Auditing exam final

1. Auditors do not provide which of the following?

a. assurance on financial statements
b. assurance on the effectiveness of internal controls over financial reporting
c. assurance on corporate sustainability reports
d. absolute assurance on the financial statements including assuming responsibility
for them
2. Recording, classifying, and summarizing economic events in a logical manner for the purpose
of providing financial information for decision making is commonly or the process of
cookingbooks of accounts is called
a. finance.
b. auditing.
c. accounting.
d. economics.
3. When auditing accounting data, auditors focus on
a. determining whether recorded information properly reflects the economic events
that occurred during the accounting period.
b. determining if fraud has occurred.
c. determining if taxable income has been calculated correctly.
d. analyzing the financial information to be sure that it complies with government
requirements.
4. The possibility that a business may not be able to repay a bank loan because of an economic
downturn or crisis or failure to achieve qualitative objectives such as customer satisfaction,
employee motivation, competitiveness etc, or quantitative objective such as profitability, level
of production, cost leadership etc. . is referred to as
a. environmental risk.
b. information risk.
c. Audit risk .
d. business risk.
5. The most common way for users to obtain reliable information is to
a. have an internal audit.
b. have an independent audit.
c. verify all information personally.
d. verify the information with management.
6. External users of the financial statements
a. value the auditor's report because of the auditor's independence from the client.
b. look to the auditor's report as an indication of the statements' reliability.
c. use the audited information on the assumption that it is reasonably complete,
accurate, and unbiased.
d. minimizes information risks those buried within the financial statements.
e. consider auditor’s as the last defense line for all accounting misstatements in the
financial statements
f. all
7. Any service that requires a professional accountant or audit firm to issue a report about the
reliability of an assertion that is made by another party is a(n)
a. accounting and bookkeeping service.
b. attestation service.
c. assurance service.
d. tax service.
8. Which of the following services provides the lowest level of assurance on a financial
statement audit or public accounting service?
a. review
b. audit
c. advisory services
d. accounting & compilation services

9. The AICPA principles and the auditing standards & other best practice statements should be
viewed by practitioners as
a. ideals to work towards, but which are not achievable.
b. maximum standards that denote excellent work.
c. minimum standards of performance that must be achieved on each audit engagement.
d. benchmarks to be used on all audits, reviews, and compilations

10. The auditor's responsibilities section of the standard unmodified opinion audit report states
that the audit is designed to

a. discover all errors and/or irregularities.

b. discover material errors and/or irregularities.
c. conform to generally accepted accounting principles.
d. obtain reasonable assurance whether the statements are free of material misstatement

11. The management's responsibilities section of the standard unmodified opinion audit report
for a nonpublic company states that the financial statements are

a. the responsibility of the auditor.

b. the responsibility of management.
c. the joint responsibility of management and the auditor.
d. police authorities..
12. The auditor's responsibilities section of the standard unmodified opinion audit report states
that the auditor is
a. responsible for the financial statements and the opinion on them.
b. responsible for the financial statements.
c. exercising professional judgment throughout the audit.
d. expressing an opinion on the effectiveness of internal controls.
13. What category of audit report will be issued if the auditor concludes that the financial
statements are not fairly presented?
a. disclaimer
b. qualified
c. standard unmodified opinion
 d. adverse
14. an auditor’s report neither favorable nor unfavorable issued by the auditor is called

a. disclaimer
b. qualified
c. standard unmodified opinion
d. adverse
.
15. As a result of management's refusal to permit the auditor to physically examine inventory,
the auditor must depart from the unmodified opinion audit report because
the financial statements have not been prepared in accordance with GAAP.
the scope of the audit has been restricted by circumstances beyond either the client's or
auditor's control.
the financial statements have not been audited in accordance with GAAS.
the scope of the audit has been restricted

