Chapter 7 Overview of the Financial Audit Process
11. Ultimately, the decision about whether or not an auditor is independent must be made by a. Auditor b. Public c. Client's management d. Audit committee
A
25. Nature of an entity refers to a. The entity's operations, its ownership and governance, the types of investments that it is making and plans to make, the way that the entity is structured and how it is financed. b. The overall plans for the entity. c. The operational approaches by which management intends to achieve its objectives. d. The result of significant conditions, events, circumstances, actions or inactions that could adversely affect the entity's ability to achieve its objectives and execute its strategies, or the setting of inappropriate objectives and strategies.
A
25. The objective of performing analytical procedures in planning an audit engagement is to identify the existence of: a. Unusual transactions and events. b. Illegal acts that went undetected because of internal control weaknesses. c. Related party transactions. d. Recorded transactions that were not properly authorized.
A
25. The preliminary use of the analytical review procedures by the auditor is a. Required to identify heightened risk b. Optional in accordance with the auditor's judgment c. Only used when other planning procedures cannot be applied d. Used to assist the auditor in documenting internal control
A
3. Audit procedures performed to obtain an understanding of the entity and its environment, including its internal control, and to assess the risks of material misstatements at the financial statement and assertion levels. a. Risk assessment procedures c. Tests of control b. Substantive procedure d. Analytical procedure
A
35. The auditor should design and perform further audit procedures whose nature, timing, and extent are responsive to the assessed risks of material misstatement at the assertion level. Which of the following is the most important consideration in responding to the assessed risks? a. The nature of the audit procedures. c. The timing of the audit procedures. b. The extent of the audit procedures. d. All of these are equally important.
A
35. The auditor should design and perform further audit procedures whose nature, timing, and extent are responsive to the assessed risks of material misstatement at the assertion level. Which of the following is the most important consideration in responding to the assessed risks? a. The nature of the audit procedures b. The extent of the audit procedures c. The timing of audit procedures d. All of these are equally important
A
4. An audit plan contains the nature, extent, and timing of procedures for gathering evidence. Regarding audit procedures, which of the following best describes risk assessment procedure? a. This category of procedures is used to obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels. b. This category of procedures is used to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. c. This category of procedures is used to detect material misstatements at the assertion level. d. All of these affect the extent of planning.
A
45. The auditor's substantive procedures should include the following audit procedures related to the financial statement closing process: I. Agreeing the financial statements to the underlying accounting records. II. Examining material journal entries and other adjustments made during the course of preparing the financial statements. a. I and II b. I only c. II only d. Neither I nor II
A
6. An auditor may achieve audit objectives related to particular assertions by: a. Performing analytical procedures. c. Preparing audit documentation. b. Adhering to a system of quality control. d. Increasing the level of detection risk.
A
9. A person or firm possessing special skill, knowledge and experience in a particular field excluding accounting and auditing a. Expert c. multiskilled personnel b. Quality control reviewer d. taxation specialist
A
1. Set the following phases in proper order: i. Pre-Engagement iii. Evidence-Gathering v. Post-Audit Responsibilities ii. Internal controls iv. Planning vi. Reporting a. i, ii, iii,iv, v, iv b. i, iv, ii, iii, vi, v c. i, iv,iii, ii, v, vi d. i, iv, ii, iii, v, vi
B
11. The form and content of audit engagement letters may vary for each client, but they would generally include reference to the following, except: a. The objective of the audit of financial statements b. Auditor's responsibility for the financial statements. c. The form of any reports or other communication of results of the engagement. d. Unrestricted access to whatever records, documentation and other information requested in connection with the audit.
B
12. Which of the following statements is true? a. If control risk is assessed at maximum, the nature of related substantive tests should be changed from more to less effective. b. If control risk is assessed at maximum, the nature of related substantive tests should be changed from less to more effective. c. If control risk is assessed at maximum, the timing of related substantive tests should be changed from year-end to an interim date. d. If control risk is assessed at maximum, the extent of related substantive tests should be changed from a larger to a smaller sample.
B
13. When the auditor determines that detection risk regarding a financial statement assertion for a material account balance or class of transactions cannot be reduced to an acceptable level, the auditor should express a. Qualified or adverse opinion c. Unqualified opinion with explanatory paragraph b. Qualified or disclaimer of opinion d. Unqualified opinion.
