Substantive-test - testbank about substantive testing …
Substantive-test - testbank about substantive testing audit theory
testbank about substantive testing audit theory
University
De La Salle University
Course
Auding Theory ( BSA42 )
53 documents
Academic year: 2022/2023
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External vs internal auditing
Auditing and assurance
University of San Jose-Recoletos
001
Financial
management Reporting Group 5
AUDITING
THEORY
1. Which of the following is not a basic element
of an audit
report?
MA1-Quiz-6-CVP-Problem-20
Managment
Accounting
a. Title of the report.
b. Introductory paragraph.
Pdfcoffee
c. Clients address.
d. Auditors address.
2. A measure of uniformity in the form and content of the auditors report is desirable because
a. it helps the auditors avoid legal liability.
it helps the readers understand the report.
Auditb.- Summative
c. it helps the auditor identify the usual circumstances that are expected to occur.
d. it makes the auditors more informed of their responsibilities with respect to audit report.
3. Which of the following is not explicitly included in the opening paragraph of an audit report?
Preview
text
a.
Identification of the financial statements that have been audited.
b. Statement that the financial statements are the responsibility of the entitys management.
c. Statement that the responsibility of the auditor is to express an opinion on the financial statements
based on his audit.
d. A statement by the auditor that the audit provides a reasonable basis for the opinion.
University of San Jose-Recoletos
4. Where do you find the following sentence?
Those standards require that we plan and perform the audit to obtain a reasonable assurance
AUDITING THEORY
a.
b.
c.
d.
about whether the financial statements are free of material misstatements.
Introductory paragraph of the auditors report.
Scope paragraph of the auditors report.
Managements representation letter.
Audit program.
Which of the following is not a basic element of an audit report? a. Title of the
report c Client฀s address b Introductory paragraph d Auditor฀s address
5. Whenever an auditor issues an adverse opinion, the implication is that the auditor
a. does not know if the statements are presented fairly.
b. does not believe the statements are presented fairly.
c. is satisfied that the statements are presented fairly except for a specific aspect of them.
d. is satisfied that the statements are presented fairly.
6. When there are multiple uncertainties that are significant to the financial statements, the auditor may
consider it appropriate to
c. disclaim an opinion.
a. withdraw from the engagement.
b. issue an adverse opinion.
d. issue a qualified opinion.
7. When an auditor expresses an opinion other than unqualified opinion, a clear description of all
substantive reasons for the modification of the opinion should be included in the report. This
explanation should be presented
a. as a separate paragraph that precedes the opinion paragraph of the audit report.
b. as a separate paragraph, preferably after the opinion paragraph of the audit report.
c. in the opinion paragraph.
d. as a separate paragraph in the notes to financial statements.
8. Which of the following does not warrant a modification of an unqualified opinion?
a. A significant doubt about the ability of the company to continue as a going concern; such concern is
adequately disclosed by the entity in the notes to financial statements.
b. A limitation of the scope of the audit, the possible effect of which is material to the financial
statements.
c. The auditor has disagreement with management regarding the acceptability of the accounting
policies, the effect of which is material.
d. The omission of significant information in the financial statement.
9. An auditors report on financial statements prepared in accordance with another comprehensive basis
of accounting should include all of the following except
a. an opinion as to whether the basis of accounting used is appropriate under the circumstances.
b. an opinion as to whether the financial statements are presented fairly in conformity with the
comprehensive basis of accounting.
c. reference to the note to the financial statements that describes the basis of presentation.
d. a statement that the basis of presentation is a comprehensive basis of accounting other than
generally accepted accounting principles.
10. 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.
c. the opinion paragraph.
b. the scope paragraph.
d. one or more additional paragraphs that follow the
opinion paragraph.
11. When the principal auditor decides to refer to another auditor in his/her report, the report should always
include
a. a qualified or adverse opinion.
b. a disclaimer of opinion regarding the
c. financial statements audited by the other auditor.
2
d. the percentage and monetary amounts of the portion of the financial statements examined by the
other auditor.
e. reference to a footnote where the division of responsibility between the principal auditor and the
other auditor is described in detail.
12. Hernandez, CPA, concludes that there is substantial doubt about JKL Co.s ability to continue as a going
concern. If JKLs financial statements adequately disclose its financial difficulties, Hernandezs
auditors report should
Include an explanatory
Specifically use
Specifically use
paragraph following
the words
the words
the opinion paragraph
Going concern
substantial doubt
a.
