HOMEWORK/RECITATION IN AUDITING IN CIS ENVIRONMENT

Name: ______________________ Section: ___________ Score:

________
Instruction: Choose the letter that corresponds to your answer through an
excel formatted sheet and prepare a summary of the answers. Please
send it to my gmail account giancatahumcpa@gmail.com. You will be
given until Tuesday at11:59pm to give the answer. This will graded as
your homework and recitation.

1. The auditor’s understanding of the entity and the environment consists of the
following aspects, except
I. Industry, regulatory, and other external factors, including the applicable
financial reporting framework
II. The nature of the entity, including the entity’s selection and application of
accounting policies
III. Objectives and strategies and the related business risks that may result in a
material misstatement of the financial statements
IV. Measurement and review of the entity’s financial performance
V. Internal control

a. I, II, III and IV only

b. I, II, and III only
c. I and III only
d. All of the above
2. Which of the following statements regarding auditor documentation of the
client’s internal control structure is correct?
a. No documentation is necessary although it is desirable
b. Documentation must include flowcharts
c. No one particular form of documentation is necessary, and the extent of
documentation may vary
d. Documentation must include narrative memoranda
3. An auditor uses the knowledge provided by the understanding of internal control
and the assessed level of control risk primarily to
a. Determine whether procedures and records concerning the safeguarding
of assets are reliable
b. Ascertain whether the opportunities to allow any person to both
perpetrate and conceal fraud are minimized
c. Determine the nature, timing, and extent of substantive tests for financial
statement assertions
d. Modify the initial assessments of inherent risk and preliminary judgments
about materiality levels
4. Narratives, flowcharts, and internal control questionnaires are three commonly
used methods of
a. documenting the study of internal control
b. documenting the auditor’s understanding of client’s organizational
structure
c. designing the audit manual and procedures
d. testing the internal control structure

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5. The auditor should perform the following risk assessment procedures to obtain
an understanding of the entity and its environment, including its internal control,
except:
a. Inquiries of the entity’s external legal counsel or of valuation experts that
the entity has used
b. Observation and inspection
c. Inquiries of management and others within the entity
d. Analytical procedures
6. The audit risk against which the auditor and those who rely on his/her opinion
require reasonable protection is a combination of three separate risks at the
account-balance or class-of-transactions level. The first risk is inherent risk.
The second risk is that material misstatements will not be prevented or detected
by internal control. The third risk is that
a. The auditor will apply an inappropriate measure of audit materiality.
b. Material misstatements that occur will not be detected by the audit.
c. The auditor will reject a correct account balance as incorrect.
d. The auditor will apply an inappropriate audit procedure.
7. Inquiries directed towards those charged with governance may most likely
a. Relate to their activities concerning the design and effectiveness of the
entity’s internal control and whether management has satisfactorily
responded to any findings from those activities
b. Relate to changes in the entity’s marketing strategies, sales trends or
contractual arrangements with its customers
c. Help the auditor in understanding the environment in which the financial
statements are prepared
d. Help the auditor in evaluating the appropriateness of the selection and
application of certain accounting policies
8. Auditors plan engagements so that audit risk will be:
a. Captured in the auditor’s fee
b. Acceptable to the SEC
c. Limited to a relatively low level
d. Consistent with the risk associated with the auditor’s portfolio of
engagements
9. The following are the inherent limitations of internal control, except
a. Errors by personnel
b. Incompatible duties
c. Management override
d. Collusion among employees
10. As the acceptable level of detection risk decreases an auditor may
a. Eliminate the assessed level of inherent risk from consideration as a
planning factor.
b. Reduce substantive testing by relying on the assessments of inherent risk
and control risk.
c. Postpone the planned timing of substantive tests from interim dates to
the year-end.
d. Lower the assessed level of control risk from the maximum level to below
the maximum.
11. The main purpose of risk assessment procedures is to