B
15. The relationship between materiality and audit risk is: a. Direct. b. Inverse. c. Indeterminable. d. None of these.
B
15. Which of the following factors is not a good indicator of potential financial failure? a. Client is constantly short of cash and working capital. b. Client's retained earnings were reduced by half as a result of a large dividend payout. c. Client relies heavily on debt financing, especially by financing permanent assets with short-term loans. d. Client has had increasing net losses for several years.
B
16. Which of the following is least likely to be considered a risk assessment procedure? a. Analytical procedures b. Confirmation of ending accounts receivable c. Inspection of documents d. Observation of performance of certain accounting procedures
B
17. These are events or conditions that provide an opportunity, a motive or a means to commit fraud or indicate that fraud may already have occurred. a. Audit risk. c. Risk of material misstatement. b. Fraud risk factors. d. Fraud indications.
B
2. Acts to be performed in order to obtain audit evidence. a. Audit standards b. Audit procedures c. Audit program d. Audit strategy
B
2. Evaluate the following statements I. During audit planning, the auditor determines important areas of the audit to which attention (audit effort) must be devoted. II. One of the purposes of audit planning is to ensure that audit work is performed efficiency and expeditiously. III. During the audit planning, the auditor determines whether an unqualified opinion may be expressed a. True, True, True c. True, False, False b. True, True, False d. False, False, False
B
2. Which of the following is not a component of a audit risk? A. Detection Risk B. Business Risk C. Control Risk D. Inherent Risk
B
20. 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 control. 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.
B
5. When there are multiple uncertainties significantly affecting the financial statements, the auditor's report would most likely contain A. An unmodified opinion B. A qualified opinion C. A disclaimer of opinion D. An adverse opinion
C
6. The engagement partner should be rotated after a pre-defined period, normally no more than a. 2 years b. 3 years c. 5 years d. 7 years
C
1. Which of the following is correct statement? a. The auditor should use professional judgment to assess audit risk and to design audit procedures to ensure it is eliminated. b. The auditor is an insurer, and his or her report constitutes a guarantee. c. The subsequent discovery that a material misstatement exists in the financial statements is evidence of inadequate planning, performance, or judgment on the part of the auditor. d. The auditor should obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach.
D
10. An auditor decides to increase the assessed level of control risk from that originally planned on the basis of audit evidence gathered and evaluated. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would a. Decrease substantive testing. c. Increase inherent risk. b. Increase materiality levels. d. Decrease detection risk.
D
12. Which of the following would not be a consideration of a CPA firm in deciding whether to accept a new client? a. The client's financial ability b. The client's standing in the business community c. The client's relations with its previous CPA firm. d. The client's probability of achieving and unqualified opinion.
D
9. An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor: a. Wishes to emphasize that entity had significant transactions with related parties. b. Concurs with the entity's change in its method of computing depreciation. c. Discovers supplementary information required by FASB has been omitted. d. Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.
D
9. The independent auditor's responsibility in a regular audit is to express opinion on the financial statements. The auditor's opinion: a. Helps the company adopt sound accounting principles b. Assists the company in maintaining adequate and effective system of accounts c. Helps management safeguard the company assets d. Helps establish the credibility of the financial statements
D
1. Which of the following statements is TRUE: I. Audit planning refers to the development of a general strategy and a detailed approach for the expected nature, timing and extent of audit. II. A purpose of audit planning is to identify the potential problems in the audit. a. I only c. both statements are TRUE b. II only d. both statements are FALSE
A
10. In which of the following situations would an expert be least likely contracted by a CPA? a. Application of accounting methods in computing inventory balances. b. Determination of fair values using specialized statistical techniques. c. Legal options concerning interpretations of engagements, statutes and regulations. d. Valuations of certain types of assets like land and buildings.
A
10. Which of the following is not included in an engagement letter? a. Restriction on cash balances, lines of credit by similar arrangements b. Accessibility to all financial reports c. Client imposed limitation in the scope d. Limitation in the scope of examination as imposed by the circumstances
A
11. As the acceptable level of detection risk decreases, the assurance directly provided from a. Substantive tests should increase. c. Substantive tests should decrease. b. Tests of controls should increase. d. Tests of controls should decrease.
