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Auditing Theory
PRTC

CHAPTER 1
1. Because an external auditor is paid a fee by a client company; he or she
a) Is absolutely independent and may conduct an audit.
b) May be sufficiently independent to conduct an audit.
c) Is never considered to be independent.
d) Must receive approval of the Securities and Exchange Commission before
conducting an audit.
Answer: B
2. Professional Skepticism requires that an auditor assumes that management is
a) Honest, in the absence of fraud risk factors.
b) Dishonest until completion of audit tests.
c) Neither honest nor dishonest.
d) Offering reasonable assurance of honesty.
Answer: C
3. The exposure period allowed for each exposure draft of PSA to be considered
by the organizations and persons to whom it is sent for comment is generally
a) 120 days
b) 90 days
c) 60 days
d) 180 days
Answer: B
4. The government agency tasked by law of implementing and enforcing the
regulatory policies of the national government with respect to the regulation
and licensing of various professions and occupations is known as
a) PRC
b) BOA
c) COA
d) SEC
Answer: A
5. An audit which has its purpose the evaluation of the economy and efficiency
with which resources are employed is known as a(n)
a) Financial audit
b) Compliance audit
c) Governmental audit
d) Operational audit
Answer: D

6. Which one of the following would be the most persuasive type of evidence?

Auditing Theory
PRTC
a)
b)
c)
d)

Check register
Bank statement
Observation of assets
Inquiry with the in-house attorney
Answer: C

7. The reliability of a clients internal documentation is most affected by which of


the following?
a) The auditors independence
b) Managements motivation to misstate accounts
c) The type of audit report that will be issued
d) Managements ability to understand generally accepted audit standards
Answer: B
8. No person shall serve the Professional Regulatory Board of Accountancy for
more than
a) 3 years
b) 6 years
c) 9 years
d) 12 years
Answer: D
9. How many CPE credit units must be accumulated by a registered accounting
professional within the three-year period?
a) 15 credit units
b) 60 credit units
c) 45 credit units
d) 90 credit units
Answer: B
10. Based on the Code of Ethics for Professional Accountants, threats to
compliance with fundamental principles arise from all of the following except:
a) Self interest
b) Advocacy
c) The audit relationship
d) Intimidation
Answer: C
11. The engagement partner should be rotated after a defined period, normally
no more than
a) 2 years
b) 3 years
c) 5 years
d) 7 years

Auditing Theory
PRTC
Answer: C
12. In evaluating the reasonableness of an entitys accounting estimates, an
auditor normally would be concerned about assumptions that are
a) Susceptible to bias
b) Consistent with prior periods
c) Insensitive to variations
d) Similar to industry guidelines
Answer: A
13. Conclusions are typically documented by auditors in which type of working
paper?
a) Audit planning memo
b) Audit program
c) Audit memoranda
d) Representation letter
Answer: C
14. Which of the following types of evidence would an auditor consider to be the
least reliable for an external audit?
a) Representations in writing from the director of the audit client.
b) A sales invoice prepared by the client.
c) A sales invoice prepared by a vendor to the client.
d) A bank confirmation form signed by the clients bank.
Answer: A
15. When making a client continuance decision, the auditor should evaluate
client based upon which of the following?
a) Client entity characteristics
b) Independence risk factors
c) Financial reporting issues
d) All of the above
Answer: D
16.
a)
b)
c)
d)

Analytical procedures used in planning an audit should focus on


Reducing the scope of tests of controls and substantive tests
Providing assurance that potential material misstatements will be identified
Enhancing the auditors understanding of the clients business
Assessing adequacy of the available evidence
Answer: C

17. During which of the following phases of an audit is the performance of

Auditing Theory
PRTC
a)
b)
c)
d)

analysis not mandatory, but rather a matter of professional judgment?


Internal control evaluation phase
Planning phase
Substantive testing phase
Completion phase
Answer: C

18. Which of the following nonfinancial information would an auditor most likely
consider in performing analytical procedures during the planning phase of an
audit?
a) Turnover of personnel in the accounting department
b) Objectivity of audit committee members
c) Square footage of selling price
d) Managements plans to repurchase stocks
Answer: C
19. Which of the following is broadest in scope?
a) Audits of financial statements
b) Assurance services
c) Operations audit
d) Review of financial statements
Answer: B
20. Statement 1: The independent auditors or in the case of auditing firm, the
signing partner, of the regulated entities under SEC SRC Rule 68, shall be
rotated after every 5 years of engagement.
Statement 2: A two-year cooling off period shall be observed in the reengagement of the signing partner or individual auditor who was rotated.
a.)True, true
b.)True, false
c.)False, true
d.)False, false
Answer: A

CHAPTER 2
1. What is the primary determinate in the difference between fraud and error
a. The materiality of the misstatement
b. The intent to deceive
c. The level of management involved
d. The type of transaction effected
Answer: B
2. The following are examples of error, except

Auditing Theory
PRTC
a. A mistake from gathering or processing data from which financial
statements are prepared
b. An incorrect accounting estimate arising from oversight or
misinterpretation of facts
c. A mistake in the application of accounting principles relating to
measurement, recognition, classification, presentation or disclosure
d. Misrepresentation in the financial statements of events, transactions,
or other significant information
Answer: D
3. The term fraud refers to an intentional act by one or more individuals
among management, those charged with governance, employees, or third
parties, involving the use of deception to obtain an unjust or illegal
advantage. Which statement is/are incorrect regarding fraud?
a. Auditors make legal determinations of whether fraud has actually
occurred
b. Fraud involving one or more members of management or those charge
with governance is referred to as employee fraud
c. Fraud involving only employees of the entity is referred to as
management fraud
d. All of the above
Answer: D
4. The risk of not detecting a material misstatement resulting from a fraud is
higher than the risk of not detecting a material misstatement resulting from
error because
a. The effect of fraudulent act is likely omitted in the accounting records
b. Fraud is ordinarily accompanied by acts specifically designed to
conceal its existence and auditors do not make legal determinations of
whether fraud has actually occurred
c. Fraud is always a result of connivance between or among employees
d. The auditor is responsible to detect errors but not fraud
Answer: B
5. The two types of fraud of intentional misstatements that are relevant to the
auditors consideration of fraud include, misstatements resulting from
fraudulent financial reporting and misstatements resulting from
misappropriation of assets. Fraudulent financial reporting least likely involve
a. Deception such as manipulation, falsification (including forgery), or
alteration of accounting records or supporting documents from which
the financial statements are prepared
b. Misrepresentation in, or intentional omission from, the financial
statement events, transaction or significant information
c. Intentional misapplication of accounting principles relating to
measurement, recognition, classification, presentation or disclosure
d. Embezzling receipts, stealing physical assets or intellectual property,
causing an entity to pay for goods and services not received, or using
an entitys assets for personal use.