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 a. All of the above.
b. Test the operating effectiveness of controls in preventing, or detecting
and correcting, material misstatement at the assertion level.
c. 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.
d. Detect material misstatement at the assertion level.
12. Control environment
a. Consists of the procedures and records 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.
b. Consists of the policies and procedures that help ensure that management
directives are carried out.
c. Includes the governance and management functions and the attitudes,
awareness, and actions of those charged with governance and
management concerning the entity’s internal control and its importance in
the entity.
d. Is the entity’s process for identifying business risks relevant to financial
reporting objectives and deciding about actions to address those risks,
and the results thereof.
13. While performing an audit, Sebastian decides to restrict the risk of
misstatement to 3%. What must be the acceptable level of detection risk if
inherent risk is 25% and control risk 40%?
a. 30%
b. 33.3%
c. 12%
d. 0.3%
14. After the study and evaluation of a client’s system of internal control has
been completed, an auditor might decide to
a. Reduce the extent of compliance testing in areas where the system of
internal accounting control is strong.
b. Increase the extent of substantive testing in areas where the system of
internal accounting control is weak.
c. Increase the extent of compliance and substantive testing in areas where
the system of internal accounting control is strong.
d. Reduce the extent of both substantive and compliance testing in areas
where the system of internal accounting control is strong.
15. Control activities constitute one of the five components of internal control.
Control activities do not encompass
a. Physical controls
b. An internal audit function
c. Information processing
d. Performance reviews
16. An auditor’s primary consideration regarding an entity’s internal control
structure and procedures is whether they
a. Prevent management override
b. Affect the financial statement assertions

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 c. Relate to the control environment
d. Reflect management’s philosophy and operating style
17. Which statement is incorrect regarding obtaining an understanding of the
entity and its environment?
a. The auditor’s primary consideration is whether the understanding that has
been obtained is sufficient to assess the risks of material misstatement of
the financial statements and to design and perform further audit
procedures.
b. That understanding establishes a frame of reference within which the
auditor plans the audit and exercises professional judgment about
assessing risks of material misstatement of the financial statements and
responding to those risks throughout the audit.
c. The depth of the overall understanding that is required b the auditor in
performing the audit is equal to that possessed by management in
managing the entity.
d. Obtaining an understanding of the entity and its environment is an
essential aspect of performing an audit in accordance with PSAs.
18. Which of the following conditions and events least likely indicate the
existence of risks of material misstatement?
a. Consistency of the entity’s IT strategy and its business strategies.
b. Changes in the supply chain.
c. Inquiries into the entity’s operations or financial results by regulatory or
government bodies.
d. Expanding into new locations.
19. Some account balances, such as those for pension or leases, are the results
of complex calculations. The susceptibility to material misstatements in those
types of accounts is defined as
a. Sampling risk
b. Audit risk
c. Detection risk
d. Inherent risk
20. An auditor’s flowchart of a client’s accounting system is a diagrammatic
representation that depicts the auditor’s
a. Understanding of the types of irregularities that are probable, given the
present system
b. Understanding of the system
c. Program for tests of controls
d. Documentation of the study and evaluation of the system
21. Determine the acceptable level of detection risk if inherent risk is medium
and control risk is high
a. Lower
b. Lowest
c. Higher
d. Medium
22. The following are the components of the internal control, except
a. Risk assessment process
b. Control risk
c. Control environment

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 d. Control activities
23. When an auditor increases the planned assessed level of control risk because
certain control procedures were determined to be ineffective, the auditor would
most likely increase the
a. Level of inherent risk
b. Extent of test of controls
c. Level of detection risk
d. Extent of test of details
24. Inherent risk and control risk differ from detection risk in that they
a. can be changed at the auditor’s discretion
b. arise from the misapplication of auditing procedures
c. exist independently of the financial statement audit
d. may be assessed in either quantitative or nonquantitative terms
25. As the acceptable level of detection risk decreases, an auditor may change
the
a. Nature of substantive tests from the less effective to a more effective
procedure.
b. Timing of tests of controls by performing them at several dates rather
that at one time.
c. Timing of substantive tests by performing them at an interim date rather
that at year-end.
d. Assessed level of inherent risk to a higher amount.
26. The following are examples of conditions and events that may indicate the
existence of risks of material misstatement, except
a. High degree of complex regulation
b. Pending litigation and contingent liabilities
c. Application of new accounting pronouncements
d. Operations in regions that are economically stable
27. Which statement is correct regarding business risk?
a. A business risk may have an immediate consequence for the risk of
misstatement for classes of transactions, account balances, and
disclosures in the assertion level or the financial statements as a whole
b. The auditor should identify or assess all business risks
c. All business risks five rise to risks of material misstatements
d. The risk of material misstatement of the financial statements is broader
than business risk, though it includes the latter
28. The susceptibility of an account balance to error that could be material,
assuming there are no related controls, is called:
a. Control risk
b. Comprehensive risk
c. Inherent risk
d. Detection risk
29. Which risks exist irrespective of audit sampling procedures:
a. control, detection
b. inherent, control, detection
c. inherent, control
d. inherent, detection