Yes
Yes
Yes
b.
Yes
Yes
No
c.
Yes
No
Yes
d.
No
Yes
Yes
13. Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going
concern for a reasonable period of time. In evaluating Hills plans for dealing with the adverse effects of
future conditions and events, Davis most likely would consider, as a mitigating factor, Hills plan to
a. accelerate research and development projects related to future products.
b. accumulate treasury stock at prices favorable to Hills historic price range.
c. purchase equipment and production facilities currently being leased.
d. negotiate reductions is required dividends being paid on preferred stock.
14. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result when
management
a. is unable to obtain audited financial statements supporting the entitys investment in a foreign
subsidiary.
b. refuses to disclose in the notes to the financial statements related-party transactions authorized by
the board of directors.
c. does not sign an engagement letter specifying the responsibilities of both the entity and the auditor.
d. fails to correct a reportable condition committed after the prior years audit.
15. The existence of audit risk is recognized by the statement in the auditors standard report that the
auditor
a. obtains reasonable assurance about whether the financial statements are free of material
misstatement.
b. assesses the accounting principle used and also evaluates the overall financial statement
presentation.
c. realizes some matters, either individually or in the aggregate, are important while other matters are
not important.
d. is responsible for expressing an opinion on the financial statements that are the responsibility of
management.
16. An auditor was unable to obtain sufficient competent evidential matter concerning certain transactions
due to an inadequacy in the entitys accounting records. The auditor would choose between issuing a(n)
a. qualified opinion and unqualified opinion with an explanatory paragraph.
b. unqualified opinion with explanatory paragraph and an adverse opinion.
c. adverse opinion and a disclaimer of opinion.
d. disclaimer of opinion and a qualified opinion.
17. If the auditor believes that the entity will not be able to continue as a going concern and the financial
statements are prepared on a going concern basis, the auditors report should include
c. adverse opinion.
a. unqualified opinion with explanatory paragraph.
b. qualified opinion.
d. disclaimer of opinion.
18. When the auditors report on the prior period, as previously issued, included a modified opinion and the
matter which gave rise to the modification is unresolved, and results in a modification of the auditors
report regarding the current period figures
a. the auditors report should be unmodified regarding the corresponding figures.
b. the auditors report should also be modified regarding the corresponding figures.
c. the auditors report does not refer to the previous modification.
d. the auditor should omit the comparatives as corresponding figures.
19. In relation to comparatives as corresponding figures, which of the following is incorrect?
a. When the prior period financial statements are not audited, the incoming auditor should state in the
auditors report that the corresponding figures are unaudited.
b. The incoming auditor must refer to the predecessor auditors report on the corresponding figures in
the incoming auditors report for the current period.
c. When the financial statements of the prior period were audited by another auditor, the incoming
auditors report should state that the prior period was audited by another auditor.
d. In situations where the incoming auditor identified that the corresponding figures are materially
misstated, the auditor should request management to revise the corresponding figures or if
management refuses to do so, appropriately modify the report.
3
20. If after performing procedures, the auditor is unable to obtain sufficient, appropriate evidence
concerning opening balances, the auditor may express modified opinion on financial statements during
and as of year end of the current period
a. either qualified or disclaimer for balance sheet and income statement.
b. qualified or disclaimer of opinion for balance sheet only.
c. qualified or disclaimer of opinion for income statement only.
d. no modification.
21. How should generally accepted auditing standards and the Philippine Standards on Auditing be looked
on by CPA practitioners?
a. They are maximum standards that must be complied with.
b. They are minimum standards of performance.
c. They are clearly defined guidelines for determining the extent of evidence to be accumulated.
d. They are minimum specific audit procedures that the auditors are expected to perform.
22. What is the overriding objective of the International Auditing Standards that are issued by the
International Auditing Practices Committee of the International Federation of Accountants?
a. To improve the uniformity of auditing practices and related services throughout the world.
b. To override a counts regulations governing the audit of financial statements.
c. To replace the generally accepted auditing standards.
d. To provide uniformity of specific audit procedures that are acceptable worldwide.
23. Which of the following least likely requires an additional explanatory paragraph in a standard unqualified
report?
a. Substantial doubt about going-concern ability of the entity.
b. Reports involving other auditors.
c. Emphasis of a matter.
d. Auditor agrees with change in generally accepted accounting principles.