Auditing Theory
PRTC
Answer: D
6. Which statement is incorrect regarding the auditors consideration of laws
and regulations in an audit of financial statements?
a. Noncompliance refers to acts of omission or commission by the entity
being audited which are contrary to prevailing laws and regulations
b. Noncompliance includes transactions entered into by, or in the name
of, the entity, or on its behalf, by TCWG, management or employees
c. Noncompliance includes personal misconduct of the entitys
management or employees though they are unrelated to the entitys
business activities
d. In the absence of evidence to the contrary, the auditor is entitled to
assume the entity is in compliance with applicable laws and
regulations affecting the client
Answer: C
7. Which of the following is usually true?
a. It is easier for the auditor to uncover fraud than errors
b. It is easier for the auditor to uncover indirect-effect illegal acts than
fraud
c. The auditors responsibility for detecting direct-effect illegal act is
similar tto the responsibility to detect fraud
d. The auditors responsibility for detecting indirect-effect illegal acts is
similar to the responsibility to detect fraud
Answer: C
8. Which of the following is the auditor least likely to do when aware of an illegal
act?
a. Discuss the matter with the clients legal counsel.
b. Obtain evidence about the potential effect of the illegal act on the
financial statements.
c. Contact the local law enforcement office regarding potential criminal
wrongdoing.
d. Consider the impact of the illegal act and its relationship with the
companys management.
Answer: C
9. Based on PSA 240 redrafted, in a financial statement audit, the auditor should
consider categories of fraud risk factors relating to misstatements arising
from (1) fraudulent financial reporting and (2) misappropriation of assets.
Which of the following is not a category of fraud risk factors in relation to
misstatements arising from misappropriation of assests?
a. Opportunities
b. Pressure/incentives
c. Attitudes/rationalization
d. Controls
Answer: D

Auditing Theory
PRTC
10.The following are examples of circumstances that may indicate the possibility
that the financial statements may contain a material misstatement resulting
from fraud, except
a. Undue time pressures imposed by management to resolve complex or
contentious issues.
b. Complaints by management about the conduct of the audit or
management intimidation of engagement team members, particularly
in connection with the auditors critical assessment of the audit
evidence or in the resolution of potential disagreements with
management.
c. Usual delays by the entity in providing requested information
d. An unwillingness to address identified weaknesses in internal control
on a timely basis.
Answer: C
11.Which of the following best describes what is meant by the term fraud risk
factors?
a. Factors whose presence indicates that the risk of fraud is high
b. Factors whose presence often has been observed in circumstances
where frauds have occurred
c. Factors whose presence requires modifications of planned audit
procedures
d. Reportable conditions identified during an audit
Answer: B
12.The following are examples of circumstances that may indicate the possibility
that the financial statements may contain a material misstatement resulting
from fraud, except
a. Unwillingness by management to permit the auditor to meet privately
with those charge with governance.
b. Accounting policies that appear to be consistent with industry norms.
c. Frequent changes in accounting estimates that do not appear to result
from changed circumstances
d. Tolerance of violations of the entitys Code of Conduct
Answer: B
13.The primary responsible for the prevention and detection of fraud and error
rests with
a. The auditor
b. Those charged with governance
c. The management of an entity
d. Both b and c
Answer: D
14.In comparing management fraud with employee fraud, the auditors risk of
failing to discover the fraud is
a. Greater for employee fraud because of the higher crime rate among
blue collar workers

Auditing Theory
PRTC
b. Greater for management fraud because of managements ability to
override existing internal controls, which is always assumed in audit.
c. Greater for employee fraud because of the larger number of
employees in the organization
d. Greater for management fraud because management are inherently
smarter than employees
Answer: B
15.The following are examples of circumstances that may indicate the possibility
that the financial statements may contain a material misstatement resulting
from fraud, except
a. Transactions that are recorded in a complete or timely manner or are
properly recorded as to amount, accounting period, classification, or
entity policy.
b. Unsupported or unauthorized balances or transactions.
c. Last minute adjustments that significantly affect financial results.
d. Tips or complaints to the auditor about alleged fraud.
Answer: A
16.The following are examples of circumstances that may indicate the possibility
that the financial statements may contain a material misstatement resulting
from fraud, except
a. Missing documents.
b. Documents that appear to have been altered.
c. Unavailability of other than photocopied or electronically transmitted
documents when documents in original form are expected to exist.
d. Significant explained items on reconciliations.
Answer: D
17.Communication of a misstatement resulting from fraud, or suspected fraud,
or error to the appropriate level of management on a timely basis is
important because it enables management to take action as necessary.
Ordinarily, the appropriate level of management is
a. At least equal to level of persons who appear to be involved with
misstatements or suspected fraud
b. At least one level above persons who appear to be involved with the
misstatement or suspected fraud
c. The audit committee of board of directors
d. The lead of internal audit department
Answer: B
18.The auditor may encounter exceptional circumstances that bring into
question the auditors ability to continue performing the audit, including
where
a. The entity does not take the remedial action regarding fraud that the
auditor considers necessary in the circumstances, even when the fraud
is not material to the financial statements

Auditing Theory
PRTC
b. The auditors consideration of the risk of material misstatement
resulting from fraud and the results of audit tests indicate a significant
risk of material and pervasive fraud
c. The auditor has significant concern about the competence or integrity
of management or those charged with governance that affect the
auditors ability to rely on managements representation s.
d. All of the above
Answer: D
19.PSAs require auditors to document which of the following matters related to
the auditors consideration of material misstatements due to fraud?
a. Reasons supporting a conclusion that there is not a significant risk of
material improper expense recognition.
b. Procedures performed to obtain information necessary to identify and
assess the risks of material fraud.
c. Results of the internal auditors procedures performed to address the
risk of management override of controls.
d. Discussions with management regarding separation of duties.
Answer: B
20.Examples of the type of information that may come to the auditors attention
that may indicate that noncompliance with laws or regulations has occurred
least likely include
a. Payments for unspecified services or loans to consultants, related
parties, employees or government employees
b. Payments for goods or services made other than to the country from
which the goods or services originated.
c. Unauthorized transactions or improperly recorded transactions.
d. Payments with proper exchange control documentation.
Answer: D

