AAP Quiz 3

AUDITING AND ASSURANCE PRINCIPLES: QUIZ 3
1. In conducting a substantive test of an account balance, an auditor hypothesizes that no material

error exists. The risk that sample results will support the hypothesis when a material error actually
does exist is the risk of
a. Alpha error
b. Type I error
c. Incorrect rejection
d. Incorrect acceptance
2. Which of the following items would most likely be found in an auditor’s permanent file papers?
a. Excerpts of shareholders’ and directors’ meetings
b. Preliminary analytical procedure notes
c. Representation letter
d. Staff assignments for the current audit
3. For variables sampling purposes, changes in certain parameters affect sample size positively while
changes in others have a negative effect. In this regard, which of the following statements is true?
a. An increase in beta risk reduces sample size.
b. An increase in alpha risk increases sample size.
c. As materiality (M) increases, sample size increases.
d. Population size affects sample size inversely, i.e., as population size increases, sample size decreases.
4. S1: Information Produced by Entity test is a required audit procedure.
S2: Normally, subsidiary ledger-general ledger agreement testing is being performed as part of
audit procedure per account.
Which of the following statement/s is/are false?

a. Neither Statement I or II
b. Both Statements I and II
c. Statement I only
d. Statement II only
5. Assuming the tolerable deviation rate is 5 percent, the expected population rate is 3 percent, and
the allowance for sampling risk is 2 percent, what should an auditor conclude if tests of 100
randomly selected documents reveal 4 deviations?
a. Accept the sample results as support for assessing control risk below the maximum because the
tolerable rate less the allowance for sampling risk equals the expected population deviation rate.
b. Assess control risk at the maximum because the sample deviation rate plus the allowance for sampling
risk exceeds the tolerable rate.
c. Accept the sample results as support for assessing control risk below the maximum because the
sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
d. Assess control risk at the maximum because the tolerable rate plus the allowance for sampling risk
exceeds the expected population deviation rate.
6. Which measure or ratio would aid the auditor to detect misclassification in accounts?
a. Gross profit margin
b. Return on equity
c. Inventory turnover
d. Current ratio
7. PPS sampling is most appropriate when the auditor
a. Expects no errors
b. Anticipates overstatement errors
c. Anticipates understatement errors
d. Has assessed control risk at the maximum
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8. The test of unusual approval of entries at year-end by client’s key officers and completeness of the
entries to reconcile with the trial balance are being done in performing _____________.
a. Journal-entry testing
b. Test of unusual items at trial balance
c. Information produced by entity testing
d. SL-GL agreement
9. S1: Client may access auditor’s working papers on inventory as deemed necessary.
S2: Where attendance in physical inventory count is impracticable due to pandemic for example,
alternative audit procedures like inspection of documentation of the subsequent sale of specific
inventory items acquired or purchased prior to the physical inventory counting, may provide
sufficient appropriate audit evidence about the existence and condition of inventory.
S3: Audit team may consider attending the physical count virtually in cases of restrictions due to
pandemic.
Which of the following statement/s is/are true?

a. All statements are true
b. Statements I and II
c. Statement II only
d. Statements II and III
10. In testing payroll transactions, an auditor discovers that four out of a statistical sample of one
hundred selected time cards were not signed by the appropriate supervisor. To evaluate the
materiality or significance of this control deficiency, the auditor should
a. Evaluate the amount of the four-time cards in relation to the financial statements.
b. Compare the tolerable deviation rate with the expected deviation rate.
c. Report the deviations and let management assess the significance because they are in the best
position to know.
d. Compute an upper precision limit and compare with the tolerable rate.
11. Which of the following is not an aspect of sampling risk?
a. Risk of not identifying a misstatement included in a sample
b. Risk of assessing control risk too high
c. Risk of sampling results indicating that a population is materially misstated when it is not
d. Risk of incorrect acceptance
12. Sample size increases when tolerable deviation rate ___________ and expected deviation rate
___________.
a. Increases; Decreases
b. Increases; Increases
c. Decreases; Increases
d. Decreases; Decreases
13. It is sometimes impracticable or impossible for an auditor to use normal accounts receivable
confirmation procedures. In such situations, the best alternative procedure the auditor might resort
to would be
a. Examining subsequent receipts of year-end accounts receivable.
b. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a
subsequent date.
c. Performing an overall analytic review of accounts receivable and sales on a year-to-year basis.
d. Requesting that management increase the allowance for uncollectible accounts by an amount equal to
some percentage of the balance in those accounts that cannot be confirmed.
14. Which of the following statement/s is/are false?

