Auditing Theory Pre Week

Tuguegarao City CPA Review
AUDITING THEORY
Pre-week Handouts
PART 1
1. The trait that distinguishes auditors from accountants is the:
a. auditor’s ability to interpret accounting principles generally accepted in the Philippines.
b. auditor’s education beyond the Bachelor’s degree.
c. auditor’s ability to interpret AASC Statements.
d. auditor’s accumulation and interpretation of evidence related to a company’s financial
statements.
2. The generally accepted auditing standard that requires “Adequate technical training and proficiency” is
normally interpreted as requiring the auditor to have:
a. formal education in auditing and accounting.
b. worked for an entity similar to the entity being audited.
c. independence in mental attitude
d. a graduate degree in a business field.
3. An audit to determine whether an entity is following specific procedures or rules set down by some higher
authority is classified as a(n):
a. audit of financial statements.
b. compliance audit.
c. operational audit.
d. production audit.
4. In “auditing” financial accounting data, the primary concern is with:
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.
5. Which of the following is not a purpose of a program audit as performed by government auditors?
a. Determination of the extent to which the desired results established by the legislature are being
achieved.
b. Determination of the causes of inefficiencies in sponsored programs.
c. Determination of the effectiveness of organizations, programs and activities.
d. Determination as to whether the entity has complied with laws and regulations applicable to the
program.
6. External financial statement auditors must obtain evidence regarding what attributes of an internal audit
department if the external auditors intend to rely on the internal auditor’s work?
Independence from the Audit Committee Competence
a. Yes Yes
b. No No
c. Yes No
d. No Yes
7. Which of the following is not a difference between operational auditing and financial auditing?
a. Both must be CPAs.
b. Operational audit reports are usually of a restricted distribution while financial audit reports are
widely distributed.
c. Operational audits often cover non-financial issues while financial audits do not.
d. None of the above is a difference.
8. Which of the following statements regarding types of operational audits is false?
a. A functional audit has the advantage of permitting specialization by auditors.
b. An advantage of functional auditing is its ability to evaluate interrelated functions.
c. The emphasis in an organizational audit is on how efficiently and effectively functions interact.
d. Special operational auditing assignments arise at the request of management.
9. An accountant’s standard report on a compilation of a projection should not include a:
a. statement that a compilation of a projection is limited in scope.
b. separate paragraph that describes the limitations on the presentation’s usefulness.
c. disclaimer of responsibility to update the report for events occurring after the report’s date.
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d. statement that the accountant expresses only limited assurance that the results may be
achieved.
10. An auditor who was engaged to perform an examination of the financial statements of a nonpublic entity
has been asked by the client to refrain from performing various audit procedures and change the nature of the
engagement to a review of the financial statements in accordance with the standards. The client’s request was
made because the cost to complete the examination was significant. Under these circumstances, the auditor
would most likely:
a. qualify the auditor’s report and refer to the scope limitation.
b. view the request as an indication of a possible irregularity.
c. complete the examination that was in progress.
d. honor the client’s request.
11. In a review service where the client has failed to follow GAAP, the accountant is:
a. not required to determine the effect of a departure if management has not done so, but
that fact must be disclosed in the report.
b. required to determine the effect of a departure if management has not done so, and that fact must
be disclosed in the report.
c. not required to determine the effect of a departure if management has not done so, and that fact
need not be disclosed in the report.
d. required to determine the effect of a departure if management has not done so, and that fact need
not be disclosed in the report.
12. Before performing a review of a nonpublic entity’s financial statements, an accountant should:
a. complete a series of inquiries concerning the entity’s procedures for recording, classifying, and
summarizing transactions.
b. obtain a sufficient level of knowledge of the accounting principles and practices of the
industry in which the entity operates.
c. inquire whether management has omitted substantially all of the disclosures required by generally
accepted accounting principles.
d. apply analytical procedures to provide limited assurance that no material modifications should be
made to the financial statements.
13. Attestation standards allow a CPA to perform all but which of the following services for a forecast or
projection?
a. Compilation
b. Review
c. Examination
d. Agreed-upon procedures
14. A CPA who has been engaged to audit financial statements that were prepared on a cash basis:
a. must ascertain that there is proper disclosure of the fact that the cash basis has been
used, the general nature of material items omitted, and the net effect of such omissions.
b. may not be associated with such statements which are not in accordance with generally accepted
accounting principles.
c. must render a qualified report explaining the departure from generally accepted accounting
principles in the opinion paragraph.
d. must restate the financial statements on an accrual basis and then render the standard (short-form)
report.
15. An accountant’s standard report on a compilation of a projection should not include a:
a. statement that a compilation of a projection is limited in scope.
b. separate paragraph that describes the limitations on the presentation’s usefulness.
c. disclaimer of responsibility to update the report for events occurring after the report’s date.
d. statement that the accountant expresses only limited assurance that the results may be
achieved.
16. An accountant may accept an engagement to apply agreed-upon procedures to prospective financial
statements provided that:
a. distribution of the report is to be restricted to the specified users involved.
b. the prospective financial statements are also examined.
c. responsibility for the adequacy of the procedures performed is taken by the accountant.
d. negative assurance is expressed on the prospective financial statements taken as a whole
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17. When an accountant performs more than one level of service (for example, a compilation and a review, or
a compilation and an audit) concerning the financial statements of a nonpublic entity, the accountant generally
should issue the report that is appropriate for:
a. both engagements.
b. a compilation engagement.
c. the lowest level of service rendered.
d. the highest level of service rendered.
18. Which of the following procedures is not included in a review engagement of a nonpublic entity?
a. Inquiries of management.
b. Inquiries regarding events subsequent to the balance sheet date.
c. Any procedures designed to identify relationships among data that appear to be unusual.
d. A study and evaluation of internal control.
19. An accountant who reviews the financial statements of a nonpublic entity should issue a report stating that
a review:
a. is substantially equivalent in scope to an audit.
b. is substantially more in scope than a compilation.
c. is substantially less in scope than an audit.
d. provides only limited assurance that the financial statements are fairly presented.
20. An agreed-upon procedures engagement is one in which:
a. the auditor and management agree that procedures will be applied to all accounts and
circumstances.
b. the auditor and management agree that procedures will not be applied to all accounts and
circumstances.
c. the auditor and management or a third party agree that the engagement will be limited
to certain specific procedures.
d. the auditor and management or a 3rd party agree that the auditor will apply his or her judgment to
determine procedures to be performed.
21. Professional standards prohibit one of the following types of engagements for prospective financial
statements from being undertaken.
a. A compilation.
b. A review.
c. An examination.
d. An agreed-upon procedures engagement.
22. Which of the following is not one of the types of engagements and related forms of conclusions that are
definedby the attestation standards?
a. Reviews.
b. Compilations.
c. Examinations.
d. Agreed-upon procedures.
23. The quarterly reports submitted to the SEC by the client:
a. have to be audited and the CPA firm must be identified.
b. do not have to be audited, but the CPA firm which does the year-end audit must be identified.
c. have to be audited, but the CPA firm does not have to be identified.
d. do not have to be audited, but the CPA firm which does the year-end audit must review
the quarterly statements before they are submitted to the SEC.
24. Evidence for a review engagement consists primarily of:
Inquiries Analytical procedures Tests of details
a. No Yes No
b. Yes Yes No
c. No No Yes
d. Yes No Yes
25. Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS) should be
looked upon 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.
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26. Which of the following statements best describes the primary purpose of Statements on Auditing
Standards?
a. They are guides intended to set forth auditing procedures that are applicable to a variety of
situations.
b. They are procedural outlines that are intended to narrow the areas of inconsistency and divergence
of auditor opinion.
c. They are authoritative statements, enforced through the Code of Professional Conduct, and are
intended to limit the degree of auditor judgment.
d. They are interpretations that are intended to clarify the meaning of “generally accepted
auditing standards.”
27. The auditor’s judgment concerning the overall fairness of presentation of financial position, results of
operations, and changes in cash flow is applied within the framework of:
a. quality control.
b. generally accepted auditing standards which include the concept of materiality.
c. the auditor’s evaluation of the audited company’s internal control.
d. generally accepted accounting principles.
28. A basic objective of a CPA firm is to provide professional services to conform to professional standards.
Reasonable assurance of achieving this basic objective is provided through:
a. continuing professional education.
b. compliance with generally accepted reporting standards.
c. a system of quality control.
d. a system of peer review.
29. Within the context of quality control, the primary purpose of continuing professional education and training
activities is to enable a CPA firm to provide its personnel with:
a. technical training that assures proficiency as a valuation expert.
b. professional education that is required in order to perform with due professional care.
c. knowledge required to fulfil assigned responsibilities.
d. knowledge required to perform a peer review.
30. Which of the following is not an essential component of quality control?
a. Policies and procedures to ensure that firm personnel are actively engaged in marketing
strategies.
b. Policies and procedures to ensure that the work performed by firm personnel meet applicable
professional standards.
c. Policies to ensure that personnel maintain their independence in fact and in appearance.
d. Policies that ensure that monitoring activities are effectively applied.
31. Which of the following statements most accurately captures the intent of the standards of field work?
a. Field work standards are primarily concerned with personal attributes necessary during the conduct
of the audit.
b. Field work standards provide extensive guidance regarding the conduct of an audit.
c. Field work standards are primarily directed at the auditor’s planning, understanding of
internal control, and evidence accumulation.
d. Field work standards are primarily concerned with the conduct of substantive testing as opposed to
testing of internal controls.
32. Which of the following is the least likely form of business for a CPA firm?
a. General partnership
b. General corporation
c. Limited liability company
d. Limited liability partnership
33. Three common types of attestation services are:
a. audits, reviews, and “other” attestation services.
b. audits, verifications, and “other” attestation services.
c. reviews, verifications, and “other” attestation services.
d. audits, reviews, and verifications.
34. An operational audit has as one of its objectives to:
a. determine whether the financial statements fairly present the entity’s operations.
b. evaluate the feasibility of attaining the entity’s operational objectives.
c. make recommendations for improving performance.
d. report on the entity’s relative success in attaining profit maximization.
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35. An audit of historical financial statements is most often performed to determine whether the:
a. organization is operating efficiently and effectively.
b. entity is following specific procedures or rules set down by some higher authority.
c. management team is fulfilling its fiduciary responsibilities to shareholders.
d. none of these choices.
36. Because the same CPA firm does both the annual audit and the public company interim financial statement
review, they are referred to as _______.
a. practitioners
b. accountants
c. auditors
d. CPAs
37. Practitioners who perform reviews and compilations are referred as:
a. bookkeepers.
b. accountants.
c. auditors.
d. CPAs.
38. Which of the following would not be included in a CPA’s report based upon a review of the financial
statements of a nonpublic entity?
a. A statement that the review was in accordance with generally accepted auditing
standards.
b. A statement that all information included in the financial statements is the representation of
management.
c. A statement describing the principal procedures performed.
d. A statement describing the auditor’s conclusions based upon the results of the review.
39. For reviews, an accountant does which of the following?
Obtain an understanding of internal control. Perform tests of controls. Perform tests of transactions.
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. No No No
40. Which of the following is not a similarity between external and internal auditors?
a. Both must be independent of the company.
b. Both must be competent.
c. Both use similar methodologies in performing their work.
d. Both consider risk and materiality in their work.
41. Which of the following is not one of the major differences between financial and operational auditing?
a. The financial audit is oriented to the past, but an operational audit concerns performance for the
future.
b. The financial audit report is distributed to many readers, but the operational audit report goes to a
few managers.
c. Financial audits deal with the information on the financial statements, but operational
audits are concerned with the information in the ledgers.
d. Financial audits are limited to matters that directly affect the financial statements, but operational
audits cover any aspect of efficiency and effectiveness.