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30. When CPA firms do an audit of historical financial statements, part of the
audit usually consists of identifying operational problems and making
recommendations that may benefit the audit client. The recommendations can
be made orally but they typically made through the use of a
a. Client Letter
b. Management Letter
c. Engagement Letter
d. Letter of Representation
31. Which statement is incorrect regarding analytical procedures?
a. When such analytical procedures use data gathered at a high level, the
results of those analytical procedures provide a clear-cut indication about
whether a material misstatement may exist
b. When comparisons of those expectations with unrecorded amounts or
ratios developed from recorded amounts yields unusual or unexpected
relationships, the auditor considers those results in identifying risks of
material misstatement
c. In performing analytical procedures as risk assessment procedures, the
auditor develops expectations about plausible relationships that are
reasonably expected to exist
d. Analytical procedures may be helpful in identifying the existence of
unusual transactions, events and amounts, ratios and trends that might
indicate matters that have financial statement and audit implications
32. Which of the following statements with respect to required auditor
communication of deficiencies in internal control is correct?
a. Such communication is required to be in writing.
b. Such communication is incidental to the auditor’s study and evaluation of
the system of internal control.
c. Such communication must include a description of all weaknesses.
d. Such communication is the principal reason for the testing and evaluating
internal control.
33. Audit risk consists of inherent risk, control risk and detection risk. Which of
the following statements is true?
a. The existing levels of inherent risk, control risk, and detection risk can be
changed at the discretion of the auditor.
b. Detection risk is a function of the efficiency of an auditing procedure.
c. Cash is more susceptible to theft than an inventory of coal because it has
a greater inherent risk.
d. The risk that material misstatement will not be prevented or detected on
a timely basis by internal control can be reduced to zero by effective
controls.
34. Nature of the entity refers to
a. The entity’s operations, its ownership and governance, the types of
investments that it is making and plans to make, the way that the entity
is structured and how it is financed
b. The operational approaches by which management intends to achieve its
objectives
c. The result of significant conditions, events and circumstances, actions or
inactions that could adversely affect the entity’s ability to achieve its

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 objectives and execute the strategies or the setting of inappropriate
objectives and strategies
d. The overall plans for the entity
35. Reasons to evaluate internal control would not include
a. basis for planning the audit
b. determining the nature, timing, and extent of audit procedures
c. formulating constructive suggestions for improvements
d. basis for type of opinion to be rendered
36. Determine the acceptable level of detection risk if inherent risk is low and
control risk is high
a. Lower
b. Lowest
c. Higher
d. Medium
37. Which of the following is an incorrect statement?
a. Detection risk bears an inverse relationship to inherent and control risks
b. The greater the inherent and control risks the auditor believes exists, the
less detection risk can be accepted
c. Detection risk cannot be changed at the auditor’s discretion
d. The auditor might separate or combine assessments of inherent risk and
control risk
38. Inherent risk and control risk differ from detection risk in that inherent risk
and control risk are
a. functions of the client and its environment while detection risk is not
b. changed at the auditor’s discretion while detection risk is not
c. elements of audit risk while detection risk is not
d. considered at the individual account-balance while detection risk is not
39. The level of confidence an auditor achieves on an audit engagement is:
a. Set a level lower that would be necessary absent business risk
b. Related to detection risk
c. One hundred percent
d. Equivalent to detection risk
40. Which of the following conditions and events may most likely indicate the
existence of risks of material misstatements?
a. Accounting measurements that involve simple processes
b. Significant amount of routine or systematic transactions
c. Constraints on the availability of capital and credit
d. Having personnel with appropriate accounting and financial reporting skills

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