16. An adverse opinion is issued when the auditor believes

some parts of the financial statements are materially misstated or misleading.
the financial statements would be found to be materially misstated if an investigation
were performed.
the auditor is not independent.
the overall financial statements are so materially misstated that they do not present fairly
the financial position or results of operations and cash flows in conformity with GAAP

17. In which situation would the auditor be choosing between "except for" qualified opinion and
an adverse opinion?
a. The auditor lacks independence.
b. A client-imposed scope limitation
c. A circumstance-imposed scope limitation
d. Lack of full disclosure within the footnotes

18. When the auditor determines that the financial statements are fairly stated, but there is a non
independent relationship between the auditor and the client, the auditor should issue
a. an adverse opinion.
b. a disclaimer of opinion.
c. either a qualified opinion or an adverse opinion.
d. either a qualified opinion or an unqualified opinion with modified wording.
19. . If the phrase "except for" is present in the opinion paragraph of the audit report, the auditor
has issued a(n)
a. adverse opinion.
b. disclaimer of opinion.
c. unqualified opinion.
d. qualified opinion.
20. When analyzing the various types of opinions that the auditor can issue,
a. an adverse opinion must contain the phrase "except for" in the opinion paragraph.
b. an adverse opinion can only be issued when there is a lack of knowledge by the auditor.
c. a disclaimer of opinion can be issued for material or immaterial misstatements.
 d. a qualified opinion report can be used only when the auditor concludes that the overall
financial statements are fairly stated

21. Which of the following scenarios does not result in a qualified opinion?

a. A scope limitation prevents the auditor from completing an important audit

procedure.
b. Circumstances exist that prevent the auditor from conducting a complete audit.
c. The auditor lacks independence with respect to the audited entity.
d. An accounting principle at variance with GAAP is used.

22 . Whenever the client imposes restrictions on the scope of the audit, the auditor should be
concerned that management may be trying to prevent discovery of misstatements. In such cases,
the auditor will likely issue a
a. disclaimer of opinion in all cases.
b. qualification of both scope and opinion in all cases.
c. disclaimer of opinion whenever materiality is in question.
d. qualification of both scope and opinion whenever materiality is in question

23. . The underlying reason for a code of professional conduct for any profession is
a. the need for public confidence in the quality of service of the profession.
b. it provides a safeguard to keep unscrupulous people out.
c. it is required by federal legislation.
d. it allows licensing agencies to have a yardstick to measure deficient behavior.
24. A CPA performs bookkeeping services for a client and then performs an audit of those
financial statements. OR providing Assurance & Non Assurance services for the same client &
its competitor under the existing AICPA code of professional conduct & rules, OR Ethical
Framework, is an example of a ________ threat.
a. familiarity
b. self-interest
c. self-review
d. management participation
25. The AICPA's Code of Professional Conduct requires independence for all
a. attestation engagements.
b. services performed by accountants in public practice.
c. accounting and auditing services performed.
d. professional work performed by CPAs.
26, When a member observes the profession's technical and ethical standards and strives to
continually improve her competence and quality of services, she is exercising
a. due care & diligence.
b. integrity.
c. independence.
d. objectivity.
27. A public accountant or auditor who is providing a world class audit service to a client in
return as a reward accepts GIFTS & HOSPITALITY i.e. “an all expenditure paid dinner part for
the whole family in the Mediterranean” .the possible audit threat to the AICPA's Code of
Professional Conduct (the ethical principle/Rule/ of the AICPA)?
 a. adverse interest
b. self-interest
c. self-review
d. undue influence
28. A member actively endorses & involves in the business of marketing/Promoting/ an attest
client's products or services. This is an example of which type of threat to compliance with
which of the rules under the AICPA's Code of Professional Conduct?
a. management participation
b. self-interest
c. advocacy
d. undue influence
29. For which of the following professional services must CPAs be independent?
a. management advisory services
b. audits of financial statements
c. preparation of tax returns
d. advocacy & legal litigation support services.
30. Privity of contract exists between
a. auditor and the federal government.
b. auditor and third parties.
c. auditor and client.
d. auditor and client attorney