A
11. Religious Corp. has a few large accounts receivables that total P1, 000,000. Pilgrim Corp. has a large number of small accounts receivable that also total P1, 000,000. The importance of an error in any one account is, therefore, greater for Religious Corp. than for Pilgrim Corp. This is an example of the auditor's concept of: a. Materiality. c. Reasonable, assurance. b. Comparative analysis. d. Relative risk.
A
15. For which engagements are engagement letters required? a. All engagements b. Audit engagements only c. Assurance engagements only d. All engagements except the preparation of income tax returns
A
16. When setting a preliminary judgment about materiality, a. More evidence is required for a low peso amount than for a high peso amount. b. Less evidence is required for a low peso amount than for a high peso amount. c. The same amount of evidence is required for either low or high peso amounts. d. There is no relationship between it and the peso amount of evidence needed.
A
19. The main purpose of risk assessment procedures is to a. Obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels. b. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. c. Detect material misstatements at the assertion level. d. All of the above.
A
24. Analytical procedures used in planning should on: a. Evaluating the adequacy of evidence gathered concerning unusual balances. b. Testing individual account balances that depend on accounting estimates. c. Enhancing the auditor's understanding of the client's business. d. Identifying material weaknesses in the control structure.
A
24. The auditor's understanding of the entity and its environment consists of an understanding of the following aspects: I. Industry, regulatory, and other external factors, including the applicable financial reporting framework. II. Nature of the entity, including the entity's selection and application of accounting policies. III. Objectives and strategies and the related business risks that may result in a material misstatement of the financial statements. IV. Measurement and review of the entity's financial performance. V. Internal control. a. All of the above c. I, II and III b. I, II, III and IV d. I, II, III and V
A
28. The following are examples of conditions and events that may indicate the existence of risks of material misstatement, except a. Operations in regions that are economically stable. b. Pending litigation and contingent liabilities. c. Application of new accounting pronouncements. d. Entities or business segments likely to be sold.
A
3. Which of the following pertains to the audit strategy: a. Sets out the direction, scope and focus of the audit team's efforts. b. Contains the nature, extent, and timing of risk assessment procedures and planned further audit procedures at the assertion level. c. Tailored as needed to reflect the particular engagement circumstances; aligns audit procedures, audit objectives, and audit assertions d. All of the answers.
A
31. Examples of situations where the auditor may find it impossible to design effective substantive procedures that by themselves provide sufficient appropriate audit evidence that certain assertions are not materially misstated include the following: I. An entity that conducts its business using IT to initiate orders for the purchase and delivery of goods based on predetermined rules of what to order and in what quantities and to pay the related accounts payable based on system-generated decisions initiated upon the confirmed receipt of goods and terms of payment. No other documentation of orders placed or goods received is produced or maintained, other than through the IT system. II. An entity that provides services to customers via electronic media (for example, an Internet service provider or a telecommunications company) and uses IT to create a log of the services provided to its customers, initiate and process its billings for the services and automatically record such amounts in electronic accounting records that are part of the system used to produce the entity's financial statements. a. I and II b. I only c. II only d. Neither I nor II
A
36. The audit program usually cannot be finalized until the a. Consideration of the entity's internal control has been completed. b. Engagement letter has been signed by the auditor and the client. c. Reportable conditions have been communicated to the audit committee. d. Search for unrecorded liabilities has been performed and documented.
A
37. The senior auditor responsible for coordinating the field work usually schedules a pre-audit conference with the audit team primarily to a. Give guidance to the staff regarding both technical and personnel aspects of the audit. b. Discuss staff suggestions concerning the establishment and maintenance of time budgets. c. Establish the need for using the work of specialists and internal audit. d. Provide an opportunity to document staff disagreements regarding technical issues.
A
4. The auditor report should not be dated A. Earlier than the date management approves the financial statement B. Earlier than the date of issuance of the financial statement C. Earlier than the date of the issuance of the audit report. D. Later than the balance sheet date.
A
6. Which of the following is an incorrect statement? a. Detection risk cannot be changed at the auditor's discretion. b. If individual audit risk remains the same, detection risk bears an inverse relationship to inherent and control risks. c. The greater the inherent and control risks the auditor believes exists, the less detection risk that can be accepted. d. The auditor might make separate or combined assessments of inherent risk and control risk.