S1: Summary of uncorrected misstatements can be found in summary of audit differences.
S2: Written representations letter or also know as management letter, is a critical document needed
at the end of audit because it shows management’s acknowledgment of its responsibility in the
preparation of the financial statements.
S3: Comfort letter is a letter being sent by auditor to its client at the end of audit to give
recommendations on how the client can improve on its systems, controls and processes related to
the preparation of FS.
a. All statements are true.
b. Statement III only.
c. Statements I and III.
d. All statements are false.
e. Statements II and III.
15. S1: Prevention of fraud is management’s responsibility while detection of fraud is auditor’s
responsibility.
S2: In audit of expenses, test of occurrence assertion is usually lesser important than
completeness assertion.
Which of the following statement/s is/are false?

a. Both statements are false.
b. Statement II.
c. None of the statements are false.
d. Statement I.
16. Returns of positive confirmation requests for accounts receivable were very poor. As an alternative
procedure, the auditor decided to check subsequent collections. The auditor had satisfied himself
that the client satisfactorily listed the customer name next to each check listed on the deposit slip;
hence, he decided that for each customer for which a confirmation was not received that he would
add all amounts shown for that customer on each validated deposit slip for two months following
that balance sheet date. The major fallacy in the auditor’s procedures is that
a. The deposit slip would not be received directly by the auditor as a confirmation would be.
b. By looking only at the deposit slip the auditor would not know if the payment was for the receivable at
the balance sheet date or a subsequent transaction.
c. Checking of subsequent collections is not an accepted alternative auditing procedure for confirmation of
accounts receivable.
d. A customer may not have made a payment during the two-month period.
17. Which of the following types of audit evidence is the most persuasive?
a. Client work sheets supporting cost allocations
b. Client representation letter
c. Bank statements obtained from the client
d. Pre-numbered client purchase order forms
18. “Physical examination” is the inspection or count by the auditor of items such as:
a. Cash, inventory, and payroll timecards.
b. Cash, inventory, canceled checks, and tangible fixed assets.
c. Cash, inventory, and sales documents.
d. Cash, inventory, securities, notes receivable, and tangible fixed assets.
19. A material uncertainty exists
a. Refers to events or conditions which may give rise to business risks, which individually or collectively
may cast significant doubt on the entity’s ability to continue as a going concern.
b. When the management uses significant judgment and estimates in preparing the financial statements.
c. When the auditor believes that disclosure of the nature and implications of the uncertainty is necessary
for the fair presentation of the financial statements.
d. When the entity can no longer continue its operations for the foreseeable future.
20. Audit sampling is characterized by
I. Random selection of the sample items

