Colegio De Dagupan

School of Business and Accountancy

Auditing Theory

Departmental Quiz

1. The primary reason for an audit by an independent, external audit firm is to

a. Relieve management of responsibility for the financial statements.
b. Guarantee that there are no misstatements the financial statements and ensure that any
fraud will be discovered.
c. Satisfy government regulatory requirements.
d. Provide increased assurance to users as to the fairness of the financial statements.
2. An independent auditor must have which of the following?
a. A pre-existing and well-informed point of view with respect to audit.
b. A background in many different disciplines.
c. Experience in taxation that is sufficient to comply with Philippine Standards on Auditing.
d. Technical qualifications to perform an engagement.
3. Which of the following statements applies to consultation services engagements?
a. A practitioner should obtain an understanding of the internal control to assess control risk.
b. A practitioner is not permitted to compile financial forecast.
c. A practitioner is to maintain an appearance of independence.
d. A practitioner should obtain sufficient relevant data to complete the engagement.
4. Upon discovering material misstatements in a client’s financial statements that the client would
not revise, a predecessor auditor withdrew from the engagement. If asked by the auditor about
the termination of the engagement, the predecessor auditor should
a. Indicate that a misunderstanding occurred.
b. State that he/she found material misstatements that the client would not revise.
c. Suggest that the auditor obtain the client’s permission to discuss the reasons.
d. Suggest that the auditor ask the client.
5. An auditor is planning an audit engagement for a new client in a business unfamiliar to the
auditor. Which is the least useful source of information for the auditor during the preliminary
planning stage when the auditor is trying to obtain an understanding of the entity and its
environment?
a. Inquiries of internal auditing personnel.
b. Observation of the entity’s activities.
c. Inspections of documented business plans.
d. Results of performing substantive procedures.
6. According to professional standards, analytical procedures least likely to be applied to
a. Plan an audit and assist in the final review.
b. Test disclosures about reportable operating segments.
c. Compile financial statements.
 d. Review financial statements or interim financial information.
7. Three conditions are generally present in the client’s organization when fraud occurs. Those
conditions include each of the following except a/an
a. Incentive or pressure to commit fraud.
b. Professional skepticism about the likelihood of fraud.
c. Attitude or rationalization about the act of fraud.
d. Opportunity to commit fraud.
8. Internal auditing can affect the scope of the external auditor’s audit of financial statement by
a. Decreasing the external auditor’s need to perform detailed tests.
b. Eliminating the need to be on hand during the physical count of inventory.
c. Limiting direct testing by the external auditor to assertions not directly tested by internal
auditing.
d. Allowing the external auditor to limit his/her audit to substantive testing.
9. Which of the following is an unusual procedure that may be deemed necessary to discover the
effect of a related-party transaction?
a. Inspect or conform the transferability and value of collateral.
b. Confirm or discuss significant information intermediaries, such as banks, guarantors, or
agents.
c. Examine invoices and other pertinent documents such a receiving or shipping reports.
d. Determine whether the transaction has been approved by the board of directors or other
appropriate officials.
10. In evaluating the reasonableness of an accounting estimate, an auditor is most likely to
concentrate on key factors and assumptions that are
a. Consistent with prior periods.
b. Deviations from historical patterns.
c. Similar to industry guidelines.
d. Objective and not susceptible to bias.
11. Director, management, external auditor, and internal auditors all play important roles in
creating proper control processes. Senior management is primarily responsible for
a. Establishing risk management and control processes.
b. Implementing and monitoring controls designed by the board of directors.
c. Ensuring that external and internal auditors oversee the administration o risk management
and control processes.
d. Reviewing the reliability and integrity of financial and operational information.
12. Why do auditors generally use a sampling approach to evidence gathering?
a. Auditors are experts and do not need to look at much to know whether the financial
statements are correct or not.
b. Auditors must balance the cost of the audit with the need for precision.
c. Auditors must limit their exposure to their client to maintain independence.
d. The auditor’s relationship with the client is generally adversarial, so the auditor will not have
access to all of the financial information of the company.
13. An investor is reading the financial statements of the Staquio Corporation and observes that the
statements are accompanied by an auditor’s unmodified report. From this, the investor may
conclude that
a. Any disputes over significant accounting issues have been settled to the auditor’s
satisfaction.
b. The auditor is satisfied that Staquio will be highly profitable in the future.
c. The auditor is certain that Staquio’s financial statements have been prepared accurately and
that all account balances are precisely correct.
d. The auditor has determined that Staquio’s management is not qualified to lead the
company.