CHAPTER 3
1) What is the managements primary purpose of effective internal control in an
organization?
a) Obtaining high-quality data for making good business decisions
providing reasonable assurance that the entitys objectives are
achieved
b) Completion of a successful audit for the entity
c) Shareholder involvement in the companys success
d) Obtaining profitability and financial strength
Answer: A
2) Which of the
environment?

following

factors

Commitment to competence

are

included

in

A
Yes

B
Yes

an
C
No

entitys
D
Yes

control

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Auditing Theory
PRTC
Integrity and ethical values
Organizational structure
Human resources policies and procedures
Answer: D

Yes
No
Yes

No
Yes
No

Yes
Yes
Yes

Yes
Yes
Yes

3) Which of the following elements is not a part of an entitys control?


a) Control risk
b) Control activities
c) The accounting system
d) The control environment
Answer: A
4) In an auditors consideration of internal control, the completion of a
questionnaire is most closely associated with which of the following?
a) Separation of duties
b) Understanding the system
c) Flowchart accuracy
d) Tests of controls
Answer: B
5) The primary responsibility for designing, implementing and maintaining
internal control, and the tone of internal control typically originates, rests with
a) Internal auditors.
b) The CFO.
c) The external auditor.
d) The management/TCWG.
Answer: D

6) Segregation of duties deals with the segregation of which functions?


a) Recording and physical custody of assets
b) Authorizing and recording assets
c) Authorizing, recording and physical custody of assets
d) Authorizing, recording, physical custody and access to asset
Answer: C
7) Which of the following would be considered to be an application control in an
information system?
a) Controls over system software acquisition
b) Controls pertaining to system access security
c) Controls pertaining to the follow-up of exception reports
d) Control pertaining to application systems maintenance
Answer: C
8) Which of the following would require auditing through the computer rather
than auditing around the computer?
a) These are small volumes of input/output data
b) The internal controls are not embedded in the computer system

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Auditing Theory
PRTC
c) The system is complex and includes key parts of the accounting
system
d) The system was audited with computer-assisted audit techniques
(CAATs) in the previous years, revenue from the award credits is
recognized at the point of sale
Answer: C
9) Control environment component of internal control
a) Consists of policies and procedures that help ensure that management
directives are carried out.
b)
Includes the governance and management functions and the
attitudes, awareness, and actions of those charged with governance
and management concerning the entitys internal control and its
importance in the entity.
c) Is the entitys process for identifying business risks relevant to financial
reporting objectives and deciding about actions to address those risks
and the results thereof.
d) Consists of the procedures and record established to initiate, record,
process, and report entity transactions (as well as events and
conditions) and to maintain accountability for the related assets,
liabilities, and equity.
Answer: B
10)
Controls that enhance the reliability of the financial statements may be
classified as prevention controls and detection controls. Which of the
following is primarily a detection control?
a) Separation of duties between recording cash receipts and depositing
cash
b) Bank accounts are reconciled monthly by persons independent of cash
recording and cash custody
c) The human resources department authorizes the hiring of only those
persons for accounting positions that meet the written job
requirements specified by the corporate controller
d) An accounting manual, accompanied by a detailed chart of accounts,
carefully and clearly describes each of type of transaction affecting the
entity
Answer: B
11)
When considering internal control, an auditor must be aware of the
concept of reasonable assurance which recognizes that
a) Employment of competent personnel provides assurance that the
objectives of internal control will be achieved.
b) Establishment and maintenance of internal control is an important
responsibility of the management and not of the auditor.
c) Cost of internal control procedures should not exceed the benefits
expected to be derived from the control.

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d) Segregation of incompatible functions is necessary to ascertain that
the control procedures are effective.
Answer: C
12)
An auditor obtains evidence of the internal control over the accounting
system by all of the following except:
a) Walkthroughs of the accounting system.
b) Making inquiries of banks and attorneys.
c) Reviewing system flowcharts.
d) Taking plant and operational tours.
Answer: B
13)
PSAs require the auditor to obtain an understanding of the entitys
internal control structure
a) For first time audit clients.
b) For every audit.
c) Whenever the auditor wishes or sees necessary.
d) Sufficient to find any frauds that may exist.
Answer: B
14)
When auditing a company, the auditor should obtain an understanding
of internal control sufficient to:
a) Provide reasonable protection against client fraud and defalcations by
client employees.
b) Assess control risk.
c) Provide a basis for suggestions to the client for improving the
accounting system.
d) Provide a method for safeguarding assets, checking the accuracy and
reliability of accounting data, promoting operational efficiency, and
encouraging adherence to prescribed managerial policies.
Answer: B
15)
Which of the following statements about auditor documentation of the
clients internal controls is correct?
a) Documentation must include flowcharts.
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.
Answer: D
16)
When assessing the client, which of the following factors is considered
pervasive and creates both an attitude and culture that affects the clients
reporting system, the process of recording transactions, the process of
making estimates and adjustments.
a) The control environment
b) Audit testing of processes and controls
c) Designs and operations of controls

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d) Inherent and control risk
Answer: A
17)

A proper segregation of duties requires


a) An individual maintaining custody of an asset be entitled to access the
accounting records for the asset.
b) An individual authorizing a transaction records it.
c) An individual recording a transaction not compare the accounting
record of the asset with the asset.
d) An individual authorizing a transaction maintain acustody of the asset
that results from a transaction.
Answer: C

18)
Management philosophy and operating style most likely would have a
significant influence on an entitys control environment when
a) The internal auditor reports directly to management.
b) Management is dominated by one individual.
c) Accurate management job descriptions delineate specific duties.
d) The audit committee actually overseas the financial reporting process.
Answer: B
19)
When obtaining understanding of the entitys control, the auditor
should obtain knowledge about the internal controls
Design
Implementation
Operating Effectiveness
a) Yes
Yes
Yes
b) Yes
Yes
No
c) Yes
No
No
d) No
No
Yes
Answer: B
20)
A secondary purpose of the auditors consideration of internal control is
to provide
a) A basis for constructive suggestions about improvements in internal
control structure.
b) A basis for assessing control risk.
c) An assurance that the records and documents have been maintained in
accordance with existing company policies and procedures.
d) A basis for the determination of the resultant extent of the tests to
which auditing procedures are to be restricted.
Answer: A