42. Before an operational audit for effectiveness can be performed, there must be:
a. a financial audit by an independent auditor.
b. a financial audit by an internal auditor.
c. a review performed by either an independent or an internal auditor.
d. specific criteria developed to define effectiveness.
43. The two most important qualities for an operational auditor are:
a. personality and appearance.
b. independence and competence.
c. competence and technical training.
d. academic background and sufficient experience.
44. An audit designed to evaluate the efficiency and effectiveness of an organization or some part of an
organization would not be called a(n):
a. performance audit.
b. management audit.
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c. operational audit.
d. compliance audit.
45. Which of the following groups could not be involved in an operational audit?
a. CPA firms.
b. Internal auditors.
c. Government auditors.
d. None of the above answers is correct; that is, all of the above could be involved.
46. Management is responsible for:
Identifying and measuring fraud risks Taking steps to mitigate identified risks
a. Yes Yes
b. No No
c. Yes No
d. No Yes
47. Which party has the primary responsibility to oversee an organization’s financial reporting and internal
control processes?
a. The board of directors
b. The audit committee
c. Management of the company
d. The financial statement auditors
48. Auditors may identify conditions during fieldwork that change or support a judgment about the initial
assessment of fraud risks. Which of the following is not a condition which should alert an auditor that the
initial assessment should be changed?
a. The auditor’s lack of independence
b. Discrepancies in the accounting records
c. Unusual relationships between the auditor and management
d. Missing or conflicting evidence
49. Which of the following most accurately defines professional skepticism as it is used in auditing standards?
a. It either assumes management is honest or slightly dishonest, but neither all the time.
b. It neither assumes that management is dishonest nor assumes unquestioned honesty.
c. It assumes management is honest most of the time.
d. It assumes that management is dishonest in only rare instances.
50. As part of designing and performing procedures to address management override of controls, auditors
must perform which of the following procedures?
Examine all journal entries above the level of materiality Review accounting estimates for biases
a. Yes Yes
b. No No
c. Yes No
d. No Yes
PART 2
1. In what order should the following steps occur?
A. Assess client business risk
B. Understand the client’s business and industry
C. Perform preliminary analytical procedures
D. Assess acceptable audit risk
a. D, B, C, A.
b. B, A, D, C.
c. B, D, A, C.
d. D, C, B, A.
2. Which of the following is correct with respect to the use of analytical procedures?
a. Analytical procedures may be used in evaluating balances in the testing phase as long as the
auditor also uses them in assessing the going concern assumption.
b. Analytical procedures must be used throughout the audit.
c. Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor’s
attention so that the auditor’s understanding of the business is improved.
d. Analytical procedures are performed by studying plausible relationships between
financial and nonfinancial data.
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3. The predecessor auditor is required to respond to the request of the successor auditor for information, but
the response can be limited to stating that no information will be provided when:
a. the predecessor auditor has poor relations with the successor auditor.
b. the client is dissatisfied with the predecessor’s work.
c. there are actual or potential legal problems between the client and the predecessor.
d. the predecessor believes that the client lacks integrity.
4. Which of the following statements is not correct?
a. Analytical procedures used in the planning phase of the audit are primarily directed at understanding
the client’s business and directing the auditor’s attention to areas that may contain possible
misstatements.
b. Analytical procedures used in the completion phase are primarily aimed at assessing
going concern and secondarily aimed at directing the auditor’s attention to areas that may
contain possible misstatements.
c. Analytical procedures must be used in the planning and completion phases of the audit, and are
optional in the testing phase.
d. Analytical procedures used in the completion phase are primarily aimed at directing the auditor’s
attention to areas that may contain possible misstatements and secondarily aimed at assessing going
concern.
5. The first standard of fieldwork requires, in part, that audit work be properly planned. Proper planning as
intended by the first standard of fieldwork would occur when the auditor:
a. physically observes the movement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand.
b. uses negative accounts receivable confirmations instead of positive confirmations because the latter
require mailing of second requests and review of subsequent cash collections.
c. compares all cash as of a particular date to avoid performing time-consuming cash cut-off
procedures.
d. eliminates the possibility of counting inventory items more than once by arranging to make
extensive test counts.
6. Which of the following is most likely to occur at the beginning of an initial audit engagement?
a. Prepare a rough draft of the financial statements and of the auditor’s report.
b. Study and evaluate the system of internal administrative control.
c. Determine the client’s reason for an audit.
d. Consult with and review the work of the predecessor auditor prior to discussing the engagement
with the client management.
7. The five steps in applying materiality are listed below in random order.
1. Estimate the combined misstatement.
2. Estimate the total misstatement in the segment.
3. Set preliminary judgment about materiality.
4. Allocate preliminary judgment about materiality to segments.
5. Compare combined estimate with preliminary judgment about materiality.
The correct sequence from start to finish would be:
a. 1 2 5 4 3.
b. 3 4 2 1 5.
c. 4 3 1 5 2.
d. 5 1 3 2 4.
a. Either an overstatement of an asset account or an understatement of a liability account would have
the same effect on the income statement.
b. A misclassification in the balance sheet will have no effect on operating income.
c. Either an overstatement of an asset account or an overstatement of a liability account
would have the same effect on the income statement.
d. Either an understatement of an asset account or an overstatement of a liability account would have
9. Regardless of how the preliminary judgment about materiality is allocated, the auditor must be confident
that total combined misstatements in all accounts are:
a. less than the preliminary judgment.
b. equal to the preliminary judgment.
c. more than the preliminary judgment.
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d. less than or equal to the preliminary judgment.
10. When the auditor has the same level of willingness to risk that material misstatements will exist after the
audit is finished for all financial statement cycles:
a. a different extent of evidence will likely be needed for various cycles.
b. the same amount of evidence will be gathered for each cycle.
c. the auditor has not followed generally accepted auditing standards.
d. the level for each cycle must be no more than 2% so that the entire audit does not exceed 10%.
11. Which of the following statements is not true?
a. Inherent risk is inversely related to detection risk.
b. Inherent risk is inversely related to evidence.
c. Inherent risk is the susceptibility of the financial statements to material error, assuming no internal
controls.
d. Inherent risk is the auditor’s assessment of the likelihood that errors exceeding a tolerable amount
exist in a segment before considering the effectiveness of internal controls.
12. When discussing control risk (CR) and the audit risk model, which of the following is false?
a. CR is a measure of the auditor’s assessment of the likelihood that misstatements will not be
prevented or detected by internal control.
b. If the auditor concludes that internal control is completely ineffective to prevent or
detect errors, he/she would assign a low value (e.g., 0%) to CR.
c. The relationship between control risk and detection risk is inverse.
d. The relationship between control risk and evidence needed to support account balances is direct.
13. Since materiality is relative, it is necessary to have bases for establishing whether misstatements are
material. Normally, the most common base for deciding materiality is:
a. net income before taxes.
b. net working capital.
c. net income after taxes.
d. total assets.
14. Regardless of how the preliminary judgment about materiality is allocated, the auditor must be confident
that total combined misstatements in all accounts are:
a. less than the preliminary judgment.
b. equal to the preliminary judgment.
c. more than the preliminary judgment.
d. less than or equal to the preliminary judgment.
15. If planned detection risk is reduced, the amount of evidence the auditor accumulates will:
a. increase.
b. decrease.
c. remain unchanged.
d. be indeterminate.
16. If an auditor believes the chance of financial failure is high and there is a corresponding increase in
business risk for the auditor, acceptable audit risk would likely:
a. be reduced.
b. be increased.
c. remain the same.
d. be calculated using a computerized statistical package.
17. An auditor should consider two key issues when obtaining an understanding of a client’s internal controls.
These issues are:
a. the effectiveness and efficiency of the controls.
b. the frequency and effectiveness of the controls.
c. the design and utilization of the controls.
d. The implementation and efficiency of the controls.
18. The independent auditor should acquire an understanding of the internal audit function as it relates to the
independent auditor’s study and evaluation of internal control because the:
a. audit programs, working papers, and reports of internal auditors can often be used as a substitute
for the work of the independent auditor’s staff.
b. procedures performed by the internal audit staff may eliminate the independent auditor’s need for
an extensive study and evaluation of internal control.
c. work performed by internal auditors may be a factor in determining the nature, timing,
and extent of the independent auditor’s procedures.
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d. understanding of the internal audit function is an important substantive test to be performed by the
independent auditor.
19. When planning an audit, the auditor’s assessed level of control risk is:
a. determined by using actuarial tables.
b. calculated by using the audit risk model.
c. an economic issue, trading off the costs of testing controls against the cost of testing
balances.
d. calculated by using the formulas provided in the PICPA’s auditing standards.
20. To obtain an understanding of an entity’s control environment, an auditor should concentrate on the
substance of management’s policies and procedures rather than their form because:
a. management may establish appropriate policies and procedures but not act on them.
b. the board of directors may not be aware of management’s attitude toward the control environment.
c. the auditor may believe that the policies and procedures are inappropriate for that particular entity.
d. the policies and procedures may be so weak that no reliance is contemplated by the auditor.
21. Auditors are _____ to decide on the combined amount of misstatements in the financial statements that
they would consider material early in the audit.
a. permitted
b. required
c. not allowed
d. strongly encouraged
22. Which of the following statements regarding inherent risk is correct?
a. The inherent risk assigned in the audit risk model is unaffected by the auditor’s experience with
client’s organization.
b. Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows
that it was incorrect.
c. Most auditors set a high inherent risk in the first year of an audit and reduce it in
subsequent years as they gain experience, even when there is inherent risk.
d. The inherent risk assigned in the audit risk model is dependent upon the strengths in client’s internal
control system.
a. Materiality is a relative rather than an absolute concept.
b. The most important base used as the criterion for deciding materiality is total assets.
c. Qualitative factors as well as quantitative factors affect materiality.
d. Given equal dollar amounts, frauds are usually considered more important than errors.
a. be reduced.
b. be increased.
c. remain the same.
controls.
26. Tolerable misstatement as set by the auditor:
a. decreases acceptable audit risk.
b. increases inherent risk and control risk.
c. affects planned detection risk.
d. does not affect any of the four risks.
27. Which of the following underlies the application of generally accepted auditing standards, particularly the
standards of fieldwork and reporting?
a. The elements of materiality and relative risk.
b. The element of internal control.
c. The element of corroborating evidence.
d. The element of reasonable assurance.
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28. When setting a preliminary judgment about materiality:
a. more evidence is required for a low dollar amount than for a high dollar amount.
b. less evidence is required for a low dollar amount than for a high dollar amount.
c. the same amount of evidence is required for either low or high dollar amounts.
d. there is no relationship between it and the dollar amount of evidence needed.
29. 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.
30. Which of the following is not a primary consideration when assessing inherent risk?
a. Nature of client’s business.
b. Existence of related parties.
c. Frequency and intensity of management’s review of accounting transactions and
records.
d. Susceptibility to defalcation.
31. Management assertions are:
a. implied or expressed representations about accounts, transactions, and disclosures in
the financial statements.
b. stated in the footnotes to the financial statements.
c. explicitly expressed representations about the financial statements.
d. provided to the auditor in the assertions letter, but are not disclosed on the financial statements.
32. Which of the following statements is true?
a. Audit objectives follow and are closely related to management assertions.
b. Management’s assertions follow and are closely related to the audit objectives.
c. The auditor’s primary responsibility is to find and disclose fraudulent management assertions.
d. Assertions about presentation and disclosure deal with whether the accounts have been included in
the financial statements at appropriate amounts.