14. With regard to detecting fraud, auditing standards require auditors to
a. Perform procedures designed to detect all instances of fraud that might affect statements.
b. Provide reasonable assurance that the financial statements are not materially misstated
because of fraud.
c. Issue an unmodified opinion only when the auditor is satisfied that no instances of fraud
have occurred.
d. Design the audit program to meet financial statement users’ expectations concerning fraud.
15. Internal control is a function of management, and effective control is based upon the concept of
charge and discharge of responsibility and duty. Which of the following is one of the overriding
principles of internal control?
a. Responsibility for accounting and financial duties should be assigned to one responsible
officer.
b. Responsibility for the accounting duties must be borne by the audit committee.
c. Responsibility for the performance of each duty must be fixed.
d. Responsibility for accounting must be assigned only to bonded employees.
16. When engaged to compile the statements of an entity, an accountant is required to possess a
level of knowledge of the entity’s accounting principles and practices. This requirement most
likely will include obtaining a general understanding of the
a. Internal control awareness of the entity’s senior management.
b. Risk factors relating to misstatements arising from illegal acts.
c. Design of the entity’s internal controls implemented.
d. Nature of the entity’s business transactions, the form of its accounting records and the
accounting basis on which the financial information is to be presented.
17. Which of the following procedures would a CPA ordinarily perform when reviewing the financial
statements of an entity in accordance with Philippine Standards on Review Engagement (PSREs)
a. Document whether control risk is assessed at or below the maximum level.
b. Obtain an understanding of the entity’s internal control components.
c. Compare the financial statements with budgets or forecasts.
d. Apply year-end cutoff tests for the sales and purchasing functions.
18. In an assurance engagement, the responsible party and the intended users
a. Should be from different entities.
b. Should be from the same entity.
 c. Are both responsible for determining the nature, timing and extent of the procedures to be
performed.
d. May be from the same entity or different entities.
19. The following statements relate to the performance of an assurance engagement other than
audit or review of historical financial information covered by PSAs and PSREs. Which is
incorrect?
a. Those persons who are to perform the engagement should collectively possess the
necessary professional competence.
b. The assurance report should be in writing and should contain a clear expression of the
practitioner’s conclusion about the subject matter information.
c. The practitioner should consider materiality and assurance engagement risk when planning
and performing an assurance engagement.
d. The practitioner is precluded from using the work of persons from other professional
disciplines.
20. The report on an agreed-upon procedures engagement should contain
a. An expression of positive assurance based on the specific procedures performed.
b. A statement that the auditor is independent of the entity.
c. A general description of the procedures performed.
d. Identification of the purpose for which the agreed-upon procedures were performed.
21. Which of the following statements best describes assurance services?
a. Services designed to express an opinion on the fairness of historical financial statements
based on the results of an audit.
b. The preparation of financial statements or the collection, classification, and summarization
of other financial information.
c. Independent professional services that are intended to enhance the credibility of
information to meet the needs of an intended user.
d. Services designed for the improvement of operations, resulting in better outcomes.
22. Which of the following is not an overall objective of the auditor in the audit of revenues?
a. To identify and interpret significant trends and variations in the amounts of various
categories of revenue.
b. To verify that earned revenue has been recorded and recorded revenue has been
earned.
c. To verify cash deposited during the year.
d. To obtain an understanding of internal control and assess the risk of material
misstatement with particular emphasis on the use of accrual accounting to record
revenue.
23. PSA 500 describes five generalizations concerning the reliability of evidence. The situations given
below indicate the relative degrees of assurance provide by two types of evidence obtained in
different situations. Which describes an exception to one of the generalizations?
a. The schedule of insurance coverage obtained from the company’s insurance agent
provides greater assurance than one prepared by the internal audit staff.
 b. The report of an expert regarding the valuation of a collection of paintings held as an
investment provides greater assurance than the auditor’s physical observation of the
paintings.
c. The auditor’s computation of interest payable on outstanding bonds provides greater
assurance than reliance on the client’s calculation.
d. The auditor has obtained greater assurance about the balance of sales at Plant A where
he/she has made limited tests of transactions because of effective internal control than
at Plant B where he/she has made extensive tests of transactions because of ineffective
internal control.
24. In confirming accounts receivable, an auditor decided to confirm customers’ account balances
rather that individual invoices. Which of the following most likely will be included with the