CHAPTER 4

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Auditing Theory
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1. The Code of Ethics for Professional Accountants in the Philippines is
applicable to professional services performed in the Philippines on or after
a. December 31, 2009
b. December 31, 2008
c. June 30, 2008
d. June 30, 2009
Answer: C
2. Which of the following fundamental ethical principles requires a professional
accountant to be straightforward and honest in all professional and business
relationships?
a. Objectivity
b. Professional behavior
c. Professional competence and due care
d. Integrity
Answer: D
3. Which of the following threats to compliance with the fundamental principles
may occur as a result of the financial principles may occur as a result of the
financial or other interests of a professional accountant of an immediate or
close family member?
a. Self-interest
b. Self-review
c. Advocacy
d. Familiarity
Answer: A
4. These are fees calculated on a predetermined basis relating to the outcome
or result of a transaction or the result of the work performed
a. Contingent fees
b. Fixed fees
c. Predetermined fees
d. Commissions
Answer: A
5. The following statements relate to the provisions of the Code of Ethics that
deal with the professional accountants marketing of professional services.
Which is false?
a. When a professional accountant in public practice solicits new work
through advertising or other forms of marketing, a self-interest threat
to compliance with the principle of professional behavior may be
created
b. The professional accountant should be honest and truthful when
marketing professional services
c. Advertising and publicity are generally unacceptable
d. When marketing professional services, the professional accountant
should not make exaggerated claims for services offered, qualifications
possessed or experience gained.

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Answer: C
6. Which of the following threats to independence is created when a member of
the assurance team participates in the assurance engagement while
knowing, or having reason to believe, that he is to, or may, join the assurance
client sometime in the future?
a. Intimidation threat
b. Self-interest threat
c. Self-review threat
d. Familiarity threat
Answer: B
7. The following are examples of circumstances that may create familiarity
threats, excepts
a. Promoting shares in a listed entity when that entity is a financial
statement audit client
b. Long association of senior personnel with the assurance client
c. A member of the engagement team having a close or immediate
family relationship with a director or officer of the client
d. A former partner of the firm being a director or officer of the client or
an employee in a position to exert direct and significant influence over
the subject matter of the engagement
Answer: A
8. When an auditor is sued for negligence in the performance of an audit, to
what parties does the contributory negligence defense apply?
a. Only to the parties having a contractual relationship with the auditor
b. To any third party that relied on the audited financial statements
c. To any third party that lost money or suffered damages from investing
in the audited company
d. Only to those third parties that the auditor could reasonably have
known would have relied on the audited financial statements
Answer: A
9. Based on the Code of Ethics for Professional Accountants, threats to
compliance with fundamental principles arise from all of the following except:
a. Self interest
b. Advocacy
c. The audit relationship
d. Intimidation
Answer: C
10.The engagement partner should be rotated after a pre-defined period,
normally no more than
a. 2 years
b. 3 years
c. 5 years
d. 7 years

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Answer: C
11.Which of the following statements best describes an auditors responsibility
regarding misstatements?
a. An auditor should obtain reasonable assurance that the financial
statements taken as a whole are free from material misstatements,
whether caused by fraud or error.
b. An auditor should obtain absolute assurance that material
misstatements in the financial statements will be detected.
c. An auditor is responsible to detect material errors but has no
responsibility to detect material fraud that is concealed through
employee collusion or management override of internal control
d. An auditors failure to detect a material misstatement resulting from
fraud is an indication of noncompliance with the requirements of the
Philippine Standards on Auditing
Answer: A
12.What type of fraud occurs if an employee obtains financial benefit through
intimidation?
a. Conspiracy
b. Embezzlement/Defalcation
c. Extortion
d. Larceny
Answer: C
13.There is a high risk as well as a history, that fraud is instituted through which
of the following?
a. Adjusting entries
b. Closing entries
c. Unusual entries
d. All of the above
Answer: D
14.Which of the following constitutes the fraud of larceny?
a. Misappropriation of assets that have been entrusted to ones care
b. Theft of assets
c. Theft of assets covered up by manipulation of accounting records
d. Agreement between two or more persons to commit a criminal act
Answer: B
15.Which of the following is an example of a common type of financial reporting
fraud?
a. Capitalizing major overhauls to operating equipment
b. Deferring service revenue until it is delivered to customers
c. Recording sales for inventory sold with the right to return
d. Excluding a contingent liability that has been settled
Answer: C

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16.What is the best method an auditor may use to detect fraud in the financial
statements of clients?
a. Use professional skepticism
b. Understand and properly apply Generally Accepted Accounting
Standards
c. Brainstorm with the client to find the type of fraud occurring
d. Actively search for all errors in the financial statements
Answer: A
17.According to professional audit standards, how might an understanding of the
nature if fraud that may occur in the client organization best be identified by
the audit firm?
a. Fraud training courses from actual corporate fraud ex-criminals
b. Conducting a brainstorming meeting with the members of the audit
team
c. Circulating a survey to the client company employees for completion
d. Discussions with other CPA firms
Answer: B
18.Which of the following is the incorrect about the auditors responsibility of
evaluation noncompliance by the entity to laws and regulations?
a. An audit cannot be expected to detect noncompliance with all laws and
regulations
b. Noncompliance refers to acts of omissions or commission by the entity
being audited which are contrary to prevailing laws or regulations.
c. Noncompliance includes personal misconduct of entity management or
employee though they are unrelated to the entitys business activities
d. Detection of noncompliance, regardless of materiality, requires
considerations of the implications for the integrity of managements or
employees.
Answer: C
19.Which statement(s) is(are) incorrect regarding the auditors responsibility to
consider fraud and error in an audit of financial statements?
a. The auditor is not and cannot be held responsible for the prevention of
fraud and error being the primary responsibility of both the
management and those charged with governance
b. When planning and performing audit procedures and evaluating and
reporting the results thereof, the auditor should consider the risk of
misstatements in the financial statements resulting from fraud
c. In planning the audit, the auditor should discuss with other members pf
the audit team the susceptibility of the entity to material statements in
the financial statements resulting from fraud or error and exercise
professional skepticism (the best method to detect method)
d. The auditor should design audit programs that will provide reasonable
assurance that material errors and fraud will be detected in the
ordinary course of the examination

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Answer: B
20.Firms are required to establish policies and procedures relating to
independence communications with audit committees, or others charged with
governance of the client. In the case of the financial statement audit of listed
entities, such communication should be
a. Oral
b. In writing
c. Oral or in writing
d. Oral and in writing
Answer: D