33. 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.
34. Which of the following journals would be included most often in the various audit cycles?
a. Cash receipts journal.
b. Cash disbursements journal.
c. General journal.
d. Sales journal.
35. An auditor should recognize that the application of auditing procedures may produce evidence indicating
the possibility of errors or fraud and therefore 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 most recorded transactions and records of an entity.
36. If an auditor conducted an audit in accordance with auditing standards, which of the following would the
auditor likely detect?
a. Unrecorded transactions.
b. Incorrect postings of recorded transactions.
c. Counterfeit signatures on paid checks.
d. Fraud involving collusion.
37. Which of the following statements best describes the auditor’s responsibility regarding the detection of
fraud?
a. The auditor is responsible for the failure to detect fraud only when such failure clearly results from
non-performance of audit procedures specifically described in the engagement letter.
b. The auditor must extend auditing procedures to actively search for evidence of fraud in all
situations.
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c. The auditor must extend auditing procedures to actively search for evidence of fraud
where the examination indicates that fraud may exist.
d. The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued.
38. The occurrence assertion applies to _______.
a. presentation and disclosure matters
b. classes of transactions and events during the period
c. account balances
d. proper classification of income statement accounts
39. Which of the following statements about the existence and completeness assertions is not true?
a. The existence and completeness assertions emphasize different audit concerns.
b. Existence deals with overstatements and completeness deals with understatements.
c. Existence deals with understatements and completeness deals with overstatements.
d. The completeness assertion deals with unrecorded transactions.
40. When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor should:
a. include audit procedures which have a strong probability of detecting illegal acts.
b. still include some audit procedures designed specifically to uncover illegalities.
c. ignore the issue.
d. make inquiries of management regarding their policies for detecting and preventing
illegal acts and regarding their knowledge of violations, and then rely on normal audit
procedures to detect errors, irregularities, and illegalities.
41. When comparing the auditor’s responsibility for detecting employee fraud and for detecting errors, the
profession has placed the responsibility:
a. more on discovering errors than employee fraud.
b. more on discovering employee fraud than errors.
c. equally on discovering either one.
d. on the senior auditor for detecting errors and on the manager for detecting employee fraud.
42. The auditor has considerable responsibility for notifying users as to whether or not the statements are
properly stated. This imposes upon the auditor a duty to:
a. provide reasonable assurance that material misstatements will be detected.
b. be a guarantor of the fairness in the statements.
c. be equally responsible with management for the preparation of the financial statements.
d. be an insurer of the fairness in the statements.
43. When the auditor attempts to understand the operation of the accounting system by tracing a few
transactions through the accounting system, the auditor is said to be:
a. tracing.
b. vouching.
c. performing a walk-through.
d. testing controls.
44. Which of management’s concerns with respect to implementing internal controls is the auditor primarily
concerned?
a. Efficiency of operations.
b. Reliability of financial reporting.
c. Effectiveness of operations.
d. Compliance with applicable laws and regulations.
45. Which of the following activities would be least likely to strengthen a company’s internal control?
a. Separating accounting from other financial operations.
b. Maintaining insurance for fire and theft.
c. Fixing responsibility for the performance of employee duties.
d. Carefully selecting and training employees.
46. When auditing a private company, the auditor should obtain an understanding of internal control sufficient
to:
a. provide reasonable protection against client fraud and defalcations by client employees.
b. assess control risk.
c. provide a basis for suggestions to the client for improving the accounting system.
d. provide a method for safeguarding assets, checking the accuracy and reliability of accounting data,
promoting operational efficiency, and encouraging adherence to prescribed managerial policies.
47. The essence of an effectively controlled organization lies in the:
a. effectiveness of its independent auditor.
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b. effectiveness of its internal auditor.
c. attitude of its employees.
d. attitude of its management.
48. To issue a report on internal control over financial reporting for a public company, an auditor must:
a. evaluate management’s assessment process.
b. independently assess the design and operating effectiveness of internal control.
c. evaluate management’s assessment process and independently assess the design and
operating effectiveness of internal control.
d. test controls over significant account balances.
49. The most important type of protective measure for safeguarding assets is:
a. adequate separation of duties among personnel.
b. proper authorization of transactions.
c. the use of physical precautions.
d. adequate documentation.
50. Narratives, flowcharts, and internal control questionnaires are three common methods of:
a. testing the internal controls.
b. documenting the auditor’s understanding of internal controls.
c. designing the audit manual and procedures.
d. documenting the auditor’s understanding of a client’s organizational structure.
PART 3
1. Auditors are responsible for determining whether financial statements are materially misstated, so upon
discovering a material misstatement they must bring it to the attention of:
a. regulators. c. no one in particular.
b. the audit firm’s managing partner. d. the client’s management
2. Why do auditors establish a preliminary judgment about materiality?
a. To determine the appropriate level of audit experience required for the work.
b. So that the client can know what records to make available to the auditor.
c. To plan the appropriate audit evidence to accumulate and develop an overall audit
strategy.
d. To finalize the assessment of control risk.
3. Which of the following is least likely to be appropriate as the basis for determining the preliminary judgment
about materiality in the audit of financial statements?
a. Net income before taxes. c. Owners’ equity.
b. Current assets. d. Inventory.
4. Auditors begin their assessments of inherent risk during audit planning. Which of the following would not
help in assessing inherent risk during the planning phase?
a. Obtaining client’s agreement on the engagement letter.
b. Obtaining knowledge about the client’s business and industry.
c. Touring the client’s plant and offices.
d. Identifying related parties.
5. What is the primary means of dealing with risk in planning decisions related to audit evidence?
a. Selection of more effective tests of details of balances.
b. Application of the audit risk model.
c. Establishing a lower preliminary judgment about materiality.
d. Allocating materiality judgment to segments.
6. Inherent risk is _______ related to detection risk and _______ related to the amount of audit evidence.
a. directly, inversely c. inversely, inversely
b. directly, directly d. inversely, directly
7. The five steps in applying materiality are listed below in random order.
1. Estimate the combined misstatement.
2. Estimate the total misstatement in the segment.
3. Set preliminary judgment about materiality.
4. Allocate preliminary judgment about materiality to segments.
5. Compare combined estimate with preliminary judgment about materiality.
The correct sequence from start to finish would be:
a. 1 2 5 4 3. c. 4 3 1 5 2.
b. 3 4 2 1 5. d. 5 1 3 2 4.
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a. Either an overstatement of an asset account or an understatement of a liability account would have
b. A misclassification in the balance sheet will have no effect on operating income.
c. Either an overstatement of an asset account or an overstatement of a liability account
would have the same effect on the income statement.
d. Either an understatement of an asset account or an overstatement of a liability account would have
9. When a different extent of evidence is needed for the various cycles, the difference is caused by:
a. errors in the client’s accounting system.
b. a client’s need to achieve an unqualified opinion.
c. an auditor’s need to follow auditing standards.
d. an auditor’s expectations of errors and assessment of internal control.
10. When discussing control risk (CR) and the audit risk model, which of the following is false?
a. CR is a measure of the auditor’s assessment of the likelihood that misstatements will not be
prevented or detected by internal control.
b. If the auditor concludes that internal control is completely ineffective to prevent or
detect errors, he/she would assign a low value (e.g., 0%) to CR.
c. The relationship between control risk and detection risk is inverse.
d. The relationship between control risk and evidence needed to support account balances is direct.
a. be reduced.
b. be increased.
c. remain the same.
12. When management has an adequate level of integrity for the auditor to accept the engagement but cannot
be regarded as completely honest in all dealings, auditors normally:
a. reduce acceptable audit risk and increase inherent risk.
b. reduce inherent risk and control risk.
c. increase inherent risk and control risk.
d. increase acceptable audit risk and reduce inherent risk.
13. Acceptable audit risk is ordinarily set by the auditor during planning and:
a. held constant for each major cycle and account.
b. held constant for each major cycle but varies by account.
c. varies by each major cycle and by each account.
d. varies by each major cycle but is constant by account.
14. When the auditor is attempting to determine the extent to which external users rely on a client’s financial
statements, they may consider several factors except for:
a. client size. c. types and amounts of liabilities.
b. concentration of ownership. d. assessment of detection risk.
15. When the auditor has the same level of willingness to risk that material misstatements will exist after the
audit is finished for all financial statement cycles:
a. a different extent of evidence will likely be needed for various cycles.
b. the same amount of evidence will be gathered for each cycle.
c. the auditor has not followed generally accepted auditing standards.
d. the level for each cycle must be no more than 2% so that the entire audit does not exceed 10%.
controls.
17. Which of the following is an example of the concept of inherent risk?
a. Humans make more errors than computers; therefore, a manual accounting system is riskier than a
computerized system.
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b. Accounting systems with vouchers have many more controls built in, so the risk that there will be
errors on the financial statements is reduced.
c. Loans receivable for a finance company are less likely to be collectible than those of a
bank.
d. Audits with larger sample sizes are less risky than those with smaller sample sizes.
18. Which of the following underlies the application of generally accepted auditing standards, particularly the
standards of fieldwork and reporting?
a. The elements of materiality and c. The element of corroborating evidence.
relative risk. d. The element of reasonable assuranc
b. The element of internal control.
19. Investigating new clients with a focus on assessing the auditor’s potential relationship with that new client
is a critical element in determining:
a. inherent risk. c. statistical risk.
b. acceptable audit risk. d. financial risk.
20. One means of informing the client that the auditor is not responsible for the discovery of all acts of fraud is
the:
a. engagement letter. c. responsibility letter.
b. representation letter. d. client letter.
21. An understanding of a client’s business and industry and knowledge about operations are essential for
performing an adequate audit. For a new client, most of this information is obtained:
a. from the predecessor auditor. c. from the permanent file.
b. from the Securities and Exchange d. at the client’s premises.
Commission.
22. Which of the following is most likely to occur at the beginning of an initial audit engagement?
a. Prepare a rough draft of the financial statements and of the auditor’s report.
b. Study and evaluate the system of internal administrative control.
c. Determine the client’s reason for an audit.
d. Consult with and review the work of the predecessor auditor prior to discussing the engagement
with the client management.
23. The first standard of field work, which states that the work is to be adequately planned and that
assistants, if any, are to be properly supervised, recognizes that:
a. early appointment of the auditor is advantageous to the auditor and the client.
b. acceptance of an audit engagement after the close of the client’s fiscal year is generally not
permissible.
c. appointment of the auditor subsequent to the physical count of inventories requires a disclaimer of
opinion.
d. performance of substantial parts of the examination is necessary at interim dates.
24. Which of the following is correct with respect to the use of analytical procedures?
a. Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor
also uses them in assessing the going concern assumption.
b. Analytical procedures must be used throughout the audit.
c. Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor’s
attention so that the auditor’s understanding of the business is improved.
d. Analytical procedures are performed by studying plausible relationships between
financial and nonfinancial data.
a. Analytical procedures used in the planning phase of the audit are primarily directed at understanding
the client’s business and directing the auditor’s attention to areas that may contain possible
misstatements.
b. Analytical procedures used in the completion phase are primarily aimed at assessing
going concern and secondarily aimed at directing the auditor’s attention to areas that may
contain possible misstatements.
c. Analytical procedures must be used in the planning and completion phases of the audit, and are
optional in the testing phase.
d. Analytical procedures used in the completion phase are primarily aimed at directing the auditor’s
attention to areas that may contain possible misstatements and secondarily aimed at assessing going
concern.
