MABALACAT CITY COLLEGE

Dolores, Mabalacat City, Pampanga

For A.Y. 2018-2019, 1st Semester

Auditing 1

AUDITOR’S RESPONSIBILITY

November 29, 2018

Abalos, Mikaela Rae L.

Austria, Krizza Renz T.
Villanueva, Jervie B.
Source: Auditing Theory 2018 (Jekell Salosagcol, Michael Tiu, Roel Hemorsilla)
Chapter 3

1. Material misstatements may emanate from all of the following except

a. Fraud c. Noncompliance with laws and regulations
b. Error d. Inadequacy of accounting records
2. The level of assurance provided by an audit of detecting a material misstatement is
referred to as:
a. Reasonable Assurance c. Absolute Assurance
b. Moderate Assurance d. Negative Assurance
3. The responsibility for the detection and prevention of errors, fraud and
noncompliance with laws and regulations rests with
a. Auditor c. Client management
b. Client’s legal counsel d. Internal auditor
4. The responsibility for adopting sound accounting policies, maintaining adequate
internal control, and making fair representation in the financial statement rests
a. With the management c. Equally with management and the auditor
b. With the independent auditor d. With the internal audit department
5. The management responsibility to detect and prevent fraud and error is
accomplished by
a. Implementing adequate quality control system
b. Having an annual audit of financial statements
c. Implementing adequate accounting and internal control system
d. Issuing a representation letter
6. The primary responsibility for establishing and maintaining an internal control rests
with
a. The external auditors
b. The internal auditors
c. Management and those charged with governance
d. The controller or the treasurer
7. The fundamental purpose of an internal control is to
a. Safeguard the resources of the organization
b. Provide reasonable assurance that the objectives of the organization are
achieved
c. Encourage compliance with organization objectives
d. Ensure the accuracy, reliability and timeliness of information
8. Which of the following is not one of the three primary objectives of effective internal
control?
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations
 c. Compliance with laws and regulations
d. Assurance of elimination of business risk
9. Which of the following internal control objectives would be most relevant to the
audit?
a. Operational objective
b. Compliance objective
c. Financial reporting objective
d. Administrative control objective
10. An act of two or more employee to steal assets and cover their theft
by misstating the accounting records would be referred to as:
a. Collusion
b. A material weakness
c. A control deficiency
d. A significant deficiency
11. Which of the following is not one of the components of an entity’s internal control?
a. Control risk
b. Control activities
c. Information and communication
d. The control environment
12. The overall attitude and awareness of an entity’s board of director concerning the
importance of the internal control usually is reflected in its
a. Computer-based controls
b. System of segregation of duties
c. Control environment
d. Safeguard over access of assets
13. In evaluating the design of the entity’s internal control environment, the auditor
considers the certain subcomponents of control environment and how they have
been incorporated into the entity’s processes. Subcomponents of control
environment would include
a. Integrity and ethical values
b. Commitment to competence
c. Organizational structure
d. Information and communications systems
14. Which of the following components of an entity’s internal control
structure includes the development of employee promotion and training policies?
a. Control activities
b. Control environment
c. Information and communication
d. Quality control system
15. Which of the following subcomponents of the control environment define the
existing lines of responsibility and authority?
a. Organizational structure
b. Management philosophy and operating style
c. Human resource policies and practices
d. Management integrity and ethical values
16. Which of the following is not one of the subcomponents of the control
environment?
a. Management philosophy and operating style
b. Organizational structure
c. Adequate separation of duties
d. Commitment to competence
