POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY AND LAW

AUDITING PROBLEMS

QUIZ NO. 1-
R.S.PADERES
AUDITING AND THE AUDIT PROCESS Time
Limit: 45 minutes

INSTRUCTION: ENCIRCLE THE BEST ANSWER.

1. Statement 1: When a CPA is approached to perform an audit for the first

time, the CPA should make inquiries of the predecessor auditor. This is a
necessary procedure because the predecessor may be able to provide the
successor with information that will assist the successor in determining
whether the engagement should be accepted.

Statement 2: It is considered an acceptable procedure for an auditor to

consult and review the work of the predecessor auditor to reduce the scope
of his work.

a. First statement is false, Second statement is true.

b. First statement is true, Second statement is false.
c. Both statements are true.
d. Both statements are false

2. Upon completion of a typical audit, the auditor has

a. Total assurance that all material errors and irregularities have been
found.
b. High level of assurance that all material errors and irregularities have
been found.
c. A low level of assurance that all material errors and irregularities have
been found.
d. No assurance that all material errors and irregularities have been
found.

3. Why does a company choose to have an independent auditor report on its

financial statements?
a. Independent auditors will always detect management fraud.
b. The companys management preparing the statements may have a
vested interest in reporting certain results.
c. Independent auditors guarantee the accuracy of the financial
statements.
d. An independent audit is designed to search for deficiencies in the
companys internal controls.

4. Which of the following criteria is unique to the independent auditors attest

function?
a. General competence
b. Familiarity with the particular industry in which each client operates
c. Due professional care
d. Independence
5. The reason auditors accumulate evidence is to
a. Defend themselves in the event of lawsuit.
b. Justify the conclusions they have otherwise reached.
c. Satisfy the requirements of the Securities Act.
d. Enable them to reach conclusions about the fairness of the financial
statements and issue an appropriate audit report.

6. Which of the following types of audit is performed in order to determine

whether an entitys financial statements are fairly stated, in all material
respects in conformity with the generally accepted accounting principles?
a. Operational audit
b. Financial statements audit
c. Compliance audit
d. Performance audit

7. The independent auditor lends credibility to client financial statements by

a. Stating in the auditors management letter that the examination was
made in accordance with generally accepted auditing standards.
b. Maintaining a clear-cut distinction between managements
representation and the auditors representations.
c. Attaching an auditors opinion to the clients financial statements.
d. Testifying under oath about client financial information.

8. Which of the following best describes why an independent auditor reports

on the financial statements?
a. Independent auditors are likely to detect fraud.
b. Competing interests may exist between management and the users of
the statements.
c. Misstated account balances are generally corrected by an independent
audit.
d. Ineffective internal controls may exists.

9. An external audit
a. Supports an internal audit.
b. Duplicates an internal audit.
c. Overlaps an internal audit.
d. Complements an internal audit.

10.An auditor considers internal control in order to

a. Determine whether assets are safeguarded.
b. Suggest improvements on internal control.
c. Plan audit procedures.
d. Express an opinion.
11.A commercial bank will not approve a working capital loan without a report
on whether the companys financial statements are presented fairly. In this
circumstance, the type of audit required is
a. Financial statements audit.
b. Compliance audit
c. Operational audit.
d. Government audit.

12.The independent audit is important to readers of financial statements

because it
a. Determines the future stewardship of the management of the company
whose financial statements are audited.
b. Measures and communicates financial and business data included in
the financial statements.
c. Involves the objective examination of and reporting on management
prepared statements.
d. Reports on the accuracy of all information in the financial statements.

13.In comparison to the external auditor, an internal auditor is more likely to

be concerned with
a. Internal administrative control.
b. Cost accounting procedures.
c. Operational auditing.
d. Internal accounting control.

14.Whenever the auditor issues a disclaimer of opinion, the implication is that

the auditor
a. Does not know if the statements are presented fairly.
b. Does not believe if the statements are presented fairly.
c. Is satisfied that the statements are presented fairly except for a
specific aspect of them.
d. Is satisfied that the statements are presented fairly.

15.STATEMENT 1- The objective of the ordinary examination of financial

statements is the expression of an opinion on the accuracy of such
financial statements.

STATEMENT 2- The independent auditors opinion is an assurance as to the

future viability of the entity.
a. The first statement is false, the second statement is true.
b. The first statement is true, the second statement is true.
c. The first statement is false, the second statement is false.
d. The first statement is true, the second statement is false.