II. Use of probability theory
III. Too costly or cumbersome
a. I
b. I, III
c. I, II
d. I, II, III
21. Final analytics addresses what assertion?
a. Existence
b. Completeness
c. Accuracy
d. Rights and Obligations
22. Which of the following procedures would an auditor most likely perform to obtain evidence about
the occurrence of subsequent events?
a. Inquiring as to whether any unusual adjustments were made after year-end.
b. Investigating personnel changes in the accounting department occurring after year-end.
c. Confirming a sample of material accounts receivable established after year-end.
d. Comparing the financial statements being reported on with those of the prior period.
23. Items for inclusion in management representation letter are normally:
a. Determined by management.
b. Covering all the accounts in the financial statements
c. Based on AASC’s standard list.
d. Determined by auditors based on the circumstances of the engagement.
24. When the auditor expects a relatively error-free population, the auditor may begin testing with a
small sample. If the sample demonstrates the anticipated low error rate, the auditor may choose to
stop sampling. Otherwise, the auditor will go ahead with further sampling or full-scale statistical
sampling. This sample selection method is known as
a. Stop-and-go sampling
b. Discovery sampling
c. Stop-and-shop sampling
d. Cluster sampling
25. The use of the difference estimation sampling technique to estimate peso amounts is inappropriate
when
a. A book value for each sample item is unknown.
b. There are some observed differences between audited values and book values.
c. The total book value is known and corresponds to the sum of all the individual book values.
d. The audited values are nearly proportional to the book value.
26. The auditor picks specific 100 purchase orders to test if those are properly approved by the
manager. Upon inspection, 2 documents have no signature signifying the approval. How should
this finding be reported by the auditor?
a. 2% sample deviation rate
b. 2 out of 100 expected deviation
c. 2 out of 100 deviation rate
d. 2% projected deviation rate
27. A confirmation represents audit evidence obtained by the auditor as a direct written response to
the auditor from a third party such as external legal counsel of the client.
If management refuses to allow the auditor to send a confirmation request, the auditor shall issue a
qualified or adverse opinion.
a. False, False
b. False, True
c. True, False
d. True, True
28. Although most substantive testing is performed during the final audit, some substantive tests may
be done during
a. If internal control is weak, the auditor should confirm accounts receivable as of a point in time at least
one month prior to the client's fiscal year-end.
b. As a general rule, the auditor performs substantive tests of balances as of the balance sheet date and
tests of transactions during the interim as well as the year-end audit.
c. When internal control is weak, extensive substantive testing should be performed during the interim
audit.
d. Substantive testing should be performed during the interim audit only under conditions of excellent
internal control.
29. Statistical sampling techniques may be used to sample “attributes” as well as “variables”. An
example of a “variable” that can be tested using statistical sampling technique would be:
a. The balance in the accounts receivable account.
b. The number of entries improperly posted to a job order cost card.
c. The number of errors in the client-prepared aging schedule of accounts receivable.
d. Compliance with the requirement that each voucher be initialed by the treasurer before a check is
prepared for payment of the voucher.
30. The tests of balances to evaluate the adequacy of the allowance for uncollectible accounts do not
involve which of the following?
a. Testing the aging of the amounts shown in the aging categories on the aged trial balance.
b. Considering the evidence concerning the collectability of current amounts.
c. Assessing the reasonableness of the percentages used to compute the allowance component required
for each aging category and the adequacy of the overall allowance.
d. Considering the evidence concerning the collectability of past due amounts.
31. Which of the following auditing procedures most likely would assist an auditor in identifying related
party transactions?
a. Vouching accounting records for recurring transactions recorded just after the balance sheet date.
b. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
c. Reviewing confirmations of loans receivable and payable for indications of guarantees.