17. Which of the following deal with ongoing or periodic assessment of quality of
internal control by management?
a. Quality control activities
b. Monitoring activities
c. Oversight activities
d. Management activities
18. The policies and procedures that help ensure that management directives are
carried out are referred to as the:
a. Control environment
b. Control activities
c. Monitoring of controls
d. Information systems
19. Which of the following is not one of the specific control activities that
are relevant to financial statement audit?
a. Performance reviews
b. Physical controls
c. Segregation of duties
d. Monitoring
20. Proper segregation of functional responsibilities in an effective structure
of internal control calls for separation of functions of
a. Authorization, execution, and payment
b. Authorization, recording, and custody
c. Custody, execution, and reporting
d. Authorization, payment, and recording
21. Which of the following best describes the purpose of the control activities?
a. The actions, policies and procedures that reflect the overall attitudes of the
management
b. The identification and analysis of risks and relevant to the preparation of the
 financial statements
c. The policies and procedures that help ensure that necessary actions aretaken
in order to achieve the entity’s objectives
d. Activities that deal with the ongoing assessment of the quality of internal
control by management
22. 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
23. Which of the following is not a medium that can normally be used by an auditor to
record information concerning a client’s internal control policies and
procedures?
a. Narrative memorandum
b. Flowchart
c. Procedures manual
d. Questionnaire
24. An auditor uses the knowledge provided by the understanding of internal control
and the final assessed level of control risk primarily to determine the nature, timing
and extent of the
a. Attribute tests
b. Tests of control
c. Compliance tests
d. Substantive tests
25. Based on the requirement of PSA 3330, how frequently must an auditor test
operating effectiveness of controls that appear to functions as they have in past
years and on which the auditor wishes to rely in the current year?
a. Monthly
b. Each audit
c. At least every second audit
d. At least every third audit
26. Which of the following statements best describes the auditor’s responsibility
regarding the detection of material errors and frauds?
a. The auditor is responsible for the failure to detect material errors an frauds
only when such failure results from the misapplication of PSA.
b. The audit should be designed to provide reasonable assurance that material
errors and frauds will be detected.
c. The auditor is responsible for the failure to detect material errors and fraud
 only when the auditor fails to confirm receivables or observe inventories.
d. Extended auditing procedures are required to detect unrecorded
transactions even if there is no evidence that material errors and frauds may
exists.
27. The auditor’s best defense when material misstatements in the financial statements
are not uncovered in the audit is that
a. The audit was conducted in accordance with generally accepted accounting
principles
b. Client is guilty of contributory negligence
c. The audit was conducted in accordance with PSA
d. The financial statements are client’s responsibility
28. The auditor’s responsibility for failure to detect fraud arises
a. When the failure clearly results from non-compliance to PSA
b. Whenever the amounts involved are material
c. Only when the examination was specifically designed to detect fraud
d. Only when such failure clearly results from negligence so gross as to sustain
an inference of fraud on the part of the auditor
29. An intentional act by one or more individuals among management, employees, or
third parties which results in misrepresentation of financial statements refer to
a. Error
b. Noncompliance
c. Fraud
d. Illegal acts
30. Which of the following statements is correct regarding errors and fraud?
a. An error is unintentional, whereas fraud is intentional.
b. Frauds occur more often than errors in financial statements.
c. Errors are always fraud and frauds are always errors.
d. Auditors have more responsibility for finding fraud than errors.