26. When are auditors likely to encounter judgment problems in the use of analytical procedures?
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a. Whenever the auditor places reliance on management’s explanations for unusual fluctuations in
account balances without first developing independent expectations.
b. Whenever the auditor allows unaudited balances to unduly influence his/her expectations of current
balances.
c. Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when
trying to explain what caused them.
d. The auditor is likely to encounter judgment problems in each of the above instances.
27. The first standard of fieldwork requires, in part, that audit work be properly planned. Proper planning as
intended by the first standard of fieldwork would occur when the auditor:
a. physically observes the movement of securities already counted to guard against the
substitution of such securities for others that are not actually on hand.
b. uses negative accounts receivable confirmations instead of positive confirmations because the latter
require mailing of second requests and review of subsequent cash collections.
c. compares all cash as of a particular date to avoid performing time-consuming cash cut-off
procedures.
d. eliminates the possibility of counting inventory items more than once by arranging to make
extensive test counts.
28. An auditor who accepts an audit engagement and does not possess the industry expertise of the business
entity should:
a. engage financial experts familiar with the nature of the business entity.
b. obtain a knowledge of matters that relate to the nature of the entity’s business.
c. refer a substantial portion of the audit to another CPA who will act as the principal auditor.
d. first inform management that an unqualified opinion cannot be issued.
29. The major concern when using nonfinancial data in analytical procedures is the:
a. accuracy of the nonfinancial data.
b. source of the nonfinancial data.
c. type of nonfinancial data.
d. presence of multiple sources of nonfinancial data.
30. In what order should the following steps occur?
A. Assess client business risk
B. Understand the client’s business and industry
C. Perform preliminary analytical procedures
D. Assess acceptable audit risk
a. D, B, C, A.
b. B, A, D, C.
c. B, D, A, C.
d. D, C, B, A
31. Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
a. The prospective client has fired its prior auditor.
b. The CPA lacks a thorough understanding of the prospective client's operations and industry.
c. The CPA is unable to review the predecessor auditor's working papers.
d. The prospective client is unwilling to make financial records available to the CPA.
32. Which of the following matters is generally included in an auditor's engagement letter?
a. Limitations of the engagement.
b. Factors to be considered in establishing preliminary judgments about materiality.
c. Management's liability for illegal acts committed by its employees.
d. The auditor's responsibility to obtain negative assurance relating to the occurrence of illegal acts.
33. Which of the following is correct concerning requirements about auditor communications about fraud?
a. Fraud that involves senior management should be reported directly to the audit
committee regardless of the amount involved.
b. All fraud with a material effect on the financial statements should be reported directly by the auditor
to the Securities and Exchange Commission.
c. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor
through use of an "emphasis of a matter" paragraph added to the audit report.
d. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.
34. When a company has changed auditors, according to the Professional Standards:
a. The successor auditor has the responsibility to initiate contact with the predecessor
auditor to ask about the client before the engagement is accepted; the predecessor has no
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responsibility to initiate this contact, even when aware of matters bearing on the integrity
of management.
b. The predecessor must respond fully to all inquiries made by the successor auditor.
c. The successor must discuss with the predecessor matters bearing on the engagement prior to
accepting the engagement.
d. The successor may choose not to attempt any communication with the predecessor auditor.
35. Which of the following is not an example of a likely adjustment in the auditors' overall audit approach
when significant risk is found to exist?
a. Apply increased professional skepticism about material transactions.
b. Increase the assessed level of detection risk.
c. Assign personnel with particular skill to areas of high risk.
d. Obtain increased evidence about the appropriateness of management's selection of accounting
principles.
36. Which of the following statements is correct regarding the auditor's determination of materiality?
a. The planning level of materiality should normally be the larger of the amount considered for the
balance sheet versus the income statement.
b. The auditors' planning level of materiality may be disaggregated into smaller "tolerable
misstatements" for the various accounts.
c. Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for
determining the planning level of materiality.
d. The amount used for the planning should equal that used for evaluation.
37. A successor auditor has accepted an engagement that was previously performed by a predecessor auditor
and, prior to accepting the engagement, has communicated with the predecessor. When the successor
believes that the predecessor has performed satisfactory previous audits, which of the following is correct?
a. A second communication is required and must include details of previous audits.
b. Ordinarily the successor auditors may be able to accept the opening balances of the
current year with a minimum of verification work.
c. Absent ongoing litigation, a predecessor must provide all working papers requested by the
predecessor.
d. The client should be informed of the need to perform a detailed audit of all opening balances.
38. With respect to the auditor's planning of a year-end audit, which of the following statements is always
true?
a. An engagement should not be accepted after the fiscal year-end.
b. An inventory count must be observed at the balance sheet date.
c. The client's audit committee should not be told of any specific audit procedures which will be
performed.
d. It is an acceptable practice to carry out parts of the examination at interim dates.
39. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor's:
a. Awareness of the consistency in the application of generally accepted accounting principles between
accounting periods.
b. Evaluation of all matters of continuing accounting significance.
c. Opinion of any subsequent events occurring since the predecessor's audit report was issued.
d. Understanding as to the reasons for the change of auditors.
40. An auditor selects a sample from the file of shipping documents to determine whether invoices were
prepared. This test is performed to satisfy the audit objective of:
a. Accuracy.
b. Completeness.
c. Control.
d. Existence.
PART 4
1. To be effective, analytical procedures in the overall review stage of an audit engagement should be
performed by
A. The staff accountant who performed the substantive auditing procedures.
B. A beginning staff accountant who has had no other work related to the engagement.
C. A manager or partner who has a comprehensive knowledge of the client's business and
industry.
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D. The CPA firm's quality control manager.
2. When performing a financial statement audit, auditors are required to explicitly assess the risk of material
misstatement due to:
A. Fraud. C. Illegal Acts.
B. Misappropriation. D. Business risk
3. As planning materiality is decreased, the auditor should plan more work on individual accounts to.
A. Find smaller misstatements.
B. Find larger misstatements.
C. Increase the tolerable misstatement in the accounts.
D. Decrease the risk of assessing control risk too low.
4. Assertions that have a meaningful bearing on whether an account balance, transaction class or disclosure is
fairly stated are referred to as:
A. Appropriate assertions. C. Relevant assertions.
B. Sufficient assertions. D. Reliable assertions.
5. Which of the following is not an assertion relating to classes of transactions?
A. Accuracy. C. Cutoff.
B. Sufficiency. D. Classification.
6. Which of the following is required documentation in an audit?
A. A written engagement letter formalizing the level of services to be provided.
B. A flowchart of the client's organization.
C. A written audit program.
D. A memo setting forth the scope of the audit.
7. Which of the following is not considered to be an analytical procedure?
A. Comparisons of financial statement amounts with source documents.
B. Comparisons of financial statement amounts with nonfinancial data.
C. Comparisons of financial statement amounts with budgeted amounts.
D. Comparisons of financial statement amounts with comparable prior year amounts.
8. An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date
rather than as of the balance sheet date. The auditor should be aware that this practice
A. Eliminates the use of certain statistical sampling methods that would otherwise be available.
B. Presumes that the auditor will reperform the tests as of the balance sheet date.
C. Should be especially considered when there are rapidly changing economic conditions.
D. Potentially increases the risk that errors that exist at the balance sheet date will not be
detected.
9. An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of
sales is reasonable. What type of audit procedure was performed?
A. Test of transactions. C. Test of controls.
B. Analytical procedures. D. Test of details
10. The inspection of a vendor's invoice by the auditors is:
A. Direct evidence about occurrence of a transaction.
B. Physical evidence about occurrence of a transaction.
C. Documentary evidence about occurrence of a transaction.
D. Part of the client's accounting system.
11. The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of
accounts receivable to 5 percent. They believe that inherent risk is 100%, and there is a 40% risk that
material misstatement could have bypassed the client's system of internal control. What is the maximum
detection risk the auditors should specify in their substantive procedures of details of accounts receivable?
A. 5%. C. 42.7%.
B. 12.5%. D. 60%.
12. Analytical procedures are required at the planning stage of all audits and as:
A. Tests of internal control.
B. Substantive procedures.
C. A part of the final overall review.
D. Computer generated procedures.
13. During financial statement audits, auditors seek to restrict which type of risk?
A. Control risk. C. Inherent risk.
B. Detection risk. D. Account risk.
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14. In auditing an asset valued at fair value, which of the following potentially provides the auditor with the
strongest evidence?
A. A price for a similar asset obtained from an active market.
B. An appraisal obtained discounting future cash flows.
C. Management's judgment of the cost to purchase an equivalent asset.
D. The historical cost of the asset.
15. Which of the following best describes the reason that auditors are concerned with the detection of related
party transactions?
A. The financial statements must often be adjusted for the effects of material related party
transactions.
B. Material related party transactions must be disclosed in the notes to the financial
statements.
C. The substance of related party transactions will differ from their form.
D. In a related party transaction one party has the ability to exercise significant influence over the
other party.
16. Which of the following is not a financial statement assertion relating to account balances?
A. Completeness C. Rights and obligations.
B. Existence. D. Valuation and allowances.
17. Which of the following is generally true about the sufficiency of audit evidence?
A. The amount of evidence that is sufficient varies inversely with the risk of material
misstatement.
B. The amount of evidence concerning a particular account varies inversely with the materiality of the
account.
C. The amount of evidence concerning a particular account varies inversely with the inherent risk of the
account.
D. When evidence is appropriate with respect to an account it is also sufficient.
18. Which of the following is true about analytical procedures?
A. Performing analytical procedures results in the most reliable form of evidence.
B. Analytical procedures are tests of controls used to evaluate the quality of a client's internal control.
C. Analytical procedures are used for planning, but they should not be used to obtain evidence as to
the reasonableness of specific account balances.
D. Analytical procedures are used in planning, as a substantive procedure for specific
accounts, and in the final review of the audited financial statements.
19. Which of the following is a basic approach often used by auditors to evaluate the reasonableness of
accounting estimates?
A. Confirmation.
B. Observation.
C. Reviewing subsequent events or transactions.
D. Analyzing corporate organizational structure.
20. Which of the following is not a basic approach often used by auditors to evaluate the reasonableness of
accounting estimates?
A. Confirmation of amounts.
B. Review of management's process of development.
C. Independent development of an estimate.
D. Review of subsequent events.
21. A schedule set up to combine similar general ledger accounts, the total of which appears on the working
trial balance as a single amount, is referred to as a:
A. Supporting schedule. C. Corroborating schedule.
B. Lead schedule. D. Reconciling schedule.
22. Which of the following is not a function of working papers?
A. Provide support for the auditors' report.
B. Provide support for the accounting records.
C. Aid partners in planning and conducting future audits.
D. Document staff compliance with generally accepted auditing standards.
23. The auditors use analytical procedures during the course of an audit. The most important phase of
performing these procedures is the:
A. Vouching of all data supporting various ratios.
B. Investigation of significant variations and unusual relationships.
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C. Comparison of client-computed statistics with industry data on a quarterly and full-year basis.
D. Recalculation of industry date.
24. The auditors must obtain written client representations that normally should be signed by:
A. The president and the chairperson of the board.
B. The treasurer and the internal auditor.
C. The chief executive officer and the chief financial officer.
D. The corporate counsel and the audit committee chairperson.
25. Which of the following would not necessarily be considered a related party transaction?
A. Payment of a bonus to the president.
B. Purchases from another corporation that is controlled by the corporation's chief stockholder.
C. Loan from the corporation to a major stockholder.
D. Sale of land to the corporation by the spouse of a director.
26. The date of the management representation letter should coincide with the:
A. Date of the auditor's report.
B. Balance sheet date.
C. Date of the latest subsequent event referred to in the notes to the financial statements.
D. Date of the engagement agreement.
27. An example of an analytical procedure is the comparison of:
A. Financial information with similar information regarding the industry in which the entity
operates.