CHAPTER 5
1

The principal reason for an independent auditor to gather and evaluate audit
evidence is to
a Form an opinion on the financial statements.
b Detect fraud.
c Evaluate management.
d Evaluate internal control.
Answer: A

Accounting records least likely include


a The record of initial entries and supporting entries.
b The general and subsidiary ledgers.
c Worksheets and spreadsheets supporting cost allocations.
d Comparable data about competitors (benchmarking).
Answer: D

Other information that the auditor may use as audit evidence least likely
includes
a Minutes of meetings.
b Confirmation from third parties.
c Information obtained by the auditor from such audit procedures as
inquiry, observation, and inspection.
d Adjustments to the financial statements that are not reflected in formal
journal entries.
Answer: D

The independent auditors responsibility in a regular audit is to express


opinion on the financial statements. The auditors opinion:
a Helps the company adopt sound accounting principles
b Assists the company in maintaining adequate and effective system of
accounts
c Helps management safeguard the company assets
d Helps establish the credibility of the financial statements
Answer: D

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5

Which of the following is not included in an engagement letter?


a Restriction on cash balances, lines of credit by similar arrangements
b Accessibility to all financial reports
c Client imposed limitation in the scope
d Limitation in the scope of examination as imposed by the
circumstances
Answer: A

The form and content of audit engagement letters may vary for each client,
but they would generally include reference to the following, except:
a The objective of the audit of financial statements
b Auditors responsibility for the financial statements.
c The form of any reports or other communication of results of the
engagement.
d Unrestricted access to whatever records, documentation and other
information requested in connection with the audit.
Answer: B

If the auditor believes that an understanding with the client has not been
established, he or she should ordinarily
a Perform the audit with increased professional skepticism.
b Assess the control risk at the maximum level and perform a primarily
substantive audit.
c Decline to accept or perform the audit.
d Modify the scope of the audit to reflect an increased risk of material
misstatement due to fraud.
Answer: C

Which of the following factors most likely would influence an auditors


determination of the auditability of the entitys financial statements?
a The complexity of the accounting system
b The existence of related party transactions
c The adequacy of accounting records
d The operating effectiveness of control procedures
Answer: C

The extent of procedures is affected mostly by which of the following factors?


a The sheer volume of procedures to be applied by the auditor.
b The time of the year in which the client takes a physical inventory in
the warehouse.
c The auditors judgment that misstaments are probable on certain
balances.
d The availability of the clients staff or near the balance sheet date.
Answer: C

10 An integrated audit includes an audit of


a The companys internal controls.
b The companys financial statements.

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c
d

The companys compliance with its rules and processes.


Both A and B.
Answer: D

11 The auditors opinion


a Guarantees the credibility of the financial statements
b Is an assurance as to the future viability of the entity
c Certifies the correctness of the financial statements
d Is not an assurance as to the efficiency with which the management
has conducted the affairs of the entity
Answer: D
12 When should an auditor obtain an engagement letter?
a Whenever a prospective client offers to hire the audit firm
b During the interim audit period, after the auditor has evaluated the
clients internal control and estimated the amount of time required for
the audit
c When a new client is accepted by the auditor
d At the conclusion of the fieldwork, just prior to signing the audit report
Answer: C
13 For which engagements are engagement letters required?
a All engagements
b Audit engagements only
c Assurance engagements only
d All engagements except the preparation of income tax returns
Answer: A
14 Which of the following is least likely to be considered a risk assessment
procedure?
a Analytical procedures
b Confirmation of ending accounts receivable
c Inspection of documents
d Observation of performance of certain accounting procedures
Answer: B
15 Which of the following will an auditor most likely discuss with the former
auditors of a potential client prior to acceptance?
a Integrity of management
b Reasons for changing audit firms
c Disagreements with management regarding accounting principles
d All of the above must be discussed
Answer: D
16 If permission from client to discuss its affairs with the proposed auditor is
denied by the client, the predecessor auditor should
a Keep silent of the denial.
b Disclose the fact that the permission to disclose is denied by the client.

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c
d

Disclose adequately to proposed auditor all noncompliance made by


the client.
Seek legal advice before responding to the proposed auditor.
Answer: B

17 The auditor obtains audit evidence to daw reasonable conclusions on which


to base the audit opinion by performing
a Risk assessment procedures.
b Further audit procedures (test of controls and substantive procedures).
c Both A and B.
d Neither A nor B.
Answer: C
18 Which of the following statements is not true?
a Inherent risk is inversely related to detection risk.
b Inherent risk is inversely related to evidence.
c Inherent risk is the susceptibility of the financial statements to material
error, assuming no internal control.
d Inherent risk is the auditors assessment of the likelihood that errors
exceeding a tolerable amount exist in a segment before considering
the effectiveness of internal controls.
Answer: B
19 When an auditor increases the assessed level of control risk because certain
control activities were determined to be ineffective , the auditor would most
likely increase the
a Extent of tests of controls.
b Level of detection risk.
c Extent of test of details.
d Level of inherent risk.
Answer: C
20 Which statement is incorrect regarding audit evidence?
a The auditor should obtain sufficient appropriate audit evidence to be
able to draw reasonable conclusions on which to base the audit
opinion
b Accounting records alone do not provide sufficient audit evidence
c The auditor uses professional judgments and professional skepticism
in evaluating the quantity and quality of audit evidence, and thus its
sufficiency and appropriateness, to support the audit opinion
d The matter of difficulty or expense involved is a valid basis for
omitting an audit procedure for which there is no alternative.
Answer: D

CHAPTER 6
1. Which of the following statements concerning evidence is correct?
a) Appropriate evidence supporting managements assertions should be

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convincing rather than merely persuasive.
b) An effective internal control structure contributes little to the reliability of
the evidence created within the entity.
c) The cost of obtaining evidence is not an important consideration to an
auditor in deciding what evidence should be obtained
d) A clients accounting records cannot be considered sufficient audit evidence
to support the financial statements.
Answer: D
2. Which statement is incorrect regarding inspection as an audit procedure?
a) Inspection consists of examining records or documents or physical
examination of assets
b) Inspection of tangible assets may provide reliable audit evidence with
respect to their existence and about the entitys rights and obligations on
the assets
c) Inspection of individual inventory items ordinarily accompanies the
observation of inventory counting
d) Some documents represent direct audit evidence of the existence of of an
asset
Answer: B