Source: CPA Review School of the Philippines Manila

31. The primary responsibility for the prevention and detection of fraud and error rests
with
a. The auditor
b. Those charged with governance
c. The management of an entity
d. Both b and c
32. When planning and performing audit procedures and evaluating and reporting the
results thereof, the auditor should
a. Search for errors that would have a material effect and for fraud that would
 have either material or immaterial effect on the financial statements
b. Consider the risk of misstatements in the financial statements resulting from
fraud or error.
c. Search for fraud that would have a material effect and for errors that would
have either material or immaterial effect on the financial statements.
d. Consider the risk of material misstatements in the financial statements
resulting from fraud or error.
33. The following are examples of error, except
a. A mistake in gathering or processing data from which financial statements
are prepared.
b. An incorrect accounting estimate arising from oversight or misinterpretation
of facts.
c. A mistake in the application of accounting principles relating to
measurement, recognition, classification, presentation, or disclosure.
d. Misrepresentation in the financial statements of events, transactions or other
significant information.
34. The term “fraud” refers to an intentional act by one or more individuals among
management, those charged with governance, employees, or third parties, involving
the use of deception to obtain an unjust or illegal advantage. Which statement is
correct regarding fraud?
a. Auditors make legal determinations of whether fraud has actually occurred.
b. Misstatement of the financial statements may not be the objective of some
frauds.
c. Fraud involving one or more members of management or those charged with
governance is referred to as “employee fraud”.
d. Fraud involving only employees of the entity is referred to as “management
fraud”.
35. The types of intentional misstatements that is relevant to the auditor’s
consideration of fraud include
I. Misstatements resulting from fraudulent financial reporting
II. II. Misstatements resulting from misappropriation of assets
a. I and II
b. I only
c. II only
d. Neither I nor II
36. Fraudulent financial reporting involves intentional misstatements or omissions of
amounts or disclosures in financial statements to deceive financial statement users.
Fraudulent financial reporting least likely involve
a. Deception such as manipulation, falsification, or alteration of accounting
records or supporting documents from which the financial statements are
 prepared.
b. Misrepresentation in or intentional omission from, the financial statements
of events, transactions or other significant information.
c. Intentional misapplication of accounting principles relating to measurement,
recognition, classification, presentation, or disclosure.
d. Embezzling receipts, stealing physical or intangible assets, or causing an
entity to pay for goods and services not received.
37. Which of the following illustrates a perceived opportunity to commit fraud?
a. Individuals are living beyond their means.
b. Management is under pressure, from sources outside or inside the entity, to
achieve an expected (and perhaps unrealistic) earnings target.
c. An individual believes internal control could be circumvented because the
individual is in a position of trust or has knowledge of specific weaknesses in
the internal control system.
d. All of the above.
38. Which statement is incorrect regarding the auditor’s responsibility to consider
fraud and error in an audit of financial statements?
a. The auditor is not and cannot be held responsible for the prevention of fraud
and error.
b. In planning the audit, the auditor should discuss with other members of the
audit team the susceptibility of the entity to material misstatements in the
financial statements resulting from fraud or error.
c. The auditor should design test of controls to reduce to an acceptably low
level the risk that misstatements resulting from fraud and error that are
material to the financial statements taken as a whole will not be detected.
d. When the auditor encounters circumstances that may indicate that there is a
material misstatement in the financial statements resulting from fraud or
error, the auditor should perform procedures to determine whether the
financial statements are materially misstated.
39. The risk of not detecting a material misstatement resulting from fraud is higher
than the risk of not detecting a material misstatement resulting from error because
a. The effect of fraudulent act is likely omitted in the accounting records.
b. Fraud is ordinarily accompanied by acts specifically designed to conceal its
existence.
c. Fraud is always a result of connivance between or among employees.
d. The auditor is responsible to detect errors but not fraud.
40. Which of the following statements describes why a properly designed and executed
audit may not detect a material fraud?
a. Audit procedures that are effective for detecting an unintentional
misstatement may be ineffective for an intentional misstatement that is
 concealed through collusion.
b. An audit is designed to provide reasonable assurance of detecting material
errors, but there is no similar responsibility concerning material fraud.
c. The factors considered in assessing control risk indicated an increased risk of
intentional misstatements, but only a low risk of unintentional errors in the
financial statements.
d. The auditor did not consider factors influencing audit risk for account
balances that have pervasive effects on the financial statements taken as a
whole.
41. The auditor’s ability to detect a fraud depends on factors such as
I. The skillfulness of the perpetrator.
II. The frequency and extent of manipulation.
III. The degree of collusion involved.
IV. The relative size of individual amounts manipulated.
V. The seniority of those involved.
a. All of the above
b. I, III and V only
c. I, II, III and V only
d. III and V only
42. In comparing management fraud with employee fraud, the auditor’s risk of failing
to discover the fraud is
a. Greater for employee fraud because of the higher crime rate among blue
collar workers.
b. Greater for management fraud because of management’s ability to override
existing internal controls.
c. Greater for employee fraud because of the larger number of employees in the
organization.
d. Greater for management fraud because managers are inherently smarter
than employees.
43. The subsequent discovery of a material misstatement of the financial statements
resulting from fraud or error, in and of itself, indicates:
a b c d

