FAR EASTERN UNIVERSITY

INTERNAL AUDITING THEORY AND REPORTING

MIDTERM EXAMINATION

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 c. Audit program
b. Audit procedure d. Audit working papers
2. In planning the audit engagement, the audit should consider each of the following except
a. Matters relating to the entity’s business and the industries in which it operates
b. The entity’s accounting policies and procedures
c. Anticipated levels of control risk and materiality
d. The kind of opinion that is likely to be expressed
3. When planning an examination, an auditor should
a. Consider whether the extent of substantive tests may be reduced based on the results of the internal
control questionnaire
b. Make preliminary judgments about materiality levels for audit purposes
c. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them
d. Prepare a preliminary draft of the management representation letter
4. The extent of planning will vary according to any of the following, except
a. Size of the audit client
b. Auditor’s experience with the entity and knowledge of eth business
c. The nature and complexity of the audit engagement
d. The assessed level of control risk
5. Adequate planning of the audit work helps the auditor of accomplishing the following objectives, except
a. Gathering of all corroborating evidence
b. Ensuring that appropriate attention is devoted to important areas of the audit
c. Identifying the areas that need a service of an expert
d. The audit work is completed efficiently
6. Which of the following is a basic tool used by the auditor to control the audit work and review the progress
of the audit?
a. Time and expense summary c. Progress flowchart
b. Engagement letter d. Audit program
7. In planning the audit, the auditor should assess materiality at two levels
a. The preliminary level and the final level
b. The company level and the divisional level
c. The account balance level and the detailed item level
d. The financial statement level and the account balance level
8. Which of the following least likely affect the form and content of the overall audit plan?
a. Complexity of the audit engagement
b. Methodology and technology used by the auditor
c. The entity’s form of business organization
d. The size of the entity
9. One reason why an auditor makes an analytical review of the client’s operations is to identify
a. Improper separation of accounting and other financial duties
b. Weakness of a material nature in the system of internal accounting control
a. Unusual transactions
b. Non-compliance with prescribed control procedures
10. At what stage in the audit are the analytical procedures performed?
a. In planning stage
b. In conjunction with tests of transactions and test of balances
c. Near the end
d. During all stages
11. Analytical procedures used in planning an audit should focus on identifying
a. Material weaknesses in the internal control structure
b. The predictability of financial data from individual transactions
c. The various assertions that are embodied in the financial statements
d. Areas that may represent specific risk relevant to the audit
12. Which of the following is not primarily performed in the preplanning or pre-engagement phase?
a. Deciding whether to accept or reject an audit engagement c. Inquiring from predecessor auditor
b. Making a preliminary estimate of materiality d. Preparing an engagement letter
13. Where the client is changing auditors, communication between the predecessor and incoming auditors
should be initiated by the
a. Predecessor c. Incoming auditor
b. Client d. Securities and Exchange Commission
14. According to PSA 210, the auditor and the client should agree on the terms of the engagement. The
agreed terms would need to be recorded in an
a. A memorandum to be placed in the permanent section of the auditing working appears
b. An engagement letter
 c. A client representation letter
d. A confirmation letter attached to the constructive letter
15. Which of the following would be least likely to be included in the auditor’s engagement letter?
a. Forms of the report c. Objective and scope of the audit
b. Extent of his responsibilities to his client d. Type of opinion to be issued
16. The audit engagement letter should generally include a reference to each of the following except
a. the expectation of receiving a written management representation letter
b. A request for the client to confirm the terms of the engagement
c. A description of the auditor’s method of sample selection
d. The risk that material misstatements may remain undiscovered
17. A successor auditor most likely would make inquiries of the predecessor auditor regarding
a. Specialized accounting principles of the client’s industry
b. The competency of the client’s internal audit staff
c. The uncertainty inherent in applying sampling procedures
d. Disagreements with management as to auditing procedures
18. Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit
engagement?
a. Analysis of balance sheet accounts
b. Analysis of incomes statement accounts
c. Facts that might bear on the integrity of management
d. All matters of continuing accounting significance
19. The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are best
documented in
a. Independent auditor’s report c. Client’s representation letter
b. Audit engagement letter d. Audit program
20. If the auditor believes that the entity will not be able to continue as a going concern and the financial
statements are prepared on a going concern basis, the auditor’s report should include
a. Unqualified opinion with explanatory paragraph c. Adverse opinion