24. Which of the following requires a modified wording report?
a. Substantial doubt about going-concern problems of the entity.
b. Reports involving other auditors.
c. Emphasis of a matter.
d. All of the above.
25. Which of the following changes would affect comparability but not consistency?
a. Variations in format and presentation of financial information.
b. Change from FIFO to LIFO inventory costing.
c. Changes in reporting entity, such as the inclusion of a company in consolidated financial statements.
d. Correction of errors involving accounting principles.
26. When a significant portion of the financial statements have been audited by other auditors and the
principal auditor is not willing to assume the whole responsibility, the auditor report should include
a. modified wording in the introductory paragraph.
b. a modified wording in the introductory and opinion paragraphs but not on opinion paragraph.
c. modified wordings on the three paragraphs.
d. separate paragraph to indicate a divided responsibilities.
27. Which of the following types of report is mostly uncommon?
a. Adverse report.
c. Standard unqualified report with modified wordings.
b. Qualified report.
d. Unqualified report.
28. Which of the following scope limitation that is beyond the auditor and the clients control may mostly
occur on a late engagement?
a. Review of bank reconciliation prepared by client personnel.
b. Request for cutoff bank statement.
c. Tests of sales transactions.
d. Observation of year-end inventory.
29. In which of the following type of audit report would omission of scope paragraph is required?
a. An except for opinion due to possible significant effect of a client-imposed limtation.
b. A disclaimer of opinion due to possible significant effect of client-imposed scope limitation.
c. An audit report limited to income statement only.
d. A and B.
30. If the principal auditors report refers to the audit of another auditor, he is required to disclose the
a. name of another auditor.
b. portion of the financial statements audited by the other auditor.
c. opinion expressed by the other auditor and the reason if the opinion is other than unqualified.
d. reason for being unwilling to assume the responsibility for the other auditors work.
31. Under which of the following circumstances would an unqualified opinion be entirely appropriate?
a. The principal auditor decides to make reference to the qualified report of another auditor, who
audited a subsidiary
b. There are significant uncertainties affecting the financial statements.
c. There has been material effect between periods of the change in the methods of application of
GAAP.
d. There has been a material effect of a departure from generally accepted accounting principle.
4
32. Celia, CPA, is auditing Lyka Corporation for the first time. Lyka has been in the business for several years
but has never had an audit before. After the audit is completed, Celia concludes that the current year
balance sheet is stated correctly in accordance with GAAP. The client did not authorize Celia to do test
work for any of the previous years. Reporting on the current years financial statements, Celia most
likely would express
a. Qualified opinion on the financial statements of Lyka Corporation.
b. Unqualified opinion on the balance sheet and qualified opinion on the income statement.
c. Unqualified opinion on the income statement and qualified opinion on the balance sheet.
d. Unqualified opinion on Lyka Corporations financial statements.
33. Millard, CPA, is engaged in the audit of the financial statements of Alpha Company, a manufacturing
entity with branch offices in many widely separated cities. Millard was not able to count the substantial
undeposited cash receipts on the last day of the fiscal year at all branch offices. As an alternative
procedures, Millard verified all the reported undeposited cash collections in the cut-off bank statements
and was satisfied as to cut-off of cash receipts.
How should Millard prepare his audit report?
a. Issue an unqualified opinion with an emphasis of matter paragraph that refers to the use of
alternative audit procedure.
b. Issue a qualified opinion due to scope limitation.
c. Issue an unqualified opinion on income statement and a qualified opinion on the balance sheet.
d. Issue a standard unqualified opinion.
34. Trulav Company has prepared financial statements but has decided to omit the statement of cash flows.
The management believes that the users of the financial statements the statement of cash flows
confusing and prefer not have it included.
The omission of the statement of cash flows would require the auditor to
a. Include an unqualified report on emphasis of matter paragraph that explains the reasons for such an
omission of the statement.
b. Issue an adverse opinion due to inadequate disclosure.
c. Issue a qualified opinion due to inadequate disclosure.
d. Issue an unqualified opinion based on limited reported objective.
35. Due to recurring operating losses and working capital deficiencies, an auditor has substantial doubt
about the ability of the entity to continue as a going concern for a reasonable period of time. However,
the financial statement disclosures concerning these matters are adequate.