3. Which of the following audit procedures is used extensively throughout the audit
and often is complementary to performing the audit procedures?
a) Inspection
b) Observation
c) Inquiry
d) Confirmation
Answer: C
4. No deletions of of audit documentation are allowed after the
a) Clients year end
b) Documentation completion date
c) Last date of significant fieldwork
d) Report release date
Answer: B
5. Audit documentation may be recorded on paper or on electronic or other
media. Example of audit documentation include the following, except
a) Audit programs
b) Analyses
c) Control manuals
d) Issues memoranda
Answer: C

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6. The auditor notice notices significant fluctuations in key elements of the
companys financial systems. If management is unable to provide acceptable
explanation, the auditor should
a) Consider the matter a scope of 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
Answer: B

7. Which of the following methods is considered the best combination in


obtaining audit evidence assuming documentary evidence is available to the
auditor?
a) Inspection and reperformance
b) Inquiry and inspection
c) Inquiry and analytical procedure
d) Observation and inquiry
Answer: B
8. The preliminary use of the analytical review procedures by the auditor is
a) Required to identify heightened risk
b) Optional in accordance with the auditors judgment
c) Only used when other planning procedures cannot be applied
d) Used to assist the auditor in documenting internal control
Answer: A
9. Which of the following is ordinarily designed to detect possible material
misstatements on the financial statements?
a) Test of controls
b) Analytical procedures
c) Computer controls
d) Post audit work paper review
Answer: B
10. Which of the following is the best example of a substantive test?
a) Examining a sample of cash disbursement to test whether expenses have
been properly approved.
b) Confirmation of balances of accounts receivable
c) Comparison of signatures on checks to a list of authorized signers
d) Flowcharting of the clients receipt system
Answer: B
11. An exception in a test of control indicates the misstatements of the

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a)
b)
c)
d)

The amount
The likelihood
The amount, likelihood , and classification
The amount and the classification
Answer: B

12. Which is clearly a test of control?


a) Confirmation to a customer of an accounts receivable balance
b) Examination of a sample of purchase order records for electronic
authenticated authorization
c) Observing the controllers use of the company owned equipment
d) Sending a letter to the clients attorney to determine a litigation that is
pending between the plaintiff and the defendant
Answer: B
13. A procedure that would least likely to be used by an auditor in performing
test of control is
a) Inspection
b) Reperformance
c) Observation
d) Recalculation
Answer: D
14. Which assertion are auditors most concerned regarding the audit of asset
accounts?
a) Completeness
b) Existence
c) Accuracy
d) Proper period
Answer: B
15.
a)
b)
c)
d)

Which of the following statements relate to the ownership assertion?


Inventory listings are accurately included in the inventory accounts
Inventory excludes items billed to customers
Inventory is properly classified as current assets
Inventory is properly stated at cost
Answer: B

16. The strongest criticism of the reliability of audit evidence that the auditor
physically observes is that
a) The client may conceal items from the auditor
b) The auditor may not be qualified to evaluate the items he is observing
c) Such evidence is too costly in relation to its reliability
d) The observation must occur at a specific time, which is often too difficult to

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arrange
Answer: B
17. Which of the following statements about existence (testing is from the
accounting records to the supporting audit evidence) and completeness
(testing is from the supporting evidence to the accounting records) assertions
is not true?
a) The existence and completeness assertions emphasize different audit
concerns
b) Existence deals with overstatements and completeness deals with
understatements
c) Existence deals with understatements and completeness deals with
overstatements
d) The completeness assertion deals with unrecorded transactions
Answer: C
18. Theoretically, which of the following would not have an effect on the amount
of audit evidence gathered by the auditor?
a) The type of opinion to be issued.
b) The auditors evaluation of internal control.
c) The types of audit evidence available to the auditor.
d) Whether or not the client reports to the Securities and Exchange
Commission.
Answer: D
19. Most of the independent auditors work in formulating an opinion on 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.
Answer: B
20.
a)
b)
c)
d)

Audit information is usually considered relevant when it is


Derived through valid statistical sampling.
Objective and unbiased.
Factual, adequate, and convincing.
Consistent with the audit objectives.
Answer: D

CHAPTER 7
1. A risk of material misstatement is

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a. an identified and assessed risk of material misstatement that, in the
auditors judgment, requires special audit consideration.
b. a risk that may relate to the inaccurate or incomplete recording of
routine and significant classes of transactions or account balances, the
characteristics of which often permit highly automated processing with
little or no manual intervention.
c. the risk that the financial statements are materially misstated prior to
audit.
d. The risk that relate pervasively to the financial statements as a whole,
and potentially affect many assertions that could be considered
material.
Answer: C
2. Determine the most logical order of assessing the risks of material
misstatements as indicated in PSA 315?
I.
Consider the likelihood of misstatement, including the possibility of
multiple misstatements, and whether the potential misstatement is of
a magnitude that could result in a material misstatement.
II.
Assess the identified risks (if it is a significant risk), and evaluate
whether they relate more pervasively to the financial statements as a
whole and potentially affect many assertions;
III.
Identify the risks throughout the process of obtaining an understanding
of the entity and its environment, including relevant controls that
relate to the risks, and by considering the classes of transactions,
account balances, and disclosures in the financial statements
IV.
Relate the identified risks to what can go wrong at the assertion level,
taking account of relevant controls that the auditor intends to test;
a. I, II, III, and IV
b. III, II, IV, and I
c. III, II, I, and IV
d. IV, III, I, and II
Answer: B
3. While assessing the risks of material misstatement auditors identify risks,
relate risk to what could go wrong, consider the magnitude of risk and
a. Assess the risk of misstatement due to illegal acts.
b. Consider the complexity of the transactions involved
c. Consider the likelihood that the risks could result in material
misstatements
d. Determine materiality levels
Answer: C
4. The following are examples of conditions and events that may indicate the
existence of risks of material misstatement, except
a. Operations in regions that are economically stable
b. Pending litigation and contingent liabilities
c. Application of new accounting pronouncements
d. High degree of complex regulation
Answer: A