16.Professional skepticism dictates that when management makes a

statement to the auditors, the auditors should
a. Disregard the statement because it ranks low of the evidence quality
scale.
b. Corroborate the evidence with other supporting documentation
whenever possible.
c. Require that the statement be put in writing.
d. Believe on the statement in order to maintain the client-auditor
relationship.
17.An audit involves ascertaining the degree of correspondence between
assertions and established criteria. In the case of financial statements
audit, which of the following is not a valid criterion?
a. Accounting standards generally accepted in the Philippines.
b. International Accounting Standards.
c. Authoritative financial reporting framework.
d. Philippine Standards on Auditing.

18.The primary purpose of the auditors consideration of internal control is to

provide a basis for
a. Determine whether procedures and records that are concerned with
the safeguarding of assets are reliable.
b. Constructive suggestions to clients concerning deficiencies in internal
control.
c. Determine nature, timing, and extent of audit tests to be applied.
d. The expression of an opinion.

19.In making a decision to accept or continue with a client, the auditor should
consider

Its ability to service The integrity of the

client properly clients management Its
own independence

a. YES YES NO
b. YES YES
YES
c. NO NO
YES
d. NO YES
YES

20.In performing a financial statement audit, which of the following would an

auditor least consider?
a. Internal control
b. Compliance with GAAP
c. Quality of managements business decisions.
d. Fairness of the financial statement amounts.

21.As it relates to audit, materiality is

a. Not taken into consideration.
b. Related only to the sufficiency of procedures performed.
c. Based upon audit fees.
d. Determined based upon the importance to a user of the financial
statements.

22.Auditors focus on
a. Areas where the risk of material errors and irregularities is least.
b. Areas where the risk of material errors and irregularities is greatest.
c. All areas equally.
d. A random selection of all areas.
23.One of the linkages between tests of controls and substantive tests is
a. Analytical procedures
b. Risks
c. Assertions
d. Timing

24.The audit of historical financial statements should be conducted by the CPA

Professionals in accordance with
a. Philippine Financial Reporting Standards.
b. Philippine Standards on Auditing.
c. The auditors judgment.
d. The audit program.

25.Test of controls are

a. Intended to detect material misstatements in financial statement
accounts
b. Concerned with how internal control policies or procedures are applied
c. Evaluation of financial information made by a study of plausible
relationships among both financial and nonfinancial data
d. Procedures that lend hindsight in amounts and information disclosed in
financial statements as of the balance sheet data

26.Which of the following may be assessed nonquantitatively?

Inherent Risk Control Risk Detection Risk

a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

27.Management is not responsible for

a. The audited financial statements
b. The auditors report
c. Preparing spreadsheets for the auditor
d. Compliance with laws and regulations

28.Which of the following is the best definition of detection risk?

a. The auditor will compute audit materiality incorrectly.
b. The auditor will fail to detect material misstatements that exist.
c. The auditor will apply more audit procedures than are required in the
circumstances.
d. The auditor will fail to modify the audit opinion on financial statements
that are materially misstated.
29.After the study and evaluation of a clients internal control policies and
procedures has been completed, an auditor might decide to
a. Increase the extent of substantive testing in areas where the internal
control policies and procedures are strong.
b. Reduce the extent of controls testing in areas where the internal
control policies and procedures are strong.
c. Reduce the extent of both substantive and control testing in areas
where the internal control policies and procedures are strong.
d. Increase the extent of substantive testing in areas where the internal
controls are weak.

30.A procedure that involves tracing a transaction from its origination through
the companys information systems is referred to as a(n)
a. Inquiry/analysis approach
b. Reanalysis approach
c. Remediation
d. Walkthrough

31.An auditor evaluates the existing internal control in order to

a. Determine the extent of substantive tests which must be performed.
b. Determine the extent of control tests which must be performed.
c. Ascertain whether irregularities are probable.
d. Ascertain whether any employees have incompatible functions.

32.Which of the following is the auditors purpose of further testing the

internal control procedures?
a. Provide a basis for reducing the assessed level of control risk.
b. Reduce the risk that error or fraud that has not been prevented or
detected by the internal control system is not detected by the
independent audit.
c. Provide assurance that transactions are executed in accordance with
managements authorization and access to assets is limited by a
segregation of functions.
d. Provide assurance that transactions are recorded as necessary to
permit the preparation of the financial statements in conformity with
PFRS.

33.After obtaining an understanding of internal control and assessing control

risk, an auditor decided to perform tests of controls. The auditor most
likely decided that
a. It would be efficient to perform tests of controls that would result in a
reduction in planned substantive tests.
b. Additional evidence to support a further reduction in control risk is not
available.
c. An increase in the assessed level of control risk is justified for certain
financial statements assertions.
d. There were many internal control weaknesses that could allow errors to
enter the accounting system.
34.In assessing control risk , the auditor must, as a minimum
a. Perform tests of all significant controls.
b. Obtain an understanding of the design and implementation of the
clients internal control.
c. Obtain an understanding of the design of the clients internal control.
d. Obtain and understanding of the design, implementation, and
operating effectiveness of the clients internal control.