B. Recorded amounts of major disbursements with appropriate invoices.
C. Results of a statistical sample with the expected characteristics of the actual population.
D. EDP generated data with similar data generated by a manual accounting system.
28. When considering the use of management's written representations as audit evidence about the
completeness assertion, an auditor should understand that such representations:
A. Complement, but do not replace, substantive procedures designed to support the
assertion.
B. Constitute sufficient evidence to support the assertion when considered in combination with a
moderate assessed level of control risk.
C. Are generally sufficient audit evidence to support the assertion regardless of the assessed level of
control risk.
D. Replace the assessed level of control risk as evidence to support the assertions.
29. Which of the following expressions is least likely to be included in a client's representation letter?
A. No events have occurred subsequent to the balance sheet date that require adjustment to, or
disclosure in, the financial statements.
B. The company has complied with all aspects of contractual agreements that would have a material
effect on the financial statements in the event of noncompliance.
C. Management acknowledges responsibility for illegal actions committed by employees.
D. Management has made available all financial statements, including notes.
30. Which of the following statements is generally correct about audit evidence?
A. The auditor's direct personal knowledge, obtained through observation and inspection,
is more persuasive than information obtained indirectly from independent outside sources.
B. To be appropriate, audit evidence must be sufficient.
C. Accounting data alone may be considered sufficient appropriate audit evidence to issue an
unqualified opinion on financial statements.
D. Appropriateness of audit evidence refers to the amount of corroborative evidence to be obtained.
31. Which of the following statements relating to audit evidence is the most accurate statement?
A. Audit evidence gathered by an auditor from outside an enterprise is reliable.
B. Accounting data developed under satisfactory conditions of internal control are more relevant than
data developed under unsatisfactory internal control conditions.
C. Oral representations made by management are not valid evidence.
D. The auditor must obtain sufficient appropriate audit evidence.
32. Which of the following is not a typical analytical procedure?
A. Study of relationships of the financial information with relevant nonfinancial information.
B. Comparison of the financial information with similar information regarding the industry in which the
entity operates.
C. Comparison of recorded amounts of major disbursements with appropriate invoices.
D. Comparison of the financial information with budgeted amounts.
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33. Which of the following is not a primary purpose of audit working papers?
A. To coordinate the examination.
B. To assist in preparation of the audit report.
C. To support the financial statements.
D. To provide evidence of the audit work performed.
34. During an audit engagement pertinent data are prepared and included in the audit working papers. The
working papers primarily are considered to be:
A. A client-owned record of conclusions reached by the auditors who performed the engagement.
B. Evidence supporting financial statements.
C. Support for the auditors' representations as to compliance with generally accepted
auditing standards.
D. A record to be used as a basis for the following year's engagement.
35. Although the quantity, type, and content of working papers will vary with the circumstances, the working
papers generally would include the:
A. Copies of those client records examined by the auditor during the course of the engagement.
B. Evaluation of the efficiency and competence of the audit staff assistants by the partner responsible
for the audit.
C. Auditor's comments concerning the efficiency and competence of client management personnel.
D. Auditing procedures followed and the testing performed in obtaining audit evidence.
36. The permanent file section of the working papers that is kept for each audit client most likely contains:
A. Review notes pertaining to questions and comments regarding the audit work performed.
B. A schedule of time spent on the engagement by each individual auditor.
C. Correspondence with the client's legal counsel concerning pending litigation.
D. Narrative descriptions of the client's accounting procedures and controls.
37. Working papers that record the procedures used by the auditor to gather evidence should be:
A. Considered the primary support for the financial statements being examined.
B. Viewed as the connecting link between the books of account and the financial statements.
C. Designed to meet the circumstances of the particular engagement.
D. Destroyed when the audited entity ceases to be a client.
38. In general, which of the following statements is correct with respect to ownership, possession, or access to
working papers prepared by a CPA firm in connection with an audit?
A. The working papers may be obtained by third parties where they appear to be relevant
to issues raised in litigation.
B. The working papers are subject to the privileged communication rule which, in a majority of
jurisdictions, prevents third-party access to the working papers.
C. The working papers are the property of the client after the client pays the fee.
D. The working papers must be retained by the CPA firm for a period of ten years.
39. Confirmation would be most effective in addressing the existence assertion for the:
A. Addition of a milling machine to a machine shop.
B. Payment of payroll during regular course of business.
C. Inventory held on consignment.
D. Granting of a patent for a special process developed by the organization.
40. An auditor performs analytical procedures that involve comparing the gross margins of various divisional
operations with those of other divisions and with the individual division's performance in previous years. The
auditor notes a significant increase in the gross margin at one division. The auditor does some preliminary
investigation and also notes that there were no changes in products, production methods, or divisional
management during the year. Based on the above information, the most likely cause of the increase in gross
margin would be:
A. An increase in the number of competitors selling similar products.
B. A decrease in the number of suppliers of the material used in manufacturing the product.
C. An overstatement of year-end inventory.
D. An understatement of year-end accounts receivable.
41. Which of the following types of evidence is not available when using substantive tests of transactions?
A. Documentation. C. Inquiries of the client.
B. Confirmation. D. Reperformance.
42. Which of the following is not a valid basis for omitting an audit test?
A. the difficulty and expense involved in testing a particular item.
B. the relative risk involved.
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C. the degree of reliance on the relevant internal controls.
D. the relationship between the cost of obtaining evidence and its usefulness.
A. There are many ways an auditor can accumulate evidence to meet overall audit objectives.
B. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional
responsibility.
C. It is appropriate to minimize the cost of accumulating evidence.
D. Gathering evidence and minimizing costs are equally important considerations that
affect the approach the auditor selects.
44. Two overriding considerations affect the many ways an auditor can accumulate evidence:
1. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional
responsibility.
2. Cost of accumulating evidence should be minimized.
In evaluating these considerations:
A. the first is more important than the second.
B. the second is more important than the first.
C. they are equally important.
D. it is impossible to prioritize them.
A. Balance-related audit objectives are applied to account balances.
B. Transaction-related audit objectives are applied to classes of transactions.
C. Balance-related audit objectives are applied to the ending balance in balance sheet accounts.
D. Balance-related audit objectives are applied to both beginning and ending balances in
balance sheet accounts.
PART 5
1. If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate
and decreasing the risk of assessing control risk too low would have what effect on sample size?
A. Increase.
B. Remain the same.
C. Decrease.
D. Indeterminate, depends upon exact change being made.
2. If all other factors specified in an attributes sampling plan remain constant, decreasing the tolerable rate
and increasing the estimated population deviation rate would have what effect on sample size?
A. Increase.
B. Remain the same.
C. Decrease.
D. Indeterminate, depends upon exact change being made.
3. An increase in the tolerable misstatement has what effect on the planned allowance for sampling risk?
A. Increases.
B. Decreases.
C. No effect.
D. Indeterminate.
4. In performing a test of a control last year the auditors specified a tolerable deviation rate of X percent. This
year the auditors have specified a tolerable rate of less than X percent. Assuming that all other factors remain
the same, which of the following is true regarding the relationship between this year's sample size compared
to last year's sample size?
A. This year's sample is larger than last year's sample.
B. This year's sample is smaller than last year's sample.
C. This year's sample is equal to last year's sample.
D. This year's sample is indeterminate in relation to last year's sample.
5. The auditor using nonstatistical attributes sampling, but who nevertheless has chosen the sample in
conformity with random selection procedures:
A. Need not consider the risk of assessing control risk too low.
B. Has committed a nonsampling error.
C. Will have to use discovery sampling techniques to evaluate the results.
D. Should compare the deviation rate of the sample to the tolerable rate.
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6. When performing tests of controls over authorization of cash receipts, which of the following sampling
methods would be most appropriate?
A. Attributes. C. Stratified.
B. Ratio. D. Variables.
7. Which of the following statistical sampling techniques involves taking samples in a series of stages?
A. Systematic sampling. C. Continuous sampling.
B. Sequential sampling. D. Multiple location sampling.
8. Which of the following is generally not true about statistical sampling as compared to nonstatistical
sampling?
A. Statistical samples are more representative of the population.
B. Statistical sample plans involve additional costs of evaluation.
C. Statistical sampling allows a more objective evaluation of sample results.
D. Statistical sampling may assist the auditors in designing more efficient samples.
9. When using statistical sampling, which of the following need not be known to evaluate the results of an
attributes sample?
A. Sample size.
B. Risk of assessing control risk too low.
C. Number of deviations in the population.
D. Number of deviations found in the sample.
10. When the auditors have decided to use statistical rather than nonstatistical sampling, a disadvantage is
that:
A. Designing efficient samples is more difficult.
B. The costs of training staff may be higher.
C. Sampling without replacement must be used.
D. Objectively evaluating results is impossible.
11. Changing from a sampling plan using random selection with replacement to random selection without
replacement has what effect on the required sample size?
A. Increases. C. No effect.
B. Decreases D. An indeterminate effect.
12. When the auditors have chosen to test a control, what relationship will the tolerable rate normally have
when compared to the expected rate of deviations in the sample?
A. Exceed. C. Be less than.
B. Equal. D. Indefinite.
13. Increases in the planned allowance for sampling risk have what effect on required sample size?
B. Decreases. D. Indeterminate.
14. When using sampling for tests of controls, which of the following audit consequences may follow?
A. If sample results indicate that the control is operating effectively, but in fact it is not,
control risk will be assessed too low.
B. If sample results indicate that the control is operating effectively, but in fact it is not, control risk will
be assessed too high.
C. If sample results indicate that the control is not operating effectively, but in fact it is operating
effectively, the audit is likely to be faulty because of reduced substantive tests.
D. If sample results indicate that the control is not operating effectively, but in fact it is operating
effectively, control risk will be assessed too low.
15. The auditors expect a population deviation rate of billing errors of two percent, and have established a
tolerable rate of five percent. The sampling approach most likely to be used is:
A. Attributes sampling.
B. Stratified sequential sampling.
C. Discovery sampling.
D. None, as sampling does not seem appropriate in this situation.
16. Which of the following types of risk is of critical importance to auditors in performing tests of controls?
A. The risk of assessing control risk too low.
B. The risk of assessing control risk too high.
C. The risk of incorrect acceptance.
D. The risk of incorrect rejection.
17. The auditors' failure to recognize a misstatement in an amount or a deviation in an internal control data
processing procedure is described as a:
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A. Statistical error. C. Standard error of the mean.
B. Sampling misstatement. D. Nonsampling error.
18. What effect does obtaining a sample with a standard deviation larger than that estimated during planning
have on the adjusted allowance for sampling risk?
B. Decreases. D. Indeterminate.
19. The 3000 accounts receivable of DEF Company have a total book value of P60,000. Bob Smith, CPA, has
selected and audited a sample of 100 accounts with a total book value of P2,100. Using the difference
estimation technique, Smith has properly estimated a projected misstatement of an overstatement of P6,000
for the entire population. The audited value of Smith's sample is:
A. P1,700 C. P1,900
B. P1,800 D. P2,300
20. The 3000 accounts receivable of DEF Company have a total book value of P60,000. Bob Smith, CPA, has
selected and audited a sample of 100 accounts with a total book value of P2,100. Using the difference
estimation technique, Smith has properly estimated a projected misstatement of a P9,000 overstatement for
the entire population. The estimated total audited value of the population is:
A. P51,000 C. P60,000
B. P58,000 D. P69,000
21. Which of the following is a correct statement with respect to evaluating results when using nonstatistical
sampling for substantive tests?
A. When the projected misstatement exceeds the tolerable misstatement, the auditor should conclude
that the population is not misstated.