client’s confirmation letter?
a. An auditor-prepared letter explaining that a nonresponse may cause an inference that
the account balance is correct.
b. A client-prepared letter reminding the customer that a nonresponse will cause a second
request to be sent.
c. An auditor-prepared letter requesting the customer to supply missing and incorrect
information directly to the auditor.
d. A client-prepared statement of account showing the details of the customer’s account
balance.
25. Which of the following is usually included or shown in the audit documentation?
a. The manner in which exceptions and unusual matters disclosed by the auditor’s
procedures were resolved or treated.
b. The procedures used by the auditor to verify the personal financial status of members of
the client’s management team.
c. Analyses that are designed to be a part of, or a substitute for, the client’s accounting
records.
d. Excerpts from authoritative pronouncements that support the underlying generally
accepted accounting principles used in preparing the financial statements.
26. A company has computerized sales and cash receipts journals. The computer programs for these
journals have been properly debugged. The auditor discovered that the total of the accounts
receivable subsidiary accounts differs materially from the accounts receivable control account.
This discrepancy could indicate.
a. Credit memoranda being improperly recorded.
b. Lapping of receivables.
c. Receivables not being properly aged.
d. Statements being intercepted prior to mailing.
27. An auditor is reviewing a corporate client’s statement of cash flows. The auditor should expect
the cash flows to be classified according to
a. Operating activities, sources, and uses.
b. Investing, financing, and operating activities.
c. Fund inflows and fund outflows.
 d. Cash inflows and cash outflows.
28. What is the general character of the work conducted in performing a forensic audit for a
company?
a. Providing assurance that the financial statements are not materially misstated.
b. Detecting or deterring fraudulent activity.
c. Offering an opinion on the reliability of the specific assertions made by management.
d. Identifying the causes of an entity’s financial difficulties.
29. Which of the following characteristics most likely would heighten an auditor’s concern about the
risk of intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low.
b. Insiders recently purchased additional shares of the entity’s stock.
c. Management places substantial emphasis on meeting earnings projections.
d. The rate of change in the entity’s industry is low.
30. Which of the following would an auditor most likely use in determining the auditor’s planning
materiality?
a. The anticipated sample size for planned substantive procedures.
b. The entity’s annualized interim (i.e. quarterly) financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.
31. Which of the following procedures would best detect a liability omission by management?
a. Review purchase contracts and other legal documents.
b. Review articles of incorporation and corporate bylaws.
c. Review and check mathematical accuracy of financial statements.
d. Inquiry of senior support staff and recently departed employees.
32. In an audit of other assets, all of the following are done except
a. Determining that the asset is written off on a periodic basis.
b. Determining whether the asset is fairly presented in the financial statements.
c. Confirming that the asset exists.
d. Determining the basis of the carrying amount asset.
33. In connection with an audit of the prepaid insurance account, which of the following procedures
is usually not performed by the auditor?
a. Recomputed the portion of the premium that expired during the year.
b. Prepare excerpts of insurance policies for audit documentation.
c. Confirm premium rates with an independent insurance broker.
d. Examine support for premium payments.
34. On January 20, 2015, before the Bayview Co. released its financial statements for the year
ended December 31, 2014, it settled a long-standing lawsuit. A material loss resulted and no
prior liability had been recorded. How should this loss disclosed or recognized?
a. The loss should be disclosed in notes to the financial statements, but the financial
statements themselves need not be adjusted.
b. The loss should be disclosed in an emphasis of matter paragraph in the auditor’s report.
c. No disclosure or recognition is required.
 d. The financial statement should be adjusted to recognize the loss.
35. Each time an auditor draws a conclusion based on evidence from a sample, an additional risk,
sampling risk, is introduced. An example of sampling risk is
a. Drawing an erroneous conclusion from sample data.
b. Improperly applying a proper audit procedure to sample data.
c. Properly applying an improper audit procedure to sample data.
d. Projecting the results of sampling beyond the population tested.
36. If financial statements are to meet the requirements of adequate disclosure,
a. All information pertaining to the company must be disclosed in the statements or
related notes, even though some of the disclosures are potentially detrimental to the
company or its shareholders.
b. All information believed by the auditor to be essential to the fair presentation of the
financial statements must be disclosed.
c. A statement note must clearly detail any deficiencies contained in the financial
statements themselves.
d. Statement notes should be written in very technical language to avoid misinterpretation
by the reader.
37. The risk of material misstatement differs from detection risk in that it
a. Arises from the misapp