b. Qualified opinion d. Disclaimer of opinion
21. When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an
understanding of the nature of the act to
a. Increase the assessed level of control risk
b. Recommend remedial actions to the audit committee
c. Evaluate the effect on the financial statements
d. Determine the reliability of management’s representations
22. The role of persons entrusted with supervision, control and direction of an entity
a. Governance b. Board of directors c. Government d. Management
23. The information obtained by the auditor in arriving at the conclusions on which the audit opinion is based is
called;
a. Audit working papers c. Audit assertions
b. Audit evidence d. Audit standards
24. Those evidence specifically outlined in an audit program are primarily designed to’
a. Gather evidence c. Test internal systems
b. Detect errors or irregularities d. Protect the auditor in the event of litigation
25. Evidential matter is generally considered sufficient when
a. It is appropriate
b. There is enough of it 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
26. The sufficiency of evidential matter ultimately is based on the;
a. Availability of corroborating data c. pertinence of the evidence
b. PSA d. Judgment of the auditor
27. Auditing standards require the auditor to obtain an understanding of the client’s internal control structure;
a. For very audit c. Sufficient to find any frauds which may exist
b. For first time audits d. Whenever it would be appropriate
28. The primary responsibility for establishing and maintaining adequate accounting and internal control
systems rests with
a. The external auditors c. Management
b. The internal auditors d. the controller or the treasurer
29. The primary objective of procedures performed to obtain an understanding of internal control is to provide
an auditor with
a. Evidential matter to use in reducing detection risk
b. A basis from which to modify test of controls
c. Knowledge necessary to plan the audit
d. Information necessary to prepare flowcharts
30. The fundamental purpose of an internal control system is to
a. Safeguard the resources of the organization
b. Provide reasonable assurance that the objectives of the organization are achieved
c. Encourage compliance with organization objectives
d. Ensure the accuracy, reliability and timeliness of information
31. When considering internal control, the auditor’s primary concern is to determine
 a. The reliability of the accounting information system
b. The possibility of fraud occurring
c. Compliance with policies, plans and procedures
d. The type of an opinion he well use
32. Inherent limitations of internal control would include
a. Incompatible functions c. lack of authorization
b. Changing conditions d. Incompetent employees
33. An effective system of internal control
a. Cannot be circumvented by management
b. Can reduce the cost of an external audit
c. Can prevent collusion among employees
d. Eliminates risks and potential loss to the organization
34. The risk that the auditor may express an incorrect opinion on the financial statements is called
a. Inherent risk b. Control risk c. Detection risk d. Audit risk
35. The susceptibility of an account to misstatements assuming no internal control is referred to as the
a. Inherent risk b. Control risk c. Detection risk d. Audit risk
36. Tests of controls do not normally include
a. Inquiry b. Observation c. Inspection d. Confirmation
37. Tests of controls are designed to obtain evidence to support the auditor’s assessment of control risk
a. at a high level c. at zero level
b. at less than high level d. at the maximum level
38. Tests of controls may include all of the following except;
a. Inspection b. Inquiry c. Reperformance d. Reconciliation
39. This involves the application of the procedures to less than 100% of the items within an account balance
or class of transactions. This enables the auditor to obtain an devaluate audit evidence about some
characteristics of the selected items in order to form an opinion about the characteristics of all the items
supporting an account balance or transaction class
a. Audit techniques c. Selective testing
b. Audit sampling d. Specific identification
40. Audit sampling for substantive tests is appropriate when
a. Analytical procedures used
b. The auditor wants to eliminate sampling risk
c. A population contains small number of large value items
d. Test of details are performed
41. Audit sampling for test of control is generally appropriate when
a. Control leaves evidence of performance
b. Control leaves no evidence of performance
c. 100% of the transactions is tested
d. Examining specific high value items in the population
42. The individual items constituting a population is called
a. Sample b. Sampling frame c. Sampling unit d. Sampling interval
43. The possibility that the auditor’s conclusion based on a sample may differ from the conclusion reached if
the entire population were subjected to the same procedure is called
a. Audit risk b. Sampling risk c. Non-sampling risk d. Detection risk
44. According to PSA, audit related services do not include;
a. Review b. Compilation c. Consultancy d. Agreed upon procedures
45. Which of the following services provides moderate level of assurance?
a. Audit b. Review c. Compilation d. Agreed upon procedures
46. A report on factual findings is the end product of the auditor when performing
a. Examination b. Audit c. Review d. Agreed upon procedures
47. What level of assurance does an accountant give on compilation report?
a. None b. Low c. Moderate d. High

***END OF EXAMINATION***