The auditor should issue his report that contains
c. Standard unqualified opinion.
a. Disclaimer of opinion.
b. Adverse opinion.
d. Unqualified opinion with an emphasis of matter paragraph.
36. A continuing auditor has just completed the audit of the entity. The audit report for the past three years
included an emphasis of matter paragraph that referred to a substantial doubt about the ability of the
entity to continue as a going concern. At the middle of the current audit year, the major stockholders
infused substantial capital that made the company stable. The continuing auditor should report on the
comparative financial statements by
a. Updating the audit report by issuing a standard three-paragraph audit report.
b. Including an emphasis of matter paragraph that refers to prior years going concern problem.
c. Issue an unqualified opinion with an emphasis of matter paragraph that describes the steps the
management did in solving its going concern problem.
d. Qualify the audit report due to questionable strategy of strengthening the entitys financial stability.
37. An auditor assesses control risk to do which of the following?
a. Determine the tests of controls to perform
b. Determine the nature, timing, and extent of substantive tests to perform
c. Ascertain whether reportable conditions exists
d. Ascertain whether there is an appropriate segregation of duties among employees
38. Which of the following auditing procedures should not be considered a test of control?
a. Observing preparation of the bank reconciliation
b. Inquiring about the entitys organization structure
c. Inspecting customer order forms for the signature of the credit manager
d. Confirming with the customer the amount owed to the client
39. One of the companys internal control structure procedures requires that shipping documents be
matched with customer invoices. To which of the following is that procedure relevant?
a. The completeness assertion for revenue
b. The existence assertion for inventory
c. The occurrence assertion for purchases
d. The presentation and disclosure assertion for accounts receivable
40. Tests of controls are primarily concerned with all but which of the following questions?
a. How were policies or procedures performed?
b. Were the policies or procedures performed?
c. How were the policies or procedures designed?
d. Do policies or procedures exist?
5
41. Which of the following is not a reason an auditor should obtain an understanding of the elements of an
entitys internal control structure when planning an audit?
a. To identify types of potential misstatements that can occur,
b. To design substantive tests
c. To consider the operating effectiveness of the internal control structure
d. To consider factors that affect the risk of material misstatements
42. The sequence of the steps in the auditors consideration of the internal control structure is as follows:
a. Obtain an understanding, design substantive tests, perform tests of controls, determine assessed
level of control risk.
b. Design substantive tests, obtain an understanding, perform tests of control, determine assessed
level of control risk.
c. Obtain an understanding, performs tests of controls, determine assessed level of control risk, design
substantive tests.
d. Perform tests of controls, obtain an understanding, determine assessed level of internal control,
design substantive tests
43. When documenting the assessed level of control risk, the auditor should
a. Express the assessed level of control risk in either quantitative of qualitative terms for all assertions.
b. State the basis for the conclusion when the assessed level of control risk is below the maximum
level for an assertion
c. State the basis for the conclusion when the assessed level of control risk is at the maximum level for
an assertion
d. Describe how the planned substantive test have been affected by the assessed level of control risk