B. The closer the projected misstatement is to the tolerable misstatement, the higher the
risk of material misstatement.
C. When the projected misstatement is equal to zero, the auditors may conclude with certainty that no
misstatements exist in the account.
D. When the projected misstatement percentage exceeds the risk of incorrect acceptance the auditors
will generally conclude that the population is materially misstated.
22. The auditors have audited a sample with a standard deviation of audited values larger than they had
originally estimated. In this situation, to maintain the risk of incorrect acceptance at its predetermined level
without increasing the size of the sample, which of the following statements is correct?
A. The adjusted allowance for sampling risk will be smaller than had been planned.
B. The adjusted allowance for sampling risk will be larger than had been planned.
C. The risk of incorrect rejection will necessarily decrease.
D. The size of the population must be decreased.
23. Which of the following statements is correct concerning the use of nonstatistical sampling for substantive
tests?
A. Its use is generally acceptable only for populations with an immaterial book value.
B. It requires the use of structured sample size selection techniques to be acceptable.
C. It may be especially useful in circumstances in which the combination of inherent and control risk is
at the maximum level.
D. Results will be projected to the population.
24. Which of the following situations will result in the auditors concluding that the risk of material
misstatement is too high when using nonstatistical sampling for substantive tests?
A. The projected misstatement exceeds the tolerable misstatement.
B. The allowance for sampling risk exceeds the projected misstatement.
C. The risk of incorrect acceptance exceeds the risk of incorrect rejection.
D. The tolerable misstatement exceeds the sample net misstatement.
25. Which of the following is an advantage of systematic selection over random number selection?
A. It provides a stronger basis for statistical conclusions.
B. It enables the auditor to use the more efficient "sampling with replacement" tables.
C. There may be correlation between the location of items in the population, the feature of sampling
interest, and the sampling interval.
D. It does not require establishment of correspondence between random numbers and
items in the population.
26. Statistical sampling generally may be applied to test internal control when the client's internal control
procedures:
A. Depend primarily on appropriate segregation of duties.
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B. Are carefully reduced to writing and are included in client accounting manuals.
C. Leave an audit trail in the form of evidence of compliance.
D. Enable the detection of material fraud in the accounting records.
27. Which of the following statements is correct about the sample size in statistical sampling when testing
internal controls?
A. The auditor should consider the tolerable rate of deviation from the controls being
tested in determining sample size.
B. As the likely rate of deviation decreases, the auditor should increase the planned sample size.
C. The allowable risk of assessing control risk too low has no effect on the planned sample size.
D. Of all the factors to be considered, the population size has the greatest effect on the sample size.
28. To determine sample size in an attribute sampling application, what must be specified?
A. Population mean, expected error rate, allowance for sampling risk.
B. Allowance for sampling risk, risk of assessing control risk too low, standard deviation.
C. Allowance for sampling risk, risk of assessing control risk too low, expected deviation
rate.
D. Population mean, standard deviation, allowance for sampling risk.
29. The tolerable deviation rate in sampling for tests of controls is:
A. Used to determine the probability of the auditor's conclusion based upon reliance factors.
B. The probability that the financial statements are not materially in error.
C. A measure of the reliability of substantive tests.
D. The rate the auditor will tolerate without modifying the planned assessment of control
risk.
30. An auditor wishes to estimate inventory shrinkage by weighing a sample of inventory items. From
experience, the auditor knows that a few specific items are subject to unusually large amounts of shrinkage.
In using statistical sampling, the auditor's best course of action is to:
A. Eliminate any of the items known to be subject to unusually large amounts of shrinkage.
B. Increase the sample size to lessen the effect of the items subject to unusually large amounts of
shrinkage.
C. Stratify the inventory population so that items subject to unusually large amounts of
shrinkage are reviewed separately.
D. Continue to draw new samples until a sample is drawn which includes none of the items known to
be subject to large amounts of shrinkage.
31. If all other factors specified in an attributes sampling plan remain constant, changing the specified
tolerable rate from 6% to 10%, and changing the specified risk of assessing control risk too low from 3% to
7% would cause the required sample size to:
A. Increase. C. Decrease.
B. Remain the same. D. Change by 4%.
32. Which of the following factors does an auditor need to consider in planning a particular audit sample for a
test of control?
A. Number of items in the population.
B. Total dollar amount of the items to be sampled.
C. Acceptable level of risk of assessing control risk too low.
D. Tolerable misstatement.
33. When using a statistical sampling plan, the auditors would probably require a smaller sample if the:
A. Population increases.
B. Desired allowance for sampling risk decreases.
C. Desired risk of incorrect acceptance increases.
D. Expected deviation rate increases.
34. Which of the following statements is correct concerning statistical sampling in tests of controls?
A. The population size has little effect on determining sample size except for very small
populations.
B. The expected population deviation rate has little or no effect on determining sample size except for
very small populations.
C. As the population size doubles, the sample size also should double.
D. For a given tolerable rate, a larger sample size should be selected as the expected population
deviation rate decreases.
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35. When performing a test of a control over cash disbursements, a CPA may use a systematic sampling
technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that
the items in the population:
A. Must be recorded in a systematic pattern before the sample can be drawn.
B. May occur in a systematic pattern and destroy the sample randomness.
C. May systematically occur more than once in the sample.
D. Must be systematically replaced in the population after sampling.
36. While performing a substantive test of details during an audit, the auditor determined that the sample
results supported the conclusion that the recorded account balance was materially misstated. It was, in fact,
not materially misstated. This situation illustrates the risk of:
A. Incorrect acceptance. C. Assessing control risk too high.
B. Incorrect rejection. D. Assessing control risk too low.
37. An auditor plans to examine a sample of 20 checks for counter signatures as prescribed by the client's
control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should
consider the reasons for this limitation and:
A. Evaluate the results as if the sample size had been 19.
B. Treat the missing check as a deviation for the purpose of evaluating the sample.
C. Treat the missing check in the same manner as the majority of the other 19 checks, i.e.,
countersigned or not.
D. Choose another check to replace the missing check in the sample.
38. Which of the following best illustrates the concept of sampling risk?
A. A randomly chosen sample may not be representative of the population as a whole on
the characteristic of interest.
B. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
C. An auditor may fail to recognize deviations in the documents examined for the chosen sample.
D. The documents related to the chosen sample may not be available for inspection.
39. Various 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. Lower assessment of control risk.
B. Greater reliance on analytical procedures.
C. Smaller expected frequency of misstatements.
D. Smaller measure of tolerable misstatement.
40. In variables estimation sampling, the sample standard deviation is used to calculate the
A. Point estimate of central tendency.
B. Tainting of the sample interval.
C. Risk of incorrect acceptance.
D. Adjusted allowance for sampling risk.
PART 6
1. The auditor’s responsibility with respect to events occurring between the balance sheet date and the end of
the audit examination is best expressed by which of the following statements?
a. The auditor is fully responsible for events occurring in the subsequent period and should extend all
detailed procedures through the last day of fieldwork.
b. The auditor is responsible for determining that a proper cutoff has been made and
performing a general review of events occurring in the subsequent period.
c. The auditor’s responsibility is to determine that a proper cutoff has been made and that transactions
recorded on or before the balance sheet date actually occurred.
d. The auditor has no responsibility for events occurring in the subsequent period unless these events
affect transactions recorded on or before the balance sheet date.
2. A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one
of these subsequent events might result in adjustment of the December 31 financial statements?
a. Sale of a major subsidiary.
b. Adoption of accelerated depreciation methods.
c. Write-off of a substantial portion of inventory as obsolete.
d. Collection of 90% of the accounts receivable existing at December 31.
3. After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further
audit tests or inquiries with respect to the audited financial statements covered by that report unless:
a. material adverse events occur after the date of the auditor’s report.
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b. final determination or resolution was made of a contingency which had been disclosed in the
financial statements.
c. final determination or resolution was made on matters which had resulted in a qualification in the
auditor’s report.
d. new information comes to the auditor’s attention concerning an event that occurred
prior to the date of the auditor’s report that may have affected the auditor’s report.
4. An auditor’s decision concerning whether or not to “dual date” the audit report is based upon the auditor’s
willingness to:
a. extend auditing procedures and assume responsibility for a greater period of time.
b. accept responsibility for subsequent events.
c. permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor’s
report.
d. assume responsibility for events subsequent to the issuance of the auditor’s report.
5. Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial
statements under examination because such events typically represent the:
a. culmination of conditions that existed at the balance sheet date.
b. discovery of new conditions occurring in the subsequent events period.
c. final estimates of losses relating to casualties occurring in the subsequent events period.
d. preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet
date.
6. An auditor must obtain written client representations that normally should be signed by:
a. the treasurer and the internal auditor.
b. the president and the chairperson of the board.
c. the chief executive officer and the chief financial officer.
d. the corporate counsel and the audit committee chairperson.
7. Elise-Greer, LLP is an affiliate of the audit client and is audited by another firm of auditors. Which of the
following is most likely to be used by the auditor to obtain assurance that all guarantees of the affiliate’s
indebtedness have been detected?
a. Send the standard bank confirmation request to all of the client’s lender banks.
b. Review client minutes and obtain a representation letter.
c. Examine supporting documents for all entries in intercompany accounts.
d. Obtain written confirmation of indebtedness from the auditor of the affiliate.
8. A company guarantees the debt of an affiliate. Which of the following best describes the audit procedure
that would make the auditor aware of the guarantee?
a. Review minutes and resolutions of the board of directors.
b. Review prior year’s audit files with respect to such guarantees.
c. Review the possibility of such guarantees with the chief accountant.
d. Review the legal letter returned by the company’s outside legal counsel.
9. An attorney is responding to an independent auditor as a result of the client’s letter of inquiry. The attorney
may appropriately limit the response to:
a. asserted claims and litigation.
b. asserted, overtly threatened, or pending claims and litigation.
c. items which have an extremely high probability of being resolved to the client’s detriment.
d. matters to which the attorney has given substantive attention in the form of legal
consultation or representation.
10. Management furnishes the independent auditor with information concerning litigation, claims, and
assessments. Which of the following is the auditor’s primary means of initiating action to corroborate such
information?
a. Request that client lawyers undertake a reconsideration of matters of litigation, claims, and
assessments with which they were consulted during the period under examination.
b. Request that client management send a letter of inquiry to those lawyers with whom
management consulted concerning litigation, claims, and assessments.
c. Request that client lawyers provide a legal opinion concerning the policies and procedures adopted
by management to identify, evaluate, and account for litigation, claims, and assessments.
d. Request that client management engage outside attorneys to suggest wording for the text of a
footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.
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11. A CPA has received an attorney’s letter in which no significant disagreements with the client’s assessments
of contingent liabilities were noted. The resignation of the client’s lawyer shortly after receipt of the letter
should alert the auditor that:
a. an adverse opinion will be necessary.
b. undisclosed unasserted claims may have arisen.
c. the auditor must begin a completely new examination of contingent liabilities.
d. the attorney was unable to form a conclusion with respect to the significance of litigation, claims,
and assessments.
12. Which of the following is not a reason why the auditor requests that the client provide a letter of
representation?
a. Professional auditing standards require the auditor to obtain a letter of representation.
b. It impresses upon management its responsibility for the accuracy of the information in the financial
statements.
c. It provides written documentation of the oral responses already received to inquiries of
management.
d. It provides written documentation, which is a higher quality of evidence than
management’s oral responses to inquiries.
13. The process of “final evidence accumulation” is always done late in the engagement. Which one of the
following would be done the earliest in the engagement?
a. Final analytical procedures.
b. Search for contingent liabilities.
c. Evaluate the going concern assumption.
d. Acquire the client’s letter of representation.