A
7.What is the best method an auditor may use to detect fraud in the financial statements of clients? a. Use professional skepticism b. Understand and properly apply Generally Accepted Accounting Standards c. Brainstorm with the client to find the type of fraud occurring d. Actively search for all errors in the financial statements
A
18. If permission from client to discuss its affairs with the proposed auditor is denied by the client, the predecessor auditor should a. Keep silent of the denial. b. Disclose the fact that the permission to disclose is denied by the client. c. Disclose adequately to proposed auditor all noncompliance made by the client. d. Seek legal advice before responding to the proposed auditor.
B
19. Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement? a. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques. b. Management's disregard of its responsibility to maintain an adequate internal control environment. c. The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions. d. Management's refusal to permit the CPA to perform substantive tests before the year-end.
B
20. The auditor should perform the following risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control, except: a. Inquiries of management and others within the entity. b. Inquiries of the entity's external legal counsel or of valuation experts that the entity has used. c. Analytical procedures. d. Observation and inspection.
B
21. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding: a. The predecessor's evaluation of matters of continuing accounting significance. b. Disagreement which the predecessor had with the client concerning auditing procedures and accounting principles. c. The degree of cooperation the predecessor received concerning the inquiry of the client's legal counsel d. The predecessor's assessment of inherent risk and judgements about materiality
B
21. Inquiries directed towards those charged with governance may most likely a. Relate to their activities concerning the design and effectiveness of the entity's internal control and whether management has satisfactorily responded to any findings from these activities. b. Help the auditor understand the environment in which the financial statements are prepared. c. Relate to changes in the entity's marketing strategies, sales trends, or contractual arrangements with its customers. d. Help the auditor in evaluating the appropriateness of the selection and application of certain accounting policies.
B
22. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's: a. Opinion of any subsequent events occurring since the predecessor's audit report was issued. b. Understanding as to the reasons for the change of auditors c. Awareness of the consistency in the application of PFRS between periods. d. Evaluation of all matters of continuing accounting significance.
B
22. Which one of the factors is not a good indicator of potential financial failure? a. Client is constantly short of cash and working capital. b. Client's retained earnings were reduced by half as a result of a large dividend payout. c. Client relies heavily on debt financing, especially by financing permanent assets with short-term loans. d. Client has had increasing net losses for several years.
B
23. Analytical procedures are required: A B C D • Ask a risk assessment procedure performed during planning Yes Yes Yes Yes • As a substantive test procedure during evidence-gathering Yes Yes No No • As an overall review at audit completion No Yes No Yes
B
24. If permission from the client to discuss its affairs with the proposed auditor is denied by the client, the predecessor auditor should: a. Keep silent of the denial b. Disclose the fact that the permission to disclosure is denied bu the client c. Disclose adequately to proposed auditor all noncompliance made by the client d. Seek legal advice before responding to the proposed auditor
B
24. Which of the following methods is considered the best combination in obtaining audit evidence assuming documentary evidence is available to the auditor? a. Inspection and reperformance b. Inquiry and inspection c. Inquiry and analytical procedure d. Observation and inquiry
B
26. Which of the following is ordinarily designed to detect possible material misstatements on the financial statements? a. Test of controls b. Analytical procedures c. Computer controls d. Post audit work paper review
B
27. Which of the following is the best example of a substantive test? a. Examining a sample of cash disbursement to test whether expenses have been properly approved. b. Confirmation of balances of accounts receivable c. Comparison of signatures on checks to a list of authorized signers d. Flowcharting of the client's receipt system
B
37. Most of the independent auditor's work in formulating an opinion on financial statements consists of a. Studying and evaluating internal control. b. Obtaining and examining evidential matter. c. Examining cash transactions. d. Comparing recorded accountability with assets.
B
39. The strongest criticism of the reliability of audit evidence that the auditor physically observes is that a. The client may conceal items from the auditor b. The auditor may not be qualified to evaluate the items he is observing c. Such evidence is too costly in relation to its reliability d. The observation must occur at a specific time, which is often too difficult to arrange
B
40. Which is clearly a test of control? a. Confirmation to a customer of an accounts receivable balance b. Examination of a sample of purchase order records for electronic authenticated authorization c. Observing the controller's use of the company owned equipment d. Sending a letter to the client's attorney to determine a litigation that is pending between the plaintiff and the defendant
B
43. Which statement is incorrect regarding the extent of tests of controls? a. The auditor designs tests of controls to obtain sufficient appropriate audit evidence that the controls operated effectively throughout the period of reliance. b. The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the lesser is the extent of the auditor's tests of controls. c. If the rate of expected deviation is expected to be too high, the auditor may determine that tests of controls for a particular assertion may not be effective. d. Because of the inherent consistency of IT processing, the auditor may not need to increase the extent of testing of an automated control.
B
44. Which statement is incorrect regarding substantive procedures? a. Substantive procedures are performed in order to detect material misstatements at the assertion level, and include tests of details of classes of transactions, account balances, and disclosures and substantive analytical procedures. b. The auditor always performs substantive procedures for each class of transactions, account balance, and disclosure. c. When the auditor has determined that an assessed risk of material misstatement at the assertion level is a significant risk, the auditor should perform substantive procedures that are specifically responsive to that risk. d. In order to obtain sufficient appropriate audit evidence, the substantive procedures related to significant risks are most often designed to obtain audit evidence with high reliability.
B
5. Audit procedures to detect material misstatements at the assertion level. a. Risk assessment procedures c. Tests of control b. Substantive procedure d. Analytical procedures
B
8. The relationship between acceptable level of detection risk and the combined level of inherent and control risk is a. Direct b. Inverse c. Parallel d. Independent
B
9. The audit risk model consists of: AR = IR x CR x DR The detection risk is the dependent variable. What is the acceptable level of detection risk if the assessed level of Inherent risk is High and the Control risk is Low? a. Highest b. Medium c. Lower d. Higher
B
1. Professional Skepticism requires that an auditor assumes that management is: a. Honest, in the absence of fraud risk factors. b. Dishonest until completion of audit tests. c. Neither honest nor dishonest. d. Offering reasonable assurance of honesty.
C
1. Which of the following types of risk is significantly affected by the nature, amount, and timing of substantive auditing procedures? A. Inherent risk B. Control Risk C. Detection Risk D. Sufficiency Risk
C
12. If the auditor believes that an understanding with the client has not been established, he or she should ordinarily a. Perform the audit with increased professional skepticism. b. Assess the control risk at the maximum level and perform a primarily substantive audit. c. Decline to accept or perform the audit. d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud.
C
13. Auditors must not only decide whether to accept new clients; they also should periodically review their list of current clients and remove those clients the firm no longer wants to be associated with. Reasons for discontinuing clients might include the following, except: a. Difficulty in working with client personnel. b. Inability to negotiate an acceptable increase in the audit fee. c. Evidence indicating a client's management has integrity. d. Client need for specialized services the current firm is unable or unwilling to provide.
C
13. When the auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to as: a. The error range. c. Tolerable misstatement. b. The materiality range. d. Tolerable materiality.
C
14. When should an auditor obtain an engagement letter? a. Whenever a prospective client offers to hire the audit firm b. During the interim audit period, after the auditor has evaluated the client's internal control and estimated the amount of time required for the audit c. When a new client is accepted by the auditor d. At the conclusion of the fieldwork, just prior to signing the audit report
C
14. Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements? a. The complexity of the accounting system b. The existence of related-party transactions c. The adequacy of the accounting records. d. The operating effectiveness of control procedures.
C
14. Which of the following is not a distinguishing feature of risk-based auditing? a. Identifying areas posing the highest risk of financial statement errors. b. Analysis of internal control. c. Collecting and evaluating evidence. d. Concentrating audit resources in those areas presenting the highest risk of financial statement errors.
C
18. Which of the following characteristics mostlikely would heighten an auditor's concern about the risk of international manipulation of financial statements? a. Turnover of senior accounting personnel is low. b. Insiders recently purchased additional shares of the entity's stock. c. Management places substantial emphasis on meeting earnings projections. d. The rate of change in the entity's industry is slow.
C
18. Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? a. The details most recorded transactions are not available after a specified period of time. b. Internal control of activities requiring the segregation of duties are subject to management override. c. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements. d. Management has a reputation for consulting with several accounting firms about significant accounting issues.
C
19. The auditor obtains audit evidence to daw reasonable conclusions on which to base the audit opinion by performing a. Risk assessment procedures. b. Further audit procedures (test of controls and substantive procedures). c. Both A and B. d. Neither A nor B.
C
19. This refers to acts of omission or commission by the entity being audited which are contrary to prevailing laws or regulations: a. Fraud b. Error c. Non-compliance d. Misstatements
C
20. When an independent auditor is approached to perform an audit for the first time, he or she should make inquiries of the predecessor auditor. Inquiries are necessary because the predecessor may be able to provide the successor with information that will assist the successor in determining whether a. The company rotates auditors b. The predecessor's work should be used. c. The engagement should be accepted. d. In the predecessor's opinion, control risk is less than high.
C
20. With respect to errors and irregularities, the auditor should plan to a. Search for errors that would have a material effect and for irregularities that would have either material or immaterial effect on the financial statements. b. Search for irregularities that would have a material effect and for errors that would have either material or immaterial effect on the financial statements. c. Search for errors or irregularities that would have a material effect on the financial statements. d. Discover errors or irregularities that have either material or immaterial effect on the financial statements.
C
21. When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective , the auditor would most likely increase the a. Extent of tests of controls. b. Level of detection risk. c. Extent of test of details. d. Level of inherent risk.
C
23. If the prospective client refuses to permit the predecessor to respond or limits the predecessor's response, the successor should: a. Continue to ask the predecessor auditor questions on facts that might bear on the integrity of management. b. Accept the engagement but only after an equitable increase in the professional fee c. Inquire as to the reasons and consider the implications in deciding whether to accept the engagement d. Issue a disclaimer of opinion because the limited response of the predecessor auditor constitutes a significant scope limitation
C
23. Which of the following audit procedures is used extensively throughout the audit and often is complementary to performing the audit procedures? a. Inspection b. Observation c. Inquiry d. Confirmation
C
27. A potential business risk created by industry developments may most likely include a. Increased product liability. b. increased legal exposure c. The entity does not have the personnel or expertise to deal with the changes in the industry. d. Loss of financing due to the entity's inability to meet financing requirements.
C
28. The main purpose of substantive procedures is to a. Obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels. b. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatement at the assertion level. c. Detect material misstatements at the assertion level d. All of the above
C
29. Which of the following is not useful for obtaining an understanding of internal controls? a. Make inquiries of the client's personnel. b. Examine documents and records. c. Read industry trade magazines. d. Observe client activities and operations.
C
3. If the auditor is unable to determine whether fraud or error has occurred because of limitations imposed by the circumstances, the auditor would most likely issue a report that contains: A. An unmodified opinion B. An unmodified opinion with an emphasis of a matter paragraph C. A qualified opinion D. An adverse opinion
C
3. Inherent risk and control risk differ from detection risk in that they a. Arise from the misapplication of auditing procedures. b. May be assessed in either quantitative or nonquantitative terms. c. Exist independently of the financial statement audit. d. Can be changed at the auditor's discretion.
C
30. Which of the following is not considered by the CPA when he makes an overall audit plan? a. Identification of complex accounting areas including those involving accounting estimates. b. The effect of information technology on the audit. c. The content of the representation letters. d. The nature and timing of reports and other communication with the entity that are expected under the engagement.
C
30. Which statement is incorrect regarding significant risks that require special audit consideration? a. The auditor should determine which of the risks identified are in the auditor's judgment, risks that require special audit consideration. b. The auditor excludes the effect of identified controls related to the risk to determine whether the nature of the risk, the likely magnitude of the potential misstatement including the possibility that the risk may give rise to multiple misstatements, and the likelihood of the risk occurring are such that they require special audit consideration. c. Routine, non-complex transactions that are subject to systematic processing are more likely to give rise to significant risks because they have higher inherent risks. d. Significant risks are often derived from business risks that may result in a material misstatement.
C
31. Reasons to evaluate internal control would not include a. Basis for planning b. Determining the nature, timing, and extent of substantive procedures c. Basis for type of opinion to be rendered d. Formulating constructive suggestions for improvements
C
31. This is a listing of all the things which the auditor will use to gather sufficient appropriate audit evidence: a. Audit procedures. c. Audit program. b. Audit plan. d. Audit risk model.
C
32. 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 controls b. The frequency and effectiveness of the controls c. The design and utilization of the controls d. The implementation and efficiency
C
32. The auditor should design the written audit program so that: a. All material transactions will be selected for substantive testing. b. Substantive tests prior to the balance sheet date will be minimized. c. The audit procedures selected will achieve specific audit objectives. d. Each account balance will be tested under either tests of controls or tests of transactions.
C
33. The main purpose of substantive procedures is to a. Obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels. b. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatement at the assertion level. c. Detect material misstatements at the assertion level d. All of the above
C
34. The assessment of the risks of material misstatement at the financial statement level is affected by the auditor's understanding of the control environment. Weaknesses in the control environment ordinarily will lead the auditor to a. Have more confidence in internal control and the reliability of audit evidence generated internally within the entity. b. Conduct some audit procedures at an interim date rather than at period end. c. Modify the nature of audit procedures to obtain more persuasive audit evidence. d. Decrease the number of locations to be included in the audit scope.
C
35. Cost-benefit considerations are part of audit planning. In relation to this, which of the following audit procedures is usually the least costly to perform? a. Tests of balances. c. Analytical procedures. b. Substantive tests of transactions. d. Tests of controls.
C
37. Which statement is incorrect regarding the nature of further audit procedures? a. The nature of further audit procedures refers to their purpose and their type. b. Certain audit procedures may be more appropriate for some assertions than others. c. The higher the auditor's assessment of risk, the less reliable and relevant is the audit evidence sought by the auditor from substantive procedures. d. The auditor is required to obtain audit evidence about the accuracy and completeness of information produced by the entity's information system when that information is used in performing audit procedures.
C
38. Which of the following procedures is least likely performed in planning an FS audit? a. Coordinating the assistance of entity personnel in data preparation. b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity. c. Selecting a sample of vendor's invoices for comparison to receiving reports. d. Regarding the current year's interim financial statements.
C
39. Which statement is incorrect regarding the extent of further audit procedures? a. Extent includes the quantity of a specific audit procedure to be performed. b. The extent of an audit procedure is determined by the judgment of the auditor after considering the materiality, the assessed risk, and the degree of assurance the auditor plans to obtain. c. The auditor ordinarily decreases the extent of audit procedures as the risk of material misstatement increases. d. Increasing the extent of an audit procedure is effective only if the audit procedure itself is relevant to the specific risk.
C
4. Audit procedures to test the operating effectiveness of controls in preventing or detecting and correcting material misstatements at the assertion level. a. Risk assessment procedures c. Tests of control b. Substantive procedure d. Analytical procedures
C
41. Which statement is incorrect regarding the nature of tests of controls? a. As the planned level of assurance increases, the auditor seeks more reliable audit evidence. b. Those controls subject to testing by performing inquiry combined with inspection or reperformance ordinarily provide more assurance than those controls for which the audit evidence consists solely of inquiry and observation. c. The absence of misstatements detected by a substantive procedure provides audit evidence that controls related to the assertion being tested are effective. d. A material misstatement detected by the auditor's procedures that was not identified by the entity ordinarily is indicative of the existence of a material weakness in internal control.
C
42. Which statement is incorrect regarding the timing of tests of controls? a. Audit evidence pertaining only to a point in time may be sufficient for the auditor's purpose, for example, when testing controls over the entity's physical inventory counting at the period end. b. If the auditor plans to rely on controls that have changed since they were last tested, the auditor should test the operating effectiveness of such controls in the current audit. c. If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test the operating effectiveness of such controls at least once in every second audit. d. When there are a number of controls for which the auditor determines that it is appropriate to use audit evidence obtained in prior audits, the auditor should test the operating effectiveness of some controls each audit.
C
46. Which statement is incorrect regarding the nature, timing and extent of substantive procedures? a. Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. b. Tests of details are ordinarily more appropriate to obtain audit evidence regarding certain assertions about account balances, including existence and valuation. c. Substantive procedures cannot be performed at an interim date. d. The greater the risk of material misstatement, the greater the extent of substantive procedures.
C
47. Which statement is incorrect regarding evaluation of the sufficiency and appropriateness of audit evidence obtained? a. Based on the audit procedures performed and the audit evidence obtained, the auditor should evaluate whether the assessments of the risks of material misstatement at the assertion level remain appropriate. b. As the auditor performs planned audit procedures, the audit evidence obtained may cause the auditor to modify the nature, timing, or extent of other planned audit procedures. c. In developing an opinion, the auditor considers only the audit evidence which corroborate the assertions in the financial statements. d. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