44. In determining the assessed level f control risk, which of the following statements is correct?
a. The knowledge obtained from the understanding of the internal control structure cannot be used
b. The knowledge obtained about the internal control structure from the prior audits can be used
c. The auditor evaluates the design of a policy and whether it has been placed in operation
d. Observation provides more persuasive evidence about the operating effectiveness of a policy or
procedure than expecting documentation
45. After considering a clients internal control system, an auditor has concluded that it is well designed
and is functioning as intended. Under these circumstances the auditor would most likely
a. Determine the control policies and procedures that should prevent or detect errors and irregularities
b. Determine whether transactions are recorded to permit preparation of financial statements in
conformity with GAAP
c. Not increase the extent of predetermined substantive tests
d. Perform tests of controls to the extent outlined in the audit program
46. Ideally, tests of controls should be applied to transactions and controls
a. at each quarterly interim period
c. at the beginning of the fiscal year
b. at the balance sheet date
d. for the entire period under audit
47. A procedure that would most likely be used by an auditor in performing tests of control procedures that
involve segregation of functions and that leave no transaction trail is
a. Inspection
c. Reconciliation
b. Observation
d. Reperformance
48. Each key control that the auditor intends to rely on must be supported by sufficient
a. analytical review procedures
c. tests of transactions
d. reperformance procedures
b. tests of controls
49. When controls leave no documentary evidence or trail
a. it is impossible for the auditor to verify them so he/she will have to rely on substantive tests
b. it is important to audit that area of clients system
c. the auditor generally observes them being applied
d. the only thing available as verification of their effectiveness is inquiry of management
50. When the compensating control exists, a weakness in the system
a. could cause a material loss, so it must be tested using substantive procedures
b. is magnified and must be removed from the sampling process and examined in its entirety
c. is no longer a concern because the potential for misstatements has been sufficiently reduced
d. is reduced but not removed; therefore, it is still of concern to the auditor
51. One of the ways to eliminate nonsampling risk is through
a. control which ensure that the sample drawn is random and representative
b. proper supervision and instruction of the audit team
c. proper supervision and instruction of the clients employees
d. the use of attributes sampling rather than variables sampling
52. Sampling risk is an inherent part of sampling that results from
a. failure to recognize exceptions
c. testing less than the entire population
b. inappropriate audit procedures
d. weaknesses in clients internal control system
53. If the auditor decides to assess control risk at the maximum level, tests of control are
a. Increased in number
c. Reduced in number
6
b. Not performed
d. Unchanged from prior planned settings
54. An auditor selects a sample from the file of shipping documents to determine whether invoices were
prepared. This test is performed to satisfy the audit objective of
a. Accuracy
b. Existence
c. Completeness
d. Control
55. An auditor examining inventory may appropriately apply sampling for attributes in order to estimate the
a. Average price of inventory items
c. Percentage of slow-moving inventory items
b. Physical quantity of inventory items
d. Peso value of inventory
56. A principal advantage of statistical methods of attributes sampling over nonstatistical method is that
they provide a scientific basis for planning the
a. Expected population exception rate
c. Sample price
b. Risk of assessing control risk too low
d. Tolerable exception rate
57. A basic premise underlying analytical procedure is that:
a. These procedures cannot replace tests of balances and transactions
b. Statistical tests of financial information may lead to the discovery of material misstatements in the
financial statements
c. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations
d. Plausible relationships among data may reasonably be expected to exist and continue in the
absence of known conditions to the contrary
58. One reason why an auditor makes an analytical review of the clients operations is to identify
a. improper separation of accounting and other financial duties
b. weakness of a material nature in the system of internal accounting control
c. unusual transactions
d. non-compliance with prescribed control procedures
59. At what stage in the audit are the analytical procedures performed?
a. In planing stage
b. In conjunction with tests of transactions and tests of details of balances
c. Near the end
d. During all three states
60. Unusual fluctuations occur when
a. significant differences are not expected but do exist
b. significant differences are expected but do not exist
c. there is a material accounting error or irregularity
d. any one of the above three situations may occur
61. To help plan the nature, timing and extent of substantive auditing procedures, preliminary analytical
procedures should focus on:
a. Enhancing the auditors understanding of the clients business and events that have occurred since
the last audit date
b. Developing plausible relationships that corroborate anticipated results with a measurable amount of
precision
c. Applying ration analysis to externally generated data such as published industry statistics or price
indices
d. Comparing recorded financial information to the results of other tests of transactions and balances
62. Which of the following tends to be most predictable for purposes of analytical procedures applied as
substantive tests?
a. Relationships involving balance sheet accounts
b. Transactions subject to management discretion
c. Relationships involving income statement accounts
d. Data subject to audit testing in the prior year
63. An auditor compares the 20x3 revenues and expenses with those of the prior year and investigates all
changes exceeding 10%. By this procedure the auditor would be most likely to learn that:
a. Fourth payroll taxes were not paid
b. The client changed its capitalization policy for small tools in 20x3
c. An increase in property tax rates has not been recognized in the clients accrual
d. The 20x3 provision for uncollectible accounts were inadequate because of worsening economic
conditions
64. For which of the following account balances are substantive tests of details least likely to be performed
unless analytical review procedures indicate the need to extend details testing?
a. Payroll expense
c. Research and development
b. Marketable securities
d. Legal expense
65. Which of the following comparisons would be most useful to an auditor in evaluating the results of an
entitys operations?
a. Prior year accounts payable to current year accounts payable
b. Prior year payroll expense to budgeted current year payroll expense
c. Current year revenue to budgeted current year revenue
d. Current year warranty expense to current year contingent liabilities