d. Performing analytical procedures for indications of possible financial difficulties.
32. The concept of “dual dating” on the auditor’s report refers to
a. The client’s date of the financial statements, December 31, 2020, and the auditor’s date on the report,
March 30, 2021
b. The auditor’s date on the report, December 31, 2020, and the review required when the client files a
registration statement with the SEC, May 30, 2021
c. The auditor’s date on the report representing the end of the fieldwork, March 30, 2021 and the review
of an important event that occurred after the completion of fieldwork, April 5, 2021, but before the
auditor’s report was issued.
d. The wording problem created because some of the client’s statements are for a period of time, for year
ended December 31, 2020, and others are for one specific date, December 31, 2020.
33. Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset. Evaluate whether each of the
following statements qualifies as inspection:
I. Test performed on 100% of the items within a population
II. Selecting items over a certain amount
III. Selecting items for the total population on the basis that was expected to be representative
a. I, II and III qualify
b. I and II do not qualify; III qualifies
c. I, II and III do not qualify
d. I and II qualify; III does not qualify
34. An auditor should examine minutes of the board of directors’ meetings:
a. Through the date of the financial statements.
b. On a test basis.
c. Through the date of the audit report.
d. Only at the beginning of the audit.
35. Which of the following would be an example of sampling error?
a. The auditor selected a non-random sample and generalized the sample results to the population using
statistical methods.
b. The auditor chose a random sample, calculated a sample error rate of 4%, and concluded that the
population error rate was 4%. The true population error rate was 6%.
c. The auditor chose a non-random sample to focus on transactions for only 2 months of the year.
d. The auditor chose a random sample and divided the number of errors in the sample by the number of
accounts in the sample to calculate the sample error rate.
36. Which of the following is not a factor affecting the independent auditor's judgment about the
quantity, type, and content of audit working papers?
a. The needs for supervision and review of the work performed by assistants.
b. The nature and condition of the client's records and internal controls.
c. The expertise of client personnel and their participation in preparing schedules.
d. The type of the financial statements, schedules, or other information on which the auditor is reporting.
37. Assessing control risk too high is the risk that the sample result
a. Contains proportionately more deviations from prescribed control procedures than what actually exist in
the population as a whole.
b. Contains proportionately fewer deviations from prescribed control procedures than what actually exist in
the population as a whole.
c. Contains monetary misstatements that could be material to the financial statements when aggregated
with misstatements in other account balances or classes of transactions.
d. Does not support tolerable error for some or all of management’s assertions.
38. Which statement is incorrect regarding fair value measurements?
a. Underlying the concept of fair value measurements is a presumption that the entity is a going concern.
b. The measurement of fair value may be relatively simple for assets that are bought and sold in active
and open markets.
c. The estimation of fair value may be achieved through the use of a valuation model or through the
assistance of an expert, such as an independent appraiser.
d. Fair value is normally the amount that an entity would receive or pay in a forced transaction, involuntary
liquidation, or distress sale.
39. A number of factors influence the sample size for a substantive test of details of an account
balance. All other factors being equal, which of the following would lead to a larger sample size?
a. Smaller expected frequency of errors.
b. Smaller measure of tolerable error.
c. Lowering the assessed inherent risk through the use of analytical review procedures.
d. Lowering the assessed level of control risk.
40. S1: Interim substantive procedures are being performed because the auditor has reached to its
conclusion that the entity’s internal controls are operating effectively, and the audit has a lower
detection risk.
S2: Audit procedures being performed during interim period are sufficient to conclude on the
financial statements for a given balance sheet date.
Which of the following statement/s is/are true?