14. The auditor’s responsibility for “reviewing the subsequent events” of a public company that is about to
issue new securities is normally limited to the period of time:
a. beginning with the balance sheet date and ending with the date of the auditor’s report.
b. beginning with the start of the fiscal year under audit and ending with the balance sheet date.
c. beginning with the start of the fiscal year under audit and ending with the date of the auditor’s
report
d. beginning with the balance sheet date and ending with the date the registration
statement becomes effective.
15. Why must audit documentation be reviewed?
a. To ensure that the audit meets the CPA firm’s standard of performance.
b. To evaluate the performance of inexperienced personnel.
c. To counteract bias that often enters into the auditor’s judgment.
d. All of the above are reasons for review of audit documentation.
16. While there is no professional requirement to do so on audit engagements, CPAs frequently issue a formal
“management” letter to clients. The primary purpose of this letter is to provide:
a. evidence indicating whether the auditor is reasonably certain that internal accounting control is
operating as prescribed.
b. a permanent record of the internal accounting control work performed by the auditor during the
course of the engagement.
c. a written record of discussions between auditor and client concerning the auditor’s
observations and suggestions for improvements.
d. a summary of the auditor’s observations that resulted from the auditor’s special study of internal
control.
17. Which of the following material events occurring subsequent to the balance sheet date would require an
adjustment to the financial statements before they could be issued?
a. Loss of a plant as a result of a flood.
b. Sale of long-term debt or capital stock.
c. Settlement of litigation in excess of the recorded liability.
d. Major purchase of a business that is expected to double the sales volume.
18. Which of the following determines the sufficiency of evidence?
a. Generally Accepted Auditing Standards.
b. Securities and Exchange Commission regulations.
c. Auditor judgment.
d. Adherence to the audit program.
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19. Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor’s
report would not require disclosure in the financial statements?
a. Sale of a bond or capital stock issue.
b. Loss of plant or inventories as a result of fire or flood.
c. A significant decline in the market price of the corporation’s stock.
d. Settlement of litigation when the event giving rise to the claim took place after the balance sheet
date.
20. An auditor performs interim work at various times throughout the year. The auditor’s subsequent events
work should be extended to the date of:
a. the auditor’s report.
b. a post-dated footnote.
c. the next scheduled interim visit.
d. the final billing for audit services rendered.
21. In connection with the annual audit, which of the following is not a “subsequent events” procedure?
a. Review available interim financial statements.
b. Read available minutes of meetings of stockholders, directors, and committees and, for meetings
where minutes are not available, inquire about matters dealt with at such meetings.
c. Make inquiries with respect to the financial statements covered by the auditor’s previously issued
report if new information has become available during the current examination that might affect that
report.
d. Discuss with officers the current status of items in the financial statements that were accounted for
on the basis of tentative, preliminary, or inconclusive data.
22. As part of an audit, a CPA often requests a representation letter from the client. Which one of the
following is not a valid purpose of such a letter?
a. To provide audit evidence.
b. To emphasize to the client the client’s responsibility for the correctness of the financial statements.
c. To satisfy the CPA by means of other auditing procedures when certain customary
auditing procedures are not performed.
d. To provide possible protection to the CPA against a charge of knowledge in cases where fraud is
subsequently discovered to have existed in the accounts.
23. Which of the following is the most efficient audit procedure for the detection of unrecorded liabilities at the
balance sheet date?
a. Obtain an attorney’s letter from the client’s attorney.
b. Confirm large accounts payable balances at the balance sheet date.
c. Examine purchase orders issued for several days prior to the close of the year.
d. Compare cash disbursements in the subsequent period with the accounts payable trial
balance at year-end.
24. Which of the following auditing procedures is ordinarily performed last?
a. Reading minutes of the board of directors’ meetings.
b. Confirming accounts payable.
c. Obtaining a client representation letter.
d. Testing the purchasing function.
25. Which of the following would be a subsequent discovery of facts which would not require a response by
the auditor?
a. Discovery of the inclusion of material nonexistent sales.
b. Discovery of the failure to write off material obsolete inventory.
c. Discovery of the omission of a material footnote.
d. Decrease in the value of investments.
26. When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(n):
a. disclaimer of opinion.
b. qualified opinion.
c. standard unqualified opinion.
d. unqualified opinion with a separate explanatory paragraph.
27. Which of the following statements is correct?
a. A letter of representation is documentation of management’s acceptance of responsibility for the
financial statements and is deemed to be reliable evidence.
b. A letter of representation is not deemed to be reliable evidence because of the potential
incompetence of management.
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c. A letter of representation is not deemed to be reliable evidence because of the lack of
independence of the preparers.
d. A letter of representation is documentation of the CPA’s acceptance of responsibility for the audit of
the financial statement and is deemed to be reliable.
28. Which of the following audit procedures would most likely assist an auditor in identifying conditions and
events that may indicate there could be substantial doubt about an entity’s ability to continue as a going
concern?
a. Review compliance with the terms of debt agreements.
b. Confirmation of accounts receivable from principal customers.
c. Reconciliation of interest expense with debt outstanding.
d. Confirmation of bank balances.
29. The auditor is responsible for communicating significant internal control deficiencies to the audit
committee, or those charged with governance. This communication:
a. may be oral or written.
b. must be oral.
c. must be written.
d. must be oral via direct communication.
30. Which of the following is not one of the categories of items included in the client letter of representation?
a. Subsequent events
b. Completeness of information
c. Recognition, measurement, and disclosure
d. Materiality
31. Which of the following is not a purpose of the client letter of representation?
a. To impress upon the audit firm its responsibility for the audit.
b. To impress upon management its responsibility for the financial statement assertions.
c. To remind management of potential misstatements or omissions in the financial statements.
d. To document the responses from management to inquiries about various aspects of the audit.
32. Refusal by a client to prepare and sign the representation letter would require a(n):
a. qualified opinion or a disclaimer.
b. adverse opinion or a disclaimer.
c. qualified or an adverse opinion.
d. unqualified opinion with an explanatory paragraph.
33. Which of the following statements regarding the letter of representation is not correct?
a. It is prepared on the client’s letterhead.
b. It is addressed to the CPA firm.
c. It is signed by high-level corporate officials, usually the president and chief financial officer.
d. It is optional, not required, that the auditor obtain such a letter from management.
34. Which of the following is not a matter that is typically included in the letter of representation obtained
from an audit client?
a. Availability of all financial records and related data.
b. Absence of unrecorded transactions.
c. Compliance with aspects of contractual agreements that may affect the financial statements.
d. Assessment of management’s efficiency of decision making.
35. The audit procedures for the subsequent events review can be divided into two categories: (1) procedures
integrated as a part of the verification of year-end account balances, and (2) those performed specifically for
the purpose of discovering subsequent events. Which of the following procedures is in category 1?
a. Inquiries of client regarding contingent liabilities.
b. Obtain a letter of representation written by client.
c. Subsequent period sales and purchases transactions are examined to determine
whether the cutoff is accurate.
d. Review journals and ledgers of year 2 to determine the existence of any transaction related to year
1.
36. When should auditors generally assess a client’s ability to continue as a going concern?
a. Upon completion of the audit.
b. During the planning stages of the audit.
c. Throughout the entire audit process.
d. During testing and completion phases of the audit.
37. The letter of representation obtained from an audit client should be:
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a. dated as of the end of the period under audit.
b. dated as of the audit report date.
c. dated as of any date decided upon by the client and auditor.
d. dated as of the issuance of the financial statement.
38. At what stages of the audit must analytical procedures be used?
a. Planning and testing. c. Planning and completion.
b. Testing and completion. d. Planning, testing, and completion.
39. Which of the following subsequent events is most likely to result in an adjustment to a company’s financial
statements?
a. Merger or acquisition activities.
b. Bankruptcy (due to deteriorating financial condition) of a customer with an outstanding
accounts receivable balance.
c. Issuance of common stock.
d. An uninsured loss of inventories due to a fire.
40. Which of the following is not one of the three main reasons why it is essential that audit files be
thoroughly reviewed by another member of the audit firm at the completion of the audit?
a. To evaluate the performance of inexperienced personnel.
b. To counteract the bias that frequently enters into the auditor’s judgment.
c. To make sure that the audit meets the CPA firm’s standard of performance.
d. To evaluate the accuracy of the auditing firm’s time budget for the engagement.
41. Auditors will generally send a standard inquiry letter to:
a. only those attorneys who have devoted substantial time to client matters during the year.
b. every attorney that the client has been involved with in the current or preceding year,
plus any attorney the client engages on occasion.
c. those attorneys whom the client relies on for advice related to substantial legal matters.
d. only the attorney who represent the client in proceeding where the client is defendant.
42. Whenever subsequent events are used to evaluate the amounts included in the statements, care must be
taken to distinguish between conditions that existed at the balance sheet date and those that come into being
after the end of the year. The subsequent information should not be incorporated directly into the statements
if the conditions causing the change in valuation:
a. took place before year-end.
b. did not take place until after year-end.
c. occurred both before and after year-end.
d. are reimbursable through insurance policies.
43. Audit procedures related to contingent liabilities are initially focused on:
a. accuracy. c. existence.
b. completeness. d. occurrence.
44. The auditor has a responsibility to review transactions and activities occurring after the year-end to
determine whether anything occurred that might affect the statements being audited. The procedures required
to verify these transactions are commonly referred to as the review for:
a. contingent liabilities. c. late unusual occurrences.
b. subsequent year’s transactions. d. subsequent events.
45. The responsibility for identifying and deciding the appropriate accounting treatment for contingent
liabilities rests with a company’s _____.
a. auditors. c. management.
b. legal counsel. d. management and the auditors.
46. One of the auditor’s primary concerns relative to presentation and disclosure-related objectives is:
a. accuracy. c. completeness.
b. existence. d. occurrence.
47. Which of the following is an incorrect combination of the “likelihood of occurrence” and financial statement
treatment?
a. Remote: no disclosure.
b. Probable (amount is estimable): financial statements are adjusted.
c. Reasonably possible (amount is estimable): financial statements are adjusted.
d. Probable (amount is not estimable): footnote disclosure is required.
48. If a potential loss on a contingent liability is remote, the liability usually is:
a. disclosed in footnotes, but not accrued.
b. neither accrued nor disclosed in footnotes.
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c. accrued and indicated in the body of the financial statements.
d. disclosed in the auditor’s report but not disclosed on the financial statements.
49. Which of the following is not a condition for a contingent liability to exist?
a. There is a potential future payment to an outside party that would result from a current condition.
b. There is uncertainty about the amount of the future payment.
c. The outcome of an uncertainty will be resolved by some future event.
d. The amount of the future payment is reasonably estimable.
50. Commitments include all but which of the following?
a. Agreements to purchase raw materials.
b. Pension plans.
c. Agreements to lease facilities at set prices.
d. Each of the above is a commitment.
PART 7
1. The following statements relate to the date of the auditor’s report. Which is false?
A. The auditor should date the report as of the completion date of the audit.
B. The date of the auditor’s report should not be earlier than the date on which the financial statements
are signed or approved by management.
C. The date of the auditor’s report should not be later than the date on which the financial
statements are signed or approved by management.
D. The date of the auditor’s report should always be later than the date of the financial statements (i.e.,
the balance sheet date).
2. In which of the following circumstances would an auditor most likely add an emphasis of matter paragraph
to the auditor’s report while expressing an unqualified opinion?