35.Which of the following is not typically one of managements concerns in

designing an effective internal control structure?
a. Reliability of financial reporting.
b. Obtaining the best internal control system possible.
c. Compliance with laws and regulations.
d. Efficiency and effectiveness of operations.

36.Because an examination in accordance with generally accepted auditing

standards is influenced by the possibility of material errors, the auditor
should conduct the examination with an attitude of
a. Professional responsiveness
b. Conservative advocacy
c. Objective judgment
d. Professional skepticism

37.Which of the following is not one of the three main reasons why the auditor
should properly plan engagements?
a. To help keep audit costs reasonable.
b. To avoid misunderstanding with the client.
c. To enable the auditor to obtain sufficient appropriate evidence.
d. To enable proper on-the-job training of employees.

38.Statement 1: When a CPA is approached to perform an audit for the first

time, the CPA should make inquiries of the predecessor auditor. This is a
necessary procedure because the predecessor may be able to provide the
successor with information that will assist the successor in determining
whether the engagement should be accepted.

Statement 2: It is considered an acceptable procedure for an auditor to

consult and review the work of the predecessor auditor to reduce the scope
of his work.

a. First statement is false, Second statement is true.

b. First statement is true, Second statement is false.
c. Both statements are true.
d. Both statements are false
39.The primary purpose of an independent audit of financial statements is to
a. Provide a basis for assessing managements performance.
b. Comply with laws and regulations.
c. Assure management that the financial statements were unbiased and
free from material misstatements.
d. Provide users with an unbiased opinion about the fairness of the
financial statements.

40.Management asserts that all transactions that occurred were recorded.

This is the assertion of:
a. Completeness
b. Rights
c. Existence
d. Occurrence

41.An auditor would most likely be concerned internal control policies and
procedures that provide reasonable assurance about:
a. The efficiency of managements decision making process.
b. Appropriate prices that the entity should change for its products.
c. Methods of assigning production tasks to employees.
d. The entitys ability to process and summarizes financial data.

42.The primary responsibility for establishing and maintaining internal

controls rests with the:
a. Internal auditors.
b. Internal auditors.
c. Management. .
d. External auditors.

43.An item is material to a companys financial statements if the item:

a. Exceeds one percent of reported net income
b. Causes the company to miss analysts earnings expectations
c. Alters the total mix of information significantly
d. Reflects a new class of transactions

44.Management representations that are embodied in the account balance,

transaction class and disclosure components of the financial statements.
They include existence or occurrence, completeness, rights and
obligations, valuation or allocation and presentation and disclosure.
a. Management representation letter.
b. Assertions.
c. Accounting policies.
d. Management responsibility statement.

45.The purpose of test of controls is to provide assurance that the

a. Accounting treatment of transactions and balances is valid and proper.
b. Control procedures are functioning as intended.
c. Entity has complied with disclosure requirements of PFRS.
d. Entity has complied requirements of quality control.
46.Among the possible reasons why an auditor will discontinue servicing an
audit client is
a. Too many errors have to be adjusted to make the financial statements
conform with GAAP.
b. The auditor has to use a specialist in verifying inventory valuation.
c. The auditor is also rendering at the same time a management advisory
engagement for the same client.
d. A change in the client management and the auditor is worried about
the reputation of the new management.

47.The validity of evidence depends ultimately on the

a. Attestation standards and GAAS
b. Relevance of the evidence
c. Availability of subordinate evidence
d. Practitioners professional judgment

48.Professional skepticism
a. Neither assumes that the management is dishonest nor of
unquestioned honesty.
b. Assumes that management is either dishonest or of unquestioned
honesty.
c. Either assumes that management is honest or dishonest.
d. None of the given choices is a correct statement.

49.The adverse opinion report will be issued by the independent auditors

when they
a. Suspect that the client has not followed Philippine Financial Reporting
Standards.
b. Suspect that the client is not in conformity with generally accepted
auditing standards.
c. Have knowledge that the financial statements are not in conformity
with the Philippine Financial Reporting Standards (PFRS).
d. Have knowledge that generally accepted auditing standards (GAAS)
were not followed.

50.Managements assertions relate to an auditors objectives because:

a. The financial statements are managements responsibility
b. Management asserts that all assets, liabilities and equities actually
exist
c. An auditors objective is to reach conclusions about managements
assertions
d. An audit opinion is dependent on an auditors objectives

-END-
Faith is believing in things you dont see.