31. Fraud occurs when

a. a misstatement is made and there is both knowledge of its falsity and the intent to
deceive.
b. a misstatement is made and there is knowledge of its falsity but no intent to deceive.
c. the auditor lacks even slight care in the performance in performing the audit.
d. the auditor has an absence of reasonable care in the performance of the audit.
32. Which of the following auditor's defenses usually means non reliance on the financial
statements by the user?
a. lack of duty
b. non-negligent performance
c. absence of causal connections
d. contributory negligence
33. A broad interpretation of the rights of third-party beneficiaries holds that users whom the
auditor should have been able to foresee as being likely users of financial statements have the
same rights as those with privity of contract. This is known as the concept of
a. foreseen users.
b. foreseeable users.
c. expected users.
d. four-party contracts

34. The objective of an audit of the financial statements is an expression of an opinion on

a. the fairness of the financial statements in all material respects.
b. the accuracy of the financial statements.
c. the accuracy of the annual report.
d. the accuracy of the balance sheet and income statement
35. Auditors accumulate evidence to
a. defend themselves in the event of a lawsuit.
b. determine if the financial statements are correct.
c. satisfy the requirements of the Securities Acts of 1933 and 1934.
d. reach a conclusion about the fairness of the financial statements..
36. . Which of the following is not one of the reasons that auditors provide only reasonable
assurance on the financial statements?
a. The auditor commonly examines a sample, rather than the entire population of
transactions.
b. Accounting presentations contain complex estimates which involve uncertainty.
c. Fraudulently prepared financial statements are often difficult to detect.
d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases.
37. Which of the following statements is the most correct regarding errors and fraud?
a. An error is unintentional, whereas fraud is intentional.
b. Frauds occur more often than errors in financial statements.
c. Errors are always fraud and frauds are always errors.
d. Auditors have more responsibility for finding fraud than errors

38. Which of the following is an accurate statement concerning the auditor's responsibility to
consider laws and regulations?
a. Auditors can follow an easy, step-by-step procedure to determine how laws and
regulations impact the financial statements.
b. The auditor's responsibility will depend on whether the laws or regulations are
expected to have a direct impact on the financial statements.
c. It is the responsibility of the auditor to determine if an act constitutes noncompliance.
d. The auditor must inform an outside party if management has knowingly not complied
with a law or regulation.

39. An auditor should recognize that the application of auditing procedures may produce
evidence indicating the possibility of errors, irregularities, Misstatements & frauds and other
illegal activities. Thus the implication for the auditor is: the auditor should
a. plan and perform the engagement with an attitude of professional skepticism.
b. not rely on internal controls that are designed to prevent or detect errors or fraud.
c. design audit tests to detect unrecorded transactions.
d. extend the work to audit the majority of the recorded transactions and records of an
entity

40. Which balance sheet accounts are included in the payroll and personnel cycle?
a. cash in bank, accrued payroll, trade accounts receivable
b. accrued payroll, notes payable, and deferred tax
c. accrued payroll, cash in bank, and accrued payroll taxes
d. salaries and commissions, cash in bank, accrued payroll taxes
41. If a short-term note payable is included in the accounts payable balance on the financial
statement, there is a violation of the
a. completeness assertion.
b. existence assertion.
c. cutoff assertion.
 e. classification assertion.
42. International auditing standards and U.S. GAAP classify assertions into three categories.
Which of the following is not a category of assertions that management makes about the
accounting information in financial statements?
a. assertions about classes of transactions for the period under audit
b. assertions about account balances at period end
c. assertions about the quality, legality & confidentiality of source documents used to
prepare the financial statements
d. assertions about presentation and disclosure
43. Management makes the following assertions about account balances:
a. existence, completeness, classification, and cutoff.
b. existence, accuracy, classification, and rights and obligations.
c. existence, completeness, valuation and allocation, and rights and obligations.
d. existence, completeness, rights and obligations, and cutoff