• a failure to obtain reasonable assurance Yes Yes Yes No

• inadequate planning, performance or judgment Yes No No No

• the absence of professional competence and

due care Yes Yes No No

• a failure to comply with PSAs Yes No No No

44. Whether the auditor has performed an audit in accordance with PSAs is determined
by
a. The adequacy of the audit procedures performed in the circumstances and
the suitability of the auditor’s report based on the result of these procedures.
b. The absence of material misstatements.
c. The absence of material errors.
d. The Securities and Exchange Commission.
45. When planning the audit, which of the following is least likely a purpose of the
auditor’s inquiries of management?
a. To obtain an understanding of management’s assessment of the risk that the
financial statements may be materially misstated as a result of fraud.
b. To obtain knowledge of management’s understanding regarding the
accounting and internal control systems in place to prevent and detect error.
c. To determine whether management has discovered any material errors.
d. To determine extent of authentication of documentation.
46. Which of the following best describes what is meant by the term “fraud risk factor”?
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presence often has been observed in circumstances where
frauds have occurred.
c. Factors whose presence requires modifications of planned audit procedures.
d. Reportable conditions identified during an audit.
47. Which of the following is least likely a category of fraud risk factors that relate to
misstatements resulting from fraudulent financial reporting?
a. Management’s characteristics and influence over the control environment.
b. Industry conditions.
c. Operating characteristics and financial stability.
d. Susceptibility of assets to misappropriation.
48. Fraud risk factors relating to management’s characteristics and influence over the
control environment
a. Pertain to management’s abilities, pressures, style, and attitude relating to
internal control and the financial reporting process.
b. Involve the economic and regulatory environment in which the entity
operates.
c. Pertain to the nature and complexity of the entity and its transactions, the
entity’s financial condition, and its profitability.
d. Involve the lack of controls designed to prevent or detect misappropriation
of assets.
49. Which of the following is least likely an example of fraud risk factors relating to
management’s characteristics and influence over the control environment?
a. There is motivation for management to engage in fraudulent financial
 reporting.
b. There is a failure by management to display and communicate an
appropriate attitude regarding internal control and the financial reporting
process.
c. Non-financial management participates excessively in, or is preoccupied
with, the selection of accounting principles or the determination of
significant estimates.
d. New accounting, statutory or regulatory requirements that could impair the
financial stability or profitability of the entity.
50. The following are examples of fraud risk factors relating to industry conditions,
except
a. There is a high turnover of management, counsel or board members.
b. A high degree of competition or market saturation, accompanied by declining
margins.
c. A declining industry with increasing business failures and significant
declines in customer demand.
d. Rapid changes in the industry, such as high vulnerability to rapidly changing
technology or rapid product obsolescence.
51. Which of the following is most likely an example of fraud risk factor relating to
management’s characteristics and influence over the control environment
a. There is a strained relationship between management and the current or
predecessor auditor.
b. Inability to generate cash flows from operations while reporting earnings
and earnings growth.
c. Significant related party transactions which are not in the ordinary course of
business.
d. Significant, unusual or highly complex transactions (especially those close to
year-end) that pose difficult questions concerning substance over form.
52. Examples of fraud risk factors relating to susceptibility of assets to
misappropriation include the following, except
a. Large amounts of cash on hand or processed.
b. Inventory characteristics, such as small size combined with high value and
high demand.
c. Easily convertible assets, such as bearer bonds, diamonds or computer chips.
d. Lack of appropriate management oversight.
53. Judgments about the risk of material misstatements resulting from fraud may affect
the audit in the following ways, except
a. The application of professional skepticism may include increased sensitivity
in the selection of the nature and extent of documentation to be examined in
support of material transactions.
 b. The knowledge, skill and ability of members of the audit team assigned
significant audit responsibilities need to be commensurate with the auditor’s
assessment of the level of risk for the engagement.