A. There is a substantial doubt about the entity’s ability to continue as a going concern.
B. Management’s estimates of the effects of future events are unreasonable.
C. No depreciation has been provided in the financial statements.
D. Certain transactions cannot be tested because of management’s records retention policy.
3. An independent auditor discovers that a payroll supervisor of the company being audited has
misappropriated P50,000. The company’s total assets and income before tax are P70 million and P15 million,
respectively. Assuming no other issues affect the report, the auditor’s report will most likely contain a/an
A. Unmodified opinion C. Adverse opinion.
B. Disclaimer of opinion D. Scope qualification
4. A note to the financial statements of the Prudent Bank indicates that all of the records relating to the bank’s
business operations are stored on magnetic disks, and that no emergency backup systems or duplicate disks
are stored because the bank and its auditors consider the occurrence of a catastrophe to be remote. Based
upon this note, the auditor’s report should express
A. A qualified opinion C. An adverse opinion
B. An unmodified opinion D. A “subject to” opinion
5. When would the auditor refer to the work of an appraiser in the auditor’s report?
A. An adverse opinion is expressed based on a difference of opinion between the client and
the outside appraiser as to the value of certain assets.
B. A disclaimer of opinion is expressed because of a scope limitation imposed on the auditor by the
appraiser.
C. A qualified opinion is expressed because of a matter unrelated to the work of the appraiser.
D. An unqualified opinion is expressed and an emphasis of matter paragraph is added to disclose the
use of the appraiser’s work.
6. Which of the following terms is used in the standard to describe the effects on the financial statements of
misstatements or the possible effects on the financial statements, if any, that are undetected due to an
inability to obtain sufficient appropriate audit evidence?
A. Persuasive C. Material
B. Pervasive D. Extensive
7. When audited financial statements are presented in a document (e.g., annual report) containing other
information, the auditor
A. Should read the other information to consider whether it is inconsistent with the audited
B. Has no responsibility for the other information because it is not part of the basic financial statements.
C. Has an obligation to perform auditing procedures to corroborate the other information.
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D. Is required to express a qualified opinion if the other information has a material misstatement of fact.
8. An auditor concludes that there is a material inconsistency in the other information in an annual report to
shareholders containing audited financial statements. If the auditor concludes that the financial statements do
not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may
A. Disclaim an opinion on the financial statements after explaining the material inconsistency in an
emphasis of matter paragraph.
B. Revise the auditor’s report to include an other matter paragraph describing the material
inconsistency.
C. Express a qualified opinion after discussing the matter with the client’s directors.
D. Consider the matter closed because the other information is not in the audited statements.
9. An auditor may express a qualified opinion under which of the following circumstances?
Lack of Sufficient Restriction on the
Appropriate Evidence Scope of the Audit
A. No No
B. No Yes
C. Yes No
D. Yes Yes
10. In which of the following situations would an auditor ordinarily choose between expressing a qualified
opinion or an adverse opinion?
A. The auditor wishes to emphasize an unusually important subsequent event.
B. The financial statements fail to disclose information that is required by Philippine
Financial Reporting Standards.
C. Events disclosed in the financial statements cause the auditor to have substantial doubt about the
entity’s ability to continue as a going concern.
D. The auditor did not observe the entity’s physical inventory and is unable to become satisfied as to its
balance by other auditing procedures.
11. There are two broad financial reporting frameworks for comparatives: the corresponding figures and the
comparative financial statements. Which of the following statements is correct concerning these reporting
frameworks?
A. Under the corresponding figures framework, the corresponding figures for the prior
period(s) are integral part of the current period financial statements.
B. Under the corresponding figures framework, the corresponding figures for the prior period(s) are
considered separate financial statements.
C. Under the comparative financial statements framework, the comparative financial statements for the
prior period(s) are intended to be read in conjunction with the amounts and other disclosures relating
to the current period.
D. Under the comparative financial statements framework, the amounts and other disclosures for the
prior period(s) form part of the current period financial statements.
12. In which of the following circumstances would an auditor’s report least likely include specific reference to
the corresponding figures?
A. When the auditor’s report on the prior period, as previously issued, included a modified
opinion and the matter which gave rise to the modification is resolved and properly dealt
with in the financial statements.
B. When the auditor’s report on the prior period, as previously issued, included a modified opinion and
the matter which gave rise to the modification is unresolved, and results in a modification of the
auditor’s report regarding the current period figures.
C. When the auditor’s report on the prior period, as previously issued, included a modified opinion and
the matter which gave rise to the modification is unresolved, but does not result in a modification of
the auditor’s report regarding the current period figures.
D. When the auditor’s report on the prior period financial statements containing a material misstatement
included an unmodified opinion and the prior period financial statements have not been revised and
reissued, and the corresponding figures have not been properly restated and/or appropriate
disclosures have not been made.
13. According to PSA 710, the incoming auditor may refer to the predecessor auditor’s report on the
corresponding figures in the incoming auditor’s report for the current period. The incoming auditor’s report
should indicate
I. That the financial statements of the prior period were audited by another auditor.
Page 32 of 35
II. The type of report issued by the predecessor auditor.
III. The date of the predecessor auditor’s report.
A. I and II only. C. I and III only.
B. II and III only. D. I, II, and III.
14. When the prior period financial statements are not audited, the incoming auditor should state in the
auditor’s report that
I. The corresponding figures are unaudited.
II. The incoming auditor is not required to perform procedures regarding opening balances of the
current period.
A. I only C. Both I and II
B. II only D. Neither I nor II
15. J, CPA, audited JST Company’s prior-year financial statements. These statements are presented with
those of the current year for comparative purposes without J’s auditor’s report, which expressed a qualified
opinion. In drafting the current year’s auditor’s report, S, CPA, the incoming auditor, should
I. Not name J as the predecessor auditor.
II. Indicate the type of report issued by J.
III. Indicate the substantive reasons for J’s qualification.
IV. Indicate the date of J’s auditor’s report.
A. I, II, and IV only. C. I, II, and III only.
B. II, III, and IV only. D. I, II, III, and IV.
16. The predecessor auditor, who is satisfied after properly communicating with the incoming auditor, has
reissued his/her auditor’s report on prior year financial statements. The predecessor auditor’s report should
A. Refer to the work of the incoming auditor in the scope and opinion paragraphs.
B. Refer to the report of the incoming auditor only in the scope paragraph.
C. Refer to both the work and the report of the incoming auditor only in the opinion paragraph.
D. Not refer to the report or the work of the incoming auditor.
17. The following statements relate to unaudited prior year financial statements that are presented in
comparative form with audited current year financial statements. Which is incorrect?
A. The incoming auditor should state in the auditor’s report that the comparative financial statements
are unaudited.
B. The incoming auditor need not perform audit procedures regarding opening balances of
the current period.
C. Clear disclosure in the financial statements that the comparative financial statements are unaudited is
encouraged.
D. In situations where the incoming auditor identifies that the prior year unaudited figures are materially
misstated, the auditor should request management to revise the prior year’s figures or if
management refuses to do so, appropriately modify the report.
18. Financial statements of an entity that have been reviewed by an accountant should be accompanied by a
report stating that a review
A. Provides only limited assurance that the financial statements are fairly presented.
B. Includes examining, on a test basis, information that is the representation of management.
C. Consists principally of inquiries of company personnel and analytical procedures applied
to financial data.
D. Does not contemplate obtaining corroborating evidential matter or applying certain other procedures
ordinarily performed during an audit.
19. An accountant’s report on a review of the financial statements of an entity should state that the
accountant
A. Does not express an opinion or any form of limited assurance on the financial statements.
B. Conducted the review in accordance with the Philippine Standard on Review
Engagements.
C. Obtained reasonable assurance about whether the financial statements are free of material
misstatements.
D. Examined evidence, on a test basis, supporting the amounts and disclosures in the financial
statements.
20. Financial statements of an entity that have been reviewed by an accountant should be accompanied by a
report stating that
Page 33 of 35
A. The scope of the inquiry and analytical procedures performed by the accountant has not been
restricted.
B. The financial statements are the responsibility of the company’s management.
C. A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the
D. A review is greater in scope than a compilation, the objective of which is to present financial
statements that are free of material misstatements.
21. An accountant who reviews the financial statements of an entity should issue a report stating that a review
A. Provides less assurance than an audit.
B. Provides negative assurance that internal control is functioning as designed.
C. Provides only limited assurance that the financial statements are fairly presented.
D. Is substantially more in scope than a compilation.
22. When compiling the financial statements of an entity, an accountant should
A. Review agreements with financial institutions for restrictions on cash balances.
B. Understand the accounting principles and practices of the entity’s industry.
C. Inquire of key personnel concerning related parties and subsequent events.
D. Perform ratio analyses of the financial data of comparable prior periods.
23. When compiling an entity’s financial statements, an accountant would be least likely to
A. Perform analytical procedures designed to identify relationships that appear to be
unusual.
B. Read the compiled financial statements and consider whether they appear to include adequate
disclosure.
C. Obtain an acknowledgment from management of its responsibility for the financial statements.
D. Plan the work so that an effective engagement will be performed.
24. Which of the following should not be included in an accountant’s report based upon the compilation of an
entity’s financial statements?
A. A statement that a compilation of the company’s financial statements was made in accordance with
the Philippine Standard on Related Services applicable to compilation engagements.
B. A statement that management is responsible for the financial statements.
C. A statement that the accountant has not audited or reviewed the statements.
D. A statement that the accountant does not express an opinion but provides only negative
assurance on the statements.
25. Negative assurance may be expressed when an accountant is requested to report agreed-upon procedures
to specified
Elements of a Accounts of a
Financial Statement Financial Statement
A. Yes Yes
B. Yes No
C. No No
D. No Yes
26. An accountant may accept an engagement to apply agreed-upon procedures that are not sufficient to
express an opinion on one or more specified accounts or items of a financial statement provided that
A. The accountant’s report does not enumerate the procedures performed.
B. The financial statements are prepared in accordance with a comprehensive basis of accounting other
than generally accepted accounting principles.
C. Distribution of the accountant’s report is restricted.
D. The accountant is also the entity’s continuing auditor.
28. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its
knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. Such
prospective financial statements are known as
A. Pro forma financial statements
B. Financial projections
C. Partial presentations
D. Financial forecasts
29. A financial forecast consists of prospective financial statements that present an entity’s expected financial
position, results of operations, and cash flows. A forecast
A. Is based on the most conservative estimates.
B. Present estimates given one or more hypothetical assumptions.
Page 34 of 35
C. Unlike a projection, may contain a range.
D. Is based on assumptions reflecting conditions expected to exist and courses of action
expected to be taken.
30. When an accountant examines prospective financial statements, the accountant’s report should include a
separate paragraph that
A. Contains an opinion as to whether the prospective financial statements are properly
prepared on the basis of the assumptions and are presented in accordance with generally
accepted accounting principles in the Philippines.
B. Provides an explanation of the differences between an examination and an audit.
C. States that the accountant is responsible for events and circumstances up to 1 year after the report’s
date.
D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the prospective
31. The following statements relate to the examination of prospective financial information. Which is false?
A. The auditor should express an opinion as to whether the results shown in the prospective
financial information will be achieved.
B. Before accepting an engagement to examine prospective financial information, the auditor should
consider the intended use of the information.
C. The auditor should not accept, or should withdraw from, an engagement to examine prospective
financial information when the assumptions are clearly unrealistic.
D. When in the auditor’s judgment an appropriate level of satisfaction has been obtained, the auditor is
not precluded from expressing positive assurance regarding the assumptions.
32. Which of the following is a prospective financial information for general use upon which an accountant
may appropriately report?
A. Financial projection
B. Partial presentation
C. Pro forma financial statement
D. Financial forecast
Page 35 of 35

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