44. Which of the following assertions is described as "this assertion addresses whether all
transactions that should be included in the financial statements are in fact included"?
a. occurrence
b. completeness
c. rights and obligations
d. existence
45. Which of the following management assertions is not associated with classes of transactions
and events?
a. occurrence
b. classification
c. accuracy
d. rights and obligations
46. The procedures used to test the effectiveness of the internal controls after all the
prerequisites tests have satisfied such as: independence tests, competence tests, auditable tests of
the client, resourceful tests etc, are known as
a. tests of transactions.
b. tests of controls.
c. substantive analytical procedures.
d. control risk.
47. If the auditor has obtained a reasonable level of assurance about the fair presentation of the
financial statements through understanding internal control, assessing control risk, testing
controls, and analytical procedures, then the auditor
a. can issue an unqualified opinion.
b. can significantly reduce other substantive tests.
c. can write the engagement letter.
d. needs to perform additional tests of controls so that the assurance level can be
increased

48. The first phase in planning an audit and designing an audit approach is to
a. accept the client and perform initial audit planning.
b. set the preliminary judgment of materiality.
c. understand the client's business and industry.
 d. perform preliminary audit procedures

49. ________ is the risk that the financial statements contain a material misstatement due to
fraud or error prior to the audit.
a. Inherent risk
b. Client business risk
c. Acceptable audit risk
d. Risk of material misstatement

50. Which of the following is an accurate statement regarding audit evidence?

a. Responses to the auditor's questions by client employees are considered highly
persuasive evidence.
b. Audit evidence should provide an absolute level of assurance.
c. The auditor uses evidence to determine whether the statements are fairly presented.
d. All evidence must be highly persuasive.
51. The auditor must gather sufficient and appropriate evidence during the course of the audit.
Sufficient evidence must
a. be well documented and cross-referenced in the audit documents.
b. be based on sources that are external to company.
c. provide evidence that prove or disprove an audit objective/assertion.
d. be persuasive enough to enable the auditor to issue an audit report.
52. Appropriateness of evidence is a measure of the
a. quantity of evidence.
b. quality of evidence.
c. sufficiency of evidence.
d. meaning of evidence

53. Auditing is briefly described by David Ricchutte as a two step process of “Accumulating
Evidences & Reporting Evidences”. Thus, evidences are the Icons of auditing. Evidences are
any thing used by the auditor that serves the purpose of auditing. Which of the following are
the measurement criteria used for an audit evidence by the auditor?
a. appropriateness of an evidence to the audit objective at hand.
b. evidence that meets the sufficiency & competence criteria.
c. evidence that meets the qualitative & quantitative spectrum dimension of the subject
mater.
d. evidence that meets the relevance & reliability criteria of information.
e. all
54. 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 is relevant to the audit objective being tested.
d. it consists of written statements made by managers of the company under audit.

55. Evidence is usually more persuasive for balance sheet accounts when it is obtained
a. as close to the balance sheet date as possible.
b. only from transactions occurring on the balance sheet date.
 c. from various times throughout the client's year.
d. from the time period when transactions in that account were most numerous during
the fiscal period.
56. Which of the following statements relating to the competence of evidential matter is always
true?
a. Evidence from outside an enterprise is always reliable.
b. Accounting data developed under satisfactory conditions of internal control is not
reliable.
c. Oral representations made by management are not reliable evidence.
d. Evidence must be both reliable and relevant to be considered appropriate

57. Which of the following entities & events are likely to have the highest Control Risk?
a. family one man business
b. a startup business
c. a business that operates in more than 200 countries of the world.
d. a business in the process of modernization, transformation, restructuring, downsizing
or rightsizing, expansioning or revolution etc.
e. all
.
58. The measurement of the auditor's assessment of the susceptibility of an assertion to material
misstatement, before considering the effectiveness of related internal controls is defined as
a. audit risk.
b. inherent risk.
c. sampling risk.
d. detection risk