c. The auditor may decide to consider further management’s selection and
application of significant accounting policies, particularly those related to
revenue recognition, asset valuation or capitalizing versus expensing.
d. The auditor’s ability to assess control risk at high level may be reduced.
54. The nature, timing and extent of procedures may need to be modified in the
following ways as possible responses to the auditor’s assessment of the risk of
material misstatement resulting from both fraudulent financial reporting and
misappropriation of assets.
a. The nature of audit procedures performed may need to be changed to obtain
evidence that is more reliable or to obtain additional corroborative
information.
b. The timing of substantive procedures may need to be altered to be closer to,
or at, year-end.
c. The extent of the procedures applied will need to reflect the assessment of
the risk of material misstatement resulting from fraud.
d. All of the above.
55. The auditor may encounter circumstances that, individually or in combination,
indicate the possibility that the financial statements may contain a material
misstatement resulting from fraud or error. These circumstances include the
following, except
a. Unrealistic time deadlines for audit completion imposed by management.
b. Conflicting or unsatisfactory evidence provided by management or
employees.
c. Information provided unwillingly or after unreasonable delay.
d. Transactions recorded in accordance with management’s general or specific
authorization.
56. Which of the following circumstances most likely indicate the possibility of fraud or
error?
a. Management engages in frank communication with appropriate third parties,
such as regulators and bankers.
b. Evidence of an unduly lavish lifestyle by officers or employees.
c. Conservative application of accounting principles.
d. Minimal differences from expectations disclosed by analytical procedures.
57. Which of the following should the auditor likely to do when the application of
planned audit procedures indicates the possible existence of fraud or error?
a. The auditor should resign in order to avoid legal responsibility.
b. He should discuss the matter with the person whom he believes is involved
 with the irregularities.
c. He should consider the potential effect on the financial statements.
d. He should refer the suspected fraud or error to the internal auditor.
58. If the auditor believes an indicated fraud or error could have a material effect on
the financial statements, the nature, timing and extent of the procedures to be
performed depends on the auditor’s judgment as to
a. The type of fraud or error.
b. The likelihood that a particular type of fraud or error could have a material
effect on the financial statements.
c. The likelihood of their occurrence.
d. All of the above.
59. The auditor should document
a. Fraud risk factors identified as being present during the auditor’s assessment
process.
b. The auditor’s response to fraud risk factors identified.
c. Both a and b.
d. Neither a nor b.
60. The auditor least likely obtains written representations from management that the
management:
a. Acknowledges its responsibility for the implementation and operations of
accounting and internal control systems that are designed to prevent and
detect fraud and error.
b. Believes the effects of those uncorrected financial statement misstatements
aggregated by the auditor during the audit are material, both individually
and in the aggregate, to the financial statements taken as a whole.
c. Has disclosed to the auditor all significant facts relating to any frauds or
suspected frauds known to management that may have affected the entity.
d. Has disclosed to the auditor the results of its assessment of the risk that the
financial statements may be materially misstated as a result of fraud.
61. Communication of a misstatement resulting from fraud, or a suspected fraud, or
error to the appropriate level of management on a timely basis is important because
it enables management to take action as necessary. Ordinarily, the appropriate level
of management is
a. At least equal to the level of the persons who appear to be involved with the
misstatement or suspected fraud.
b. At least one level above the persons who appear to be involved with the
misstatement or suspected fraud.
c. The audit committee of the board of directors.
d. The head of internal audit department.
 62. The auditor may encounter exceptional circumstances that bring into question the
auditor’s ability to continue performing the audit, including where
a. The entity does not take the remedial action regarding fraud that the auditor
considers necessary in the circumstances, even when the fraud is not
material to the financial statements.
b. The auditor’s consideration of the risk of material misstatement resulting
from fraud and the results of audit tests indicate a significant risk of material
and pervasive fraud.
c. The auditor has significant concern about the competence or integrity of
management or those charged with governance.
d. All of the above.

