1.

Material misstatements may emanate from all of the following except

a) Fraud
b) Error
c) Noncompliance with laws and regulations
d) Inadequacy of accounting records
2. The primary factor that distinguishes errors from fraud is *
a) Whether the underlying cause of misstatement relates to misapplication of
accounting principles or to clerical processing
b) Whether the misstatement is perpetrated by an employee or by a member of
management
c) Whether the misstatement is concealed
d) Whether the underlying cause of misstatement is intentional or unintentional
3. The responsibility for the detection and prevention of errors, fraud and noncompliance
with laws and regulations rests with
a) Auditor
b) Client’s legal counsel
c) Client management
d) Internal auditor
4. Fraudulent financial reporting is most likely to be committed by whom?
a) Line employees of the company
b) Outside members of the company’s board of directors
c) Company’s management
d) The company’s auditors
5. Which of the following statements is true? *
a) It is usually easier for the auditor to uncover fraud than errors
b) It is usually easier for the auditor to uncover errors than fraud
c) It is usually equally difficult for the auditor to uncover errors than fraud
d) Usually, none of the statement above is true
6. The term “error” refers to unintentional misinterpretation of financial information.
Examples of errors are when (1) assets have been misappropriated, (2) transactions
without substance have been recorded, (3) records and documents have been
manipulated and falsified and (4) the effects of the transactions have been omitted from
the records *
a) All of the statements above are true
b) Only statements 1 and 2 are correct
c) All of the statements above is false
d) Only statement 3 and are true
7. Which of the following is not one of the primary reasons why auditors should be aware
of related parties and transactions between such parties
a) PFRS requires disclosure of the related party transactions if they are material
b) The existence of related parties or related party transactions may affect the
financial statements and the reliability of audit evidence
c) A related party transaction may be motivated by other than ordinary business
considerations
d) PFRS requires that related party transactions be recorded in their equivalent arm’s-
length transactions
8. Which of the following would not necessarily be a related party transaction?
a) Sale to another corporation with a similar name
b) Purchases from another corporation that is controlled by the corporation’s chief
stockholder
c) Loan from the corporation to a major stockholder
d) Sale of land to the corporation by the spouse of a director
9. Which of the following is most likely to indicate the existence of related parties?
a) Writing down obsolete inventory just before year-end
b) Failing to correct previously identified internal control deficiencies
c) Depending on a single product for the success of the entity
d) Borrowing money at an interest rate significantly below the market rate
10. When auditing related party transaction, an auditor places primary emphasis on *
a) Ascertaining the rights and obligations of the related parties
b) Confirming the existence of the related parties
c) Verifying the valuation of the related party transactions
d) Evaluating the disclosure of the related party transactions