
External Auditors or Independent Auditors – These are independent Certified Public Accountants
(CPAs) who offer their professional services to different clients on a contractual basis. External auditors
are the ones who generally perform financial statement audits.
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