Source: Auditing Theory 2018 (Jekell Salosagcol, Michael Tiu, Roel Hemorsilla)
Chapter 3

63. Fraudulent financial reporting is often called

a. Management fraud
b. Defalcation
c. Misappropriation of assets
d. Employee fraud
64. Fraudulent financial reporting is most likely to be committed by whom?
a. Line employees of the company
b. Outside members of the company’s board of directors
c. Company’s management
d. The company’s auditors
65. Which of the following statements best identifies the two types of fraud?
a. Theft of assets and employee fraud
b. Misappropriation of asset and defalcation
c. Management fraud and employee fraud
d. Fraudulent financial reporting and management fraud
66. If there is fraud involving top management, the probability that the fraud would be
uncovered in a financial statement audit is
a. Zero
b. Unlikely
c. Likely
d. Very high
67. Which of the following is an example of error?
a. Defalcation
b. Suppression or omission of the effects of transactions from the records or
documents.
 c. Recording of transactions without substance.
d. Misapplication of accounting policies.
68. Which of the following is an “error” as distinguished from “fraud”?
a. Embezzlement of company’s fund
b. Window dressing
c. Clerical mistakes in the processing of transactions
d. Lapping
69. Which one of the following terms relates to the embezzling of receipts?
a. Manipulation
b. Misrepresentation
c. Misappropriation
d. Misapplication
70. The most difficult type of misstatement to detect is fraud based on
a. The over recording of transactions
b. The nonrecording of transactions
c. Recorded transactions in subsidiaries
d. Related party receivable
71. If several employees collude to falsify documents, the chance a normal audit would
uncover such acts is:
a. Very low
b. Very high
c. Zero
d. None of the above
72. When performing a financial statement audit, auditors are required to explicitly
assess the risk of material misstatement due to
a. Errors
b. Fraud
c. Noncompliance
d. Business risk
73. Most noncompliance affect the financial statements:
a. Directly
b. Only indirectly
c. Both directly and indirectly
d. Materially if direct, immaterially if indirect
74. These are acts of omission or commission by the entity being audited, either
intentional or unintentional, which are contrary to the prevailing law and
regulations.
a. Fraud d. Defalcation
b. Misappropriation
c. Noncompliance
75. The auditor’s evaluation of the likelihood of material employee fraud is normally
done initially as part of:
a. Tests of controls
b. Tests of transactions
c. Understanding the entity’s internal control
d. The assessment of whether to accept the audit engagement
76. If the auditor believes that the fraud or error has a material effect on the financial
statements but the client is not willing to correct the misstatement, the auditor
would most likely issue a(n)
a. Unmodified report
b. Qualified or adverse opinion
c. Qualified or disclaimer of opinion
d. Unmodified opinion with emphasis of matter paragraph
77. If the auditor is precluded by the entity from obtaining evidence to evaluate
whether fraud or error that may be material to the financial statements has
occurred, the auditor should issue a report that contains
a. An adverse opinion
b. An unmodified opinion
c. Either qualified or adverse opinion
d. Either qualified opinion or a disclaimer of opinion
78. Which of the following conditions would not normally cause the auditor to question
whether material errors or possible fraud exists?
a. The accounting department is overstaffed
b. Differences exist between control accounts and supporting subsidiary
records
c. Transactions are not supported by proper documentations
d. There are frequent changes of auditors and lawyers
79. Which of the following conditions or events increases the risk of error or fraud?
a. Management is dominated by several individuals
b. There are frequent changes of auditors or legal counsel
c. There is a significantly low turnover of senior accounting personnel
d. The entity does not correct internal control deficiencies that it knows about
80. Which of the following conditions or events would least likely to increase the risk of
fraud or error?
a. Questions with respect to competence or integrity of management
b. Unusual pressures within the entity
c. Unusual transactions
d. Lack of transaction trail
Source: Auditing and Other Assurance Services (Arens)