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5. Which of the following conditions and events may most likely indicate the
existence of risks of material misstatements?
a. Having personnel with appropriate accounting and financial reporting
skills.
b. Accounting measurements that involve simple processes
c. Significant amount of routing or systematic transactions
d. Constraints on the availability of capital and credit
Answer: D
6. Which of the following conditions and events least likely indicate the
existence of risks of material misstatements?
a. Changes in the supply chain.
b. Expanding into new locations
c. Inquiries into the entitys operations or financial results by regulatory
or government bodies.
d. Consistency of the entitys IT strategy and its business strategies.
Answer: D
7. The following events and conditions indicate the existence of risks of material
misstatement, except
a. Changes in key personnel including departure of key executives.
b. Weaknesses in internal control, especially those not addressed by
management.
c. Installation of significant new IT systems related to financial reporting.
d. Operations that are subject to a low degree of complex regulation.
Answer: D
8. In exercising judgment as to which risks are significant risks, the auditor shall
consider at least the following:
I.
Whether the risk is a risk of fraud
II.
Whether the risk is related to recent significant economic, accounting
or other developments and, therefore, requires specific attention;
III.
The complexity of transactions;
IV.
Whether the risk involves significant transactions with related parties
V.
The degree of subjectivity in the measurement of financial information
related to the risk, especially those measurements involving a wide
range of measurement uncertainty
VI.
Whether the risk involves significant transactions that are outside the
normal course of business for the entity, or that otherwise appear to be
unusual.
a. I, II, III, and IV only
b. I, II, III, IV, and V only
c. I, II, and III only
d. I, II, III, IV, V, and VI
Answer: D
9. The auditor should design and perform further audit procedures whose
nature, timing, and extent are responsive to the assessed risks of material

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misstatement at the assertion level. Which of the following is the most
important consideration in responding to the assessed risks?
a. The nature of the audit procedures
b. The extent of the audit procedures
c. The timing of audit procedures
d. All of these are equally important
Answer: A
10.Which statement is/are correct regarding the nature, timing, and extent of
further audit procedures?
a. The nature of further audit procedures refers to their purpose and their
type
b. The timing refers to when audit procedures are performed or the
period or date to which the audit evidence applies
c. Extent includes the quantity of a specific audit procedure to be
performed.
d. All of the above
Answer: D
11.Reasons to evaluate internal control would not include
a. Basis for planning
b. Determining the nature, timing, and extent of substantive procedures
c. Basis for type of opinion to be rendered
d. Formulating constructive suggestions for improvements
Answer: C
12.An auditor should consider two key issues when obtaining an understanding
of a clients internal controls. These issues are:
a. The effectiveness and efficiency of controls
b. The frequency and effectiveness of the controls
c. The design and utilization of the controls
d. The implementation and efficiency
Answer: C
13.The main purpose of substantive procedures is to
a. Obtain an understanding of the entity and its environment, including
its internal control, to assess the risks of material misstatement at the
financial statement and assertion levels.
b. Test the operating effectiveness of controls in preventing, or detecting
and correcting, material misstatement at the assertion level.
c. Detect material misstatements at the assertion level
d. All of the above
Answer: C
14.Shown below (1 through 5) are the five types of test which auditors use to
determine whether financial statements are fairly stated. Which three are
substantive tests?
1. Procedures to obtain an understanding of internal control
2. Test of controls

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a.
b.
c.
d.

1,
3,
2,
2,

2,
4,
3,
3,

and
and
and
and

3. Test of transactions
4. Analytical procedures
5. Tests of details of balances
3
5
5
4

Answer: B
15.Which of the following is not useful for obtaining an understanding of internal
controls?
a. Make inquiries of the clients personnel.
b. Examine documents and records.
c. Read industry trade magazines.
d. Observe client activities and operations.
Answer: C
16.The following are the different techniques in documenting the auditors
understanding of the clients internal control system, except
a. Narrative memorandum
b. Questionnaires
c. Flowchart
d. Procedures manual
Answer: D
17.Which of the following statements regarding auditor documentation of the
clients internal control structure is correct?
a. Documentation must include flowcharts
b. Documentation must include narrative memoranda
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
Answer: D
18.Tracing transactions through the system to determine whether procedures
are being applied as prescribed
a. Test of controls
b. Inspection
c. Walk through
d. Analytical procedure
Answer: C
19.An auditor uses the knowledge provided by the understanding of internal
control and the assessed level of control risk primarily to
a. Determine whether procedures and records correcting the
safeguarding of assets are reliable.
b. Ascertain whether the opportunities to allow any person to both
perpetrate and conceal fraud are minimized.

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c. Modify the initial assessments of inherent risk and preliminary
judgments about materiality levels.
d. Determine the nature, timing, and extent of substantive test for
financial statement assertions.
Answer: D
20.The auditor should determine overall responses to address the risks of
material misstatement at the financial statement level. Such responses least
likely include
a. Emphasizing to the audit team the need to maintain professional
scepticism in gathering and evaluating audit evidence
b. Assigning more experienced staff or those with special skills or using
experts.
c. Incorporating additional elements of unpredictability in the selection of
further audit procedures to be performed.
d. Performing substantive procedures at an interim date instead of at the
period end.
Answer: D

CHAPTER 8
1. It involves the application of audit procedures to less than 100 percent of
items within a population of audit relevance such that all sampling units have
a chance of selection
a. Analytical procedures
b. Audit sampling
c. Substantive testing
d. Tests of controls
Answer: B
2. An advantage of statistical sampling over nonstatistical sampling is that
statistical sampling helps an auditor to
a. Minimize the failure to detect errors and irregularities
b. Eliminate the risk of nonsampling errors
c. Reduce the level of audit risk and materiality to a relatively low amount
d. Mathematically measures sampling risk
Answer: D
3. The risk of incorrect acceptance and the likelihood of assessing control risk
too low relate to the:
a. Allowable risk of tolerable misstatement.
b. Preliminary estimates of materiality levels.
c. Efficiency of the audit.
d. Effectiveness of the audit.
Answer: D

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4. Which of the following factors is (are) considered in determining the sample
size for a test of controls?
Expected
Tolerable
deviation rate deviation rate
a.
Yes
Yes
b.
No
No
c.
No
Yes
d.
Yes
No
Answer: A
5. How would increases in tolerable misstatement and assessed level of control
risk affect the sample size in a substantive test of details?
Increase in tolerable
Increase in assessed
misstatement
level of control risk
a. Increase sample size
Increase sample size
b. Increase sample size
Decrease sample size
c. Decrease sample size Increase sample size
d. Decrease sample size Decrease sample size
Answer: C
6. In determining the sample size for a test of controls, an auditor should
consider the likely rate of deviations, the allowable risk of assessing control
risk too low, and the:
a. Tolerable deviation rate.
b. Risk of incorrect acceptance.
c. Nature and cause of deviations.
d. Population size.
Answer: A
7. An advantage of using statistical over nonstatistical sampling methods in
tests of controls is that the statistical methods:
a. Can more easily convert the sample into a dual-purpose test useful for
substantive testing.
b. Eliminate the need to use judgment in determining appropriate sample
sizes.
c. Afford greater assurance than a nonstatistical sample of equal size.
d. Provide an objective basis for quantitatively evaluating sample risk.
Answer: D
8. The use of the ratio estimation sampling technique is most effective when:
a. The calculated audit amounts are approximately proportional to the
client's book amounts.
b. A relatively small number of differences exist in the population.
c. Estimating populations whose records consist of quantities, but not
book values.
d. Large overstatement differences and large understatement differences
exist in the population.

