CHAPTER 6

1. Which of the following statements is most correct regarding the primary purpose of audit
procedures?
a. To detect all errors or fraudulent activities as well as illegal activities
b. To comply with the SEC
c. To gather corroborative audit evidence about management’s assertions regarding the
client’s financial statements
d. To determine the amount of errors in the balance sheet accounts in order to adjust the
accounts to actual

2. A procedure designed to test for monetary misstatements directly affecting the validity of the
financial statement balances is a:
a. Test of controls
b. Substantive test
c. Test of attributes
d. Monetary-unit sampling test

3. You are auditing the company’s purchasing process for goods and services. You are primarily
concerned with the company not recording all purchase transactions. Which audit procedure below
would be the most effective audit procedure in this case?
a. Vouching from the accounts payable account to the vendor invoices.
b. Tracing vendor invoices to recorded amounts in the accounts payable account.
c. Confirmation of accounts payable recorded amounts.
d. Reconciling the accounts payable subsidiary ledger to the accounts payable account.

4. The information obtained by the auditor in arriving at the conclusions on which the audit opinion is
based is called:
a. Audit working papers
b. Audit assertions
c. Audit evidence
d. Audit standards

5. The major reason an independent auditor gathers evidence is to

a. form an opinion on the financial statements.
b. detect fraud.
c. evaluate management.
d. evaluate internal control.

6. Which of the following is the best example of a corroborating evidence?

a. General journal
b. Worksheet cost allocation
c. Vendor’s invoice
d. Cash receipts journal
7. Which of the following statements about audit evidence is correct?
a. Appropriateness is the measure of the quantity of audit evidence.
b. Sufficiency is the measure of the quality of audit evidence and its relevance to a particular
assertion and its reliability.
c. Audit evidence is more persuasive when items of evidence from different sources or of
different nature are consistent.
d. There should be a one-to-one relationship between audit objective and audit procedure.

8. Evidence is generally considered appropriate when:

a. it has been obtained by random selection.
b. there is enough of it to afford a reasonable basis for an opinion on financial statements.
c. it has the qualities of being relevant, objective, and free from known bias.
d. it consists of written statements made by managers of the enterprise under audit.

9. Evidence are generally considered sufficient when:

a. it is appropriate.
b. there is enough of it to afford a reasonable basis for an opinion on financial statements.
c. it has the qualities of being relevant, objective and free from unknown bias.
d. it has been obtained by random selection.

10. Appropriateness of evidence is a measure of the:

a. quantity of evidence.
b. quality of evidence.
c. sufficiency of evidence.
d. meaning of evidence.

11. The sufficiency and appropriateness of evidential matter ultimately is based on the
a. availability of corroborating data.
b. Philippine Standard on Auditing.
c. pertinence of the evidence.
d. judgment of the auditor.

12. An example of an external document that provides reliable information for the auditor is:
a. employees time reports.
b. bank statements.
c. purchase order for company purchases.
d. carbon copies of checks.

13. An example of a document that the auditor receives from the client, but which was prepared by
someone outside the client’s organization, is a:
a. confirmation.
b. sales invoice.
c. vendor invoice.
d. bank reconciliation.
14. To be considered reliable evidence, confirmations must be controlled by:
a. a client employee responsible for accounts receivable.
b. a financial statement auditor.
c. a client’s internal audit department.
d. a client’s controller or CFO.

15. Given the economic and time constraints in which auditors can collect evidence about management
assertions about the financial statements, the auditor normally gathers evidence that is:
a. irrefutable.
b. conclusive.
c. persuasive.
d. completely convincing.

16. It refers to the material (working papers) prepared by and for, or obtained and retained by the
auditor in connection with the performance of the audit.
a. Documentation
b. Audit report
c. Accounting data
d. Corroborative evidence

17. Which of the following best describes one of the primary objectives of audit documentation?
a. Defend against claims of a deficient audit.
b. Provide a principal support for the income taxation return.
c. Provide documentation that the audit was conducted in accordance with auditing
standards.
d. Provide additional support or recorded amounts to the client.