a. Both statements are true.
b. Statement II.
c. None of the statements are true.
d. Statement I.
41. Which of the following is not generally considered in determining sample size for tests of controls?
a. Expected population exception rate
b. Tolerable exception rate
c. Risk of assessing control risk too low
d. Population size
42. Most part of the audit of sales and collection cycle
a. Must be performed first so that the audit of the other cycles can rely on the data.
b. Must be performed simultaneously with the audit of the purchases and disbursements cycle.
c. Can be performed independently of the audit of other cycles.
d. Cannot be performed until the audit of cash is completed.
43. Before releasing the audit report, the auditor should do which of the following?
a. Perform an analytical review.
b. Give subsequent contingency disclosure.
c. Estimate the subsequent client fee for services.
d. Issue a management letter.
44. Generally, which of the following audit procedures is most reliable?
a. Observation
b. Analytical Procedures
c. Recalculation
d. Inquiry
e. Inspection
45. When are the ratio estimation and difference estimation techniques most likely to be preferable to
the mean-per-unit estimation method?
a. When differences between book and audited values are infrequent.
b. When differences between book and audited values are frequent.
c. The choice between any of the methods is irrelevant, since they all provide similar results.
d. When differences between book and projected misstatement is estimated to be small.
46. Which of the following might be detected by an auditor's review of the client's sales cut-off?
a. Lapping of year end accounts receivable.
b. Excessive goods returned for credit.
c. Inflated sales for the year.
d. Unrecorded sales discounts.
47. Which of the following auditing procedures is ordinarily performed last?
a. Testing of the purchasing function.
b. Reading of the minutes of the directors’ meetings.
c. Confirming accounts payable.
d. Obtaining a management representation letter.
48. Sample results support the conclusion that a recorded account balance is materially misstated but,
unknown to the auditor, the account is not misstated, suggesting the risk of
a. Assessing control risk too low.
b. Incorrect rejection.
c. Incorrect acceptance.
d. Assessing control risk too high.
49. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on
management’s assertions of
a. Valuation and allocation
b. Existence
c. Completeness
d. Presentation and disclosure
50. Which of the following conditions or events most likely would cause an auditor to have substantial
doubt about an entity’s ability to continue as a going concern?
a. Arrearages in preferred stock dividends are paid.
b. Usual trade credit from suppliers is denied.
c. Significant related party transactions are pervasive.
d. Restrictions on the disposal of principal assets are present.
51. Sampling risks can be eliminated by
a. Increasing sample size
b. Adequate direction, review, and supervision of the audit team
c. Performing 100% examination
d. Using random sampling
52. Auditors often request that the audit client send a letter of inquity to those attorneys who have
been consulted with respect to litigation, claims, or assessments. The primary reason for this
request is to provide the auditors with:
a. An estimate of the peso amount of the probably loss
b. An expert opinion as to whether a loss is possible, probable or remote
c. Information concerning the progress of legal cases to date
d. Corroborative audit evidence
53. In examining cash disbursements, an auditor plans to choose a sample using systematic selection
with a random start. The primary advantage of such a systematic selection is that population items
a. That include irregularities will not be overlooked when the auditor exercises compatible reciprocal
options.
b. May occur in a systematic pattern, thus making the sample more representative.
c. May occur more than once in a sample.
d. Do not have to be pre-numbered in order for the auditor to use the technique.
54. If the auditor wants to focus on testing the particular characteristic of the population to address the
risk of material misstatement, which method of selection will be most likely used?
a. Audit sampling
b. 100% examination
c. Haphazard selection
d. Non-representative selection
55. In the processing of accounts receivable confirmations, the auditor would not normally be expected
to:
a. Personally deposit the requests in the mail.
b. Include own return address envelope.
c. Reconcile the information to the corresponding customer’s account.
d. Personally prepare the confirmation letter.
56. If management refused to amend the financial statements after the same had been issued and a
fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s
report, may have caused the auditor to amend the auditor’s report, the auditor shall:
a. Review the steps taken by management to ensure that anyone in receipt of the previously issued
financial statements together with the auditor’s report thereon is informed of the situation.
b. Amend the auditor’s report to include an additional date restricted to that amendment that thereby
indicates that the auditor’s procedures on subsequent events are restricted solely to the amendment of
the financial statements described in the relevant note to the financial statements.
c. Provide a new auditor’s report on the amended financial statements.
d. Notify management (or those charged with governance) that the auditor will seek to prevent future
reliance on the auditor’s report.
57. Which of the following between assessing control risk too high or assessing control risk too low
are of more consideration?
a. Too low, because too much reliance will be put on weak controls, increasing overall audit risk.
b. Too high, because too much reliance will be put on weak controls, increasing overall audit risk.
c. Too low, because audit efficiency and consequently audit reliability will be inhibited.
58. This consists of evaluations of financial information made by a study of plausible relationships
among both financial and non-financial data.
a. Inquiry
b. Observation
c. External Confirmation
d. Analytical Review Procedure
59. An auditor who examines check disbursements discovers a missing check number. Upon inquiry to
the person responsible for disbursements and reconciliation of the cash account, he is told that the
check number is missing because the check was voided. What is the auditor's next step?
a. Since the person responsible for disbursements also reconciles the account, no additional procedures
are necessary.
b. Examine the voided checks file to determine whether the check is in the file.
c. Prepare a bank transfer schedule to identify the check.
d. Examine the bank confirmation to determine whether the check cleared.
60. Which of the following procedures is used extensively throughout the audit?
a. Inquiry
b. Analytical Review Procedure
c. External Confirmation
d. Observation
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AUDITING AND ASSURANCE PRINCIPLES: QUIZ 3

1. In conducting a substantive test of an account balance, an auditor hypothesizes that no material

Which of the following statement/s is/are false?

Which of the following statement/s is/are true?

14. Which of the following statement/s is/are false?

Which of the following statement/s is/are false?

I. Random selection of the sample items

Which of the following statement/s is/are true?

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