81. If the auditor believes that the financial statements are not fairly stated or is unable
to reach an conclusion because of insufficient evidence, the auditor:
a. Should withdraw from the engagement
b. Should request an increase in audit fees so that more resources can be used
to conduct the audit.
c. Has the responsibility of notifying financial statement users through the
auditor’s report.
d. Should notify regulators of the circumstances.
82. The auditor’s best defense when material misstatements are not uncovered is to
have conducted the audit:
a. In accordance with auditing standards.
b. As effectively as reasonably possible.
c. In a timely manner.
d. Only after an adequate investigation of the management team.
83. If management insists on financial statement disclosures that the auditor finds
unacceptable, the auditor can do all but which of the following?
a. Issue an adverse audit report
b. Issue a disclaimer of opinion.
c. Withdraw from the engagement.
d. Issue a qualified audit report.
84. The auditor has no responsibility to plan and perform the audit to obtain reasonable
assurance that misstatement, whether caused by errors or fraud, that are not ________
are detected.
a. important to the financial statements
b. statistically significant to the financial statements
c. material to the financial statements
d. identified by the client
85. The concept of reasonable assurance indicates that the auditor is:
a. Not an insurer of the correctness of the financial statements.
b. Not responsible for the fairness of the financial statements.
c. Responsible only for issuing an opinion on the financial statements.
d. Responsible for finding all misstatements.
86. The auditor gives an audit opinion on the fair presentation of the financial
statements and associates his or her name with it when, on the basis of adequate
evidence, the auditor concludes that the financial statements are unlikely to
mislead:
a. Investors
b. Management
 c. A prudent user
d. The reader
87. If the auditor were responsible for making certain that all of management’s
assertions in the financial statements were absolutely correct:
a. Bankruptcies could no longer occur.
b. Bankruptcies would be reduced to a very small number.
c. Audits would be much easier to complete.
d. Audits would not be economically feasible.
88. Which of the following statements is usually true?
a. It is easier for the auditor to uncover fraud than errors.
b. It is easier for the auditor to uncover indirect-effect illegal acts than fraud.
c. The auditor’s responsibility for detecting direct-effect illegal acts is similar to
the responsibility to detect fraud.
d. The auditor’s responsibility for detecting indirect-effect illegal acts is similar
to the responsibility to detect fraud.
89. Auditing standards make _____ distinction(s) between the auditor’s responsibilities
for searching for errors and fraud.
a. little
b. a significant
c. no
d. various
90. 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.
91. 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.
92. When the auditor knows that an illegal act has occurred, the auditor must:
a. report it to the proper governmental authorities.
b. consider the effects on the financial statements, including the adequacy of
disclosure.
c. withdraw from the engagement.
d. issue an adverse opinion.
93. 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.
94. Why does the auditor divide the financial statements into segments around the
financial statement cycles?
a. Most auditors are trained to audit cycles as opposed to entire financial
statements.
b. The approach aids in the assignment of tasks to different members of the
audit team.
c. The cycle approach is required by auditing standards.
d. The cycle approach allows the auditor to detect indirect-effect illegal acts.
95. 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.
96. Which of the following statements is not correct?
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.
97. 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.
98. 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 nonperformance 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.
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.
99. With respect to the detection of illegal acts, auditing standards state that the auditor
provides:
a. no assurance that they will be detected
b. the same reasonable assurance provided for other items
c. assurance that they will be detected, if material
d. assurance that they will be detected, if highly material
100. 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.