18. Which of the following is not an expert upon whose work an auditor may relay?
a. Actuary
b. Internal auditor
c. Appraiser
d. Engineer

19. An expert whose expertise is used by the entity in preparing financial statements is called a(n):
a. Financial expert
b. Management expert
c. Auditor’s expert
d. Specialist
20. External auditors must obtain evidence regarding what attributes of an internal audit department if
the external auditors intend to rely on internal auditor’s work?
a. Integrity
b. Objectivity
c. Competence
d. All of the above
CHAPTER 7

1. This involves developing an overall strategy for the expected conduct and scope of the examination;
the nature, extent, and timing of which vary with the size and complexity, and experience with and
knowledge of the entity.
a. Audit planning
b. Audit procedure
c. Audit program
d. Audit working papers

2. Initial planning involves four matters. Which of the following is not one of these?
a. Develop an overall audit strategy
b. Request that bank balances be confirmed
c. Schedule engagement staff and audit specialists
d. Identify the client’s reason for the audit

3. A CPA is conducting the first examination of a client’s financial statements. The CPA hopes to reduce
the audit work by consulting with the predecessor auditor and reviewing the predecessor’s working
papers. This procedure is
a. Acceptable if the client and the predecessor auditor agree to it.
b. Acceptable if the CPA refers in the audit report to reliance upon the predecessor
auditor’s work.
c. Required if the CPA is to render an unmodified opinion.
d. Unacceptable because the CPA should bring an independent viewpoint to a new
engagement.

4. The preliminary judgment about materiality and the amount of audit evidence accumulated are
related.
a. directly
b. indirectly
c. not
d. inversely

5. According to PSA 320, materiality should be considered by the auditor when:

Determining the nature, timing Evaluating the effects
and extent of audit procedures. of misstatements
a. YES YES
b. YES NO
c. NO NO
d. NO YES
6. Which of the following statements is not correct about materiality?
a. The concept of materiality recognizes that some matters are important for fair
presentation of financial statements in conformity with the applicable financial
reporting framework, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate
level of misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily
involve both quantitative and qualitative judgments
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the
needs of a reasonable person who will rely on the financial statements.

7. “Performance materiality” is the term used to indicate materiality at the:

a. balance sheet level
b. account balance level
c. income statement level
d. company-wide level

8. When comparing level of materiality used for planning purposes and the level of materiality used for
evaluating evidence, one would most likely expect
a. The level of materiality to be always similar.
b. The level of materiality for planning purposes to be similar.
c. The level of materiality for planning purposes to be higher.
d. The level of materiality for planning purposes to be based on total assets while the level
of materiality for evaluating purposes to be based on net income.

9. Qualitative factors can affect an auditor’s assessment of materiality. Which of the following
qualitative factors could influence the assessment of materiality?
I. Misstatements that are otherwise immaterial may be material if affect earnings trends.
II. Minor misstatements resulting from the consequences of contractual obligations.
a. I only
b. II only
c. I and II
d. neither I or II

10. Auditors frequently refer to the terms audit assurance, overall assurance, ad level of assurance to
refer to .
a. detection risk
b. audit report risk
c. acceptable audit risk
d. inherent risk
11. The risk that financial statements are likely to be misstated materially without regard to the
effectiveness of internal control is the;
a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk

12. When planning a financial statement audit, the auditor should assess inherent risk at the
Financial statement level Account balance or transaction class level
a. YES YES
b. YES NO
c. NO NO
d. NO YES

13. Which of the following is an incorrect statement?

a. Detection risk cannot be changed at the auditor’s discretion.
b. If individual audit risk remains the same, detection risk bears an inverse relationship to
inherent and control risk.
c. The greater the inherent and control risk the auditor believes exist, the less detection
risk that can be accepted.
d. The auditor might make separate or combines assessments of inherent risk and control
risk.

14. Relationship between control risk and detection risk is ordinarily

a. Parallel
b. Direct
c. Inverse
d. Equal

15. Which of the following is not correct regarding an auditor’s decision that a lower acceptable audit
risk is appropriate?
a. More evidence is accumulated
b. Less evidence is accumulated
c. Special care is required in assigning experienced staff
d. Review of audit documentation is performed by personnel not assigned to the
engagement
16. These consist of the analysis of significant ratios and trends including the resulting investigation of
fluctuations and relationship that are inconsistent with other relevant information or deviate from
predictable amount.
a. Financial statement analysis
b. Variance analysis
c. Analytical procedures
d. Regression analysis

17. Which of the following statements about analytical procedures is incorrect?

a. Analytical procedures are required to be performed in the planning phase of the audit.
b. Analytical procedures are required to be done during the testing phase of the audit.
c. Analytical procedures are required to be done during the completion phase of the audit.
d. Analytical procedures may be performed in the planning, testing and completion phases
of the audit.

18. In developing the overall audit plan and audit program, the auditor should assess inherent risk at
the:
Audit plan Audit program
a. Financial statement level Accounting balance level
b. Account balance level Financial statement level
c. Account balance level Account balance level
d. Financial statement level Financial statement level

19. An auditor should design the written audit program so that

a. All material transactions will be selected for substantive testing
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of
transactions.

20. Which of the following matters would least likely appear in the audit program?
a. Specific procedures that will be performed.
b. Specific audit objectives.
c. Estimated time that will be spent in performing certain procedures.
d. Documentation of the accounting and internal control systems being reviewed.