Chapter 12

1. When the auditor assess inherit risk, he considers among others the following factors except

a. Integrity of management

b. Nature of the entity's business

c. Unusual purpose on management

d. Results of the interim tests

2. Which of the following is not a benefit claimed for the practice of determining materiality in the initial
planning stage of starting an audit?

a. Being able to fine tune the audit work for effectiveness and efficiency

b. Avoiding the problem of doing more work than necessary (overauditing)

c. Being able to decide early what kind of audit opinion to give

d. Avoiding the problem of doing too little work (underauditing)

3. The revenue cycle of a company generally includes these accounts:

a. Inventory, accounts payable, and general expenses

b. Inventory, general expenses, and payroll

c. Cash, accounts receivable, and sales

d. Cash, notes payable, and capital stock

4. Which of the following ordinarily is designed to detect possible material peso errors on the financial
statements?

a. Control testing

b. Analytical procedures

c. Computer controls

d. Post-audit working paper review

5. Which of the following statements best describes an auditor's responsibility to detect errors and
Irregularities?

a. The auditor should study and evaluate the client's internal control system, and design the audit to
provide reasonable assurance of detecting all errors and irregularities

b. The auditor should assess the risk that errors and irregularities may cause the financial statements to
contain material misstatements, and determine whether the necessary internal control procedures
have been prescribed and are being followed satisfactorily

c. The auditor should consider the types of errors and irregularities that could occur, and determine
whether the necessary internal control procedures have been prescribed and are being followed

d. The auditor should assess the risk that errors and irregularities may cause the financial statements
to contain material misstatements, and design the audit to provide reasonable assurance of
detecting material errors and irregularities
6. Which of the following circumstances most likely would cause an auditor to believe that material
misstatements might exist in an entity's financial statements?

a. Accounts receivable confirmation requests yield significantly fewer responses than expected

b. Audit trails of computer-generated transactions exist for only a short time

c. The chief financial officer does not sign the management representation letter until the last day of the
auditor's field work

d. Management consults with other accountants about significant accounting matters

7. For which of the following judgements may an independent auditor share responsibility with an entity's
internal auditor, who is assessed to be both competent and objective?

I. Materiality of misstatements - NO

II. Evaluation of accounting estimates - NO

a. I only b. II only

c. Neither d. Both

8. An auditor uses the assessed level of control risk to

a. Evaluate the effectiveness of the entity's control activities

b. Identify transactions and account balances where inherent risk is at maximum

c. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high

d. Determine the acceptable level of detection risk for financial statements assertions

9. Which of the following is a step in an auditor's decision to assess control risk at below maximum?

a. Apply analytical procedures to both financial data and non-financial information to detect conditions
that may indicate weak control

b. Perform tests of details of transactions and account balances to identify potential errors and
irregularities

c. Identify specific control activities that are likely to detect or prevent material misstatements

d. Document that the additional audit effort to perform tests of controls exceed the potential reduction
in substantive testing

10. Proper segregation of duties reduce the opportunities in which a person could both

a. Journalize entries and prepare financial statements

b. Record cash receipts and record cash disbursements

c. Establish internal control and authorize transactions

Perpetuate errors and irregularities and conceal them