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Answer: A
9. Which of the following statements is correct concerning statistical sampling in
tests of controls?
a. As the population size increases, the sample size should increase
proportionately.
b. Deviations from specific control activities at a given rate ordinarily
result in misstatements at a lower rate.
c. There is an inverse relationship between the expected population
deviation rate and the sample size.
d. In determining tolerable rate, an auditor considers detection risk and
the sample size.
Answer: B
10.The likelihood of assessing control risk too high is the risk that the sample
selected to test controls:
a. Does not support the auditor's planned assessed level of control risk
when the true operating effectiveness of internal control justifies such
an assessment.
b. Contains misstatements that could be material to the financial
statements when aggregated with misstatements in other account
balances or transactions classes.
c. Contains proportionately fewer monetary errors or deviations from
prescribed internal controls than exist in the balance or class as a
whole.
d. Does not support the tolerable error for some or all of management's
assertions.
Answer: A
11.Which of the following sampling methods would be used to estimate a
numerical measurement of a population, such as a dollar value?
a. Attribute sampling.
b. Stop-or-go sampling.
c. Variables sampling.
d. Random-number sampling.
Answer: C
12.Which of the following courses of action would an auditor most likely follow in
planning a sample of cash disbursements if the auditor is aware of several
unusually large cash disbursements?
a. Set the tolerable rate of deviation at a lower level than originally
planned.
b. Stratify the cash disbursements population so that the unusually large
disbursements are selected.
c. Increase the sample size to reduce the effect of the unusually large
disbursements.

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d. Continue to draw new samples until all the unusually large
disbursements appear in the sample.
Answer: B
13.For which of the following audit tests would an auditor most likely use
attribute sampling?
a. Making an independent estimate of the amount of a LIFO inventory.
b. Examining invoices in support of the valuation of fixed asset additions.
c. Selecting accounts receivable for confirmation of account balances.
d. Inspecting employee time cards for proper approval by supervisors.
Answer: D
14.The sample size of a test of controls varies inversely with:
Expected population
Tolerable
deviation rate
rate
a.
Yes
Yes
b.
No
No
c.
Yes
No
d.
No
Yes
Answer: D
15.As a result of sampling procedures applied as tests of controls, an auditor
incorrectly assesses control risk lower than appropriate. The most likely
explanation for this situation is that:
a. The deviation rates of both the auditor's sample and the population
exceed the tolerable rate.
b. The deviation rates of both the auditor's sample and the population is
less than the tolerable rate.
c. The deviation rate in the auditor's sample is less than the tolerable
rate, but the deviation rate in the population exceeds the tolerable
rate.
d. The deviation rate in the auditor's sample exceeds the tolerable rate,
but the deviation rate in the population is less than the tolerable rate.
Answer: C
16.Which of the following most likely would be an advantage in using classical
variables sampling rather than probability-proportional-to-size (PPS)
sampling?
a. An estimate of the standard deviation of the population's recorded
amounts is not required.
b. The auditor rarely needs the assistance of a computer program to
design an efficient sample.
c. Inclusion of zero and negative balances generally does not require
special design considerations.
d. Any amount that is individually significant is automatically identified
and selected.

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Answer: C

17.An auditor desired to test credit approval on 10,000 sales invoices processed
during the year. The auditor designed a statistical sample that would provide
1% risk of assessing control risk too low (99% confidence) that not more than
7% of the sales invoices lacked approval. The auditor estimated from
previous experience that about 2 1/2% of the sales invoices lacked approval.
A sample of 200 invoices was examined and 7 of them were lacking approval.
The auditor then determined the upper deviation rate to be 8%.
In the evaluation of this sample, the auditor decided to increase the
level of the preliminary assessment of control risk because the:
a. Tolerable rate (7%) was less than the upper deviation rate (8%).
b. Expected deviation rate (7%) was more than the percentage of errors
in the sample (3.5%).
c. Upper deviation rate (8%) was more than the percentage of errors in
the sample (3.5%).
d. Expected deviation rate (2.5%) was less than the tolerable rate (7%).
Answer: A
18.An auditor examining inventory most likely would use variables sampling
rather than attributes sampling to:
a. Identify whether inventory items are properly priced.
b. Estimate whether the dollar amount of inventory is reasonable.
c. Discover whether misstatements exist in inventory records.
d. Determine whether discounts for inventory are properly recorded.
Answer: B
19.An auditor is selecting vouchers for testing an entity's internal control
activities related to the proper approval of vouchers before checks are
prepared. The auditor is matching random numbers with voucher numbers to
determine which vouchers to inspect. If a random number matches a voided
voucher, that voucher ordinarily would be replaced by another voucher in the
random sample if the voided voucher:
a. Cannot be located in the voucher file.
b. Represents a dollar amount that is material.
c. Indicates a deviation from the prescribed activity.
d. Has been properly voided.
Answer: D
20.What is an auditor's evaluation of a statistical sample for attributes when a
test of 50 documents results in3 deviations if tolerable rate is 7%, the
expected population deviation rate is 5%, and the allowance for sampling risk
is 2%.

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a. Modify the planned assessed level of control risk because the tolerable
rate plus the allowance for sampling risk exceeds the expected
population deviation rate.
b. Accept the sample results as support for the planned assessed level of
control risk because the sample deviation rate plus the allowance for
sampling risk exceeds the tolerable rate.
c. Accept the sample results as support for the planned assessed level of
control risk because the tolerable rate less the allowance for sampling
risk equals the expected population deviation rate.
d. Modify the planned assessed level of control risk because the sample
deviation rate plus the allowance for sampling risk exceeds the
tolerable rate.
Answer: D