59. The risk that audit evidence for an audit objective will fail to detect misstatements exceeding
performance materiality levels is

a. audit risk.
b. control risk.
c. inherent risk.
d. planned detection risk.
60. Inherent risk is often high for an account such as
a. inventory.
b. land.
c. capital stock.
d. notes payable.
61. The risk of material misstatement refers to
a. control risk and acceptable audit risk.
b. inherent risk.
c. the combination of inherent risk and control risk.
d. inherent risk and audit risk.
62. Which of the following statements is not true?
a. Inherent risk is inversely related to the amount of audit evidence whereas
detection risk is directly related to the amount of audit evidence required.
b. Inherent risk is directly related to evidence whereas detection risk is inversely
 related to the amount of audit evidence required.
c. Inherent risk is the susceptibility of the financial statements to material error,
assuming no internal controls.
d. Inherent risk and control risk are assessed by the auditor and function
independently of the financial statement audit

63. Which of the following audit entities have the highest inherent risk?
a. Highly regulated industries such as health, education, etc.
b. Financial institutions, such as insurance banks, etc..
c. Mining & exploration of Natural resources..
d. Agriculture & the transformation of agricultural activities.
e. all

PART II . AUDIT EXERCISES ON CONCEPTS, TERMINOLOGIES, PRINCIPLES &

PRACTICES.

1. For each of the following Accounting, auditing & client business related theories &
practices, determine management & auditor responsibilities ( i.e. Division of
Responsibilities between the Two).

Theories/practices/attributes. Management Auditor

1. Financial statement
2. Internal control
3. Accounting estimates & judgment
4. Going concern
5. Notes to the financial statement
6. Accounting misstatements
7. Frauds
8. Compliance to laws & regulations
9. Related parties
10. Post Balance Sheet
11. Illegal activities.
12. Accounting policies, procedures etc.
2. Abc. Corporation a world class entity that operates almost in all parts of the world with
more than 200 investments, 150 associates & 100 subsidiaries. For the financial year
2020, ABC appoints one of the big four audit firm with international Networking PWC
as their auditor in 2021. Major Field work assignment is completed in December 31,
2021. Audit opinion is issued, approved & released for distribution to the wide spectrum
users of accounting information that is to those in the privity of the contract, foreseen
users whose name is associated with the financial statements & known by the auditor, &
finally to the potential users of the accounting information, in decembe31, 2022.
Information about many uncertainties, contingencies & commitments which is
significantly material to the financial statements that can cast doubt as to the continuity of
the entity is not appropriately identified, described & explained.
Using the above statement, answer the following questions.

1. What are the prerequisites tests & conditions to be satisfied by the newly appointed
PWC audit firm as auditor of ABC ?
2. Since the beginnings of human civilizations, auditor’s are required to be independent.
Independence in fact & appearance is universal requirement of the profession. .thus,
who should be independent?
To whom should be independent?
When should be independent?
For what transactions, events, relationships & interests should the auditor be
independent?
3. What are the rights of the auditor given by laws & professions?
4. What are the obligations/duties/ of the PWC Audit firm.
5. An accounts receivable worth of $5000,000,000, is overlooked or omitted from the
book of accounts and is pervasively material to the current assets, working capital,
liquidity position & to the overall presentation of the financial statements.
a. Identify the management assertion violated
b. Identify the type opinion to be issued by the auditor.
c. Identify the implication for the going concern of the entity.
6. Legal liability cases related to Auditors
1. who is legally liable?
2. To whom is the auditor legally liable?
3. What are the causes of legal liability of auditor?
4. What is the different defense mechanism of the auditor as defendant
in front of the court?
7. Audit planning related questions
a. Why auditors are required to make plan?
b. Identify the component parts of audit planning.
c. What are the common audit tests performed by the auditor?
d. Distinguish among business failure, financial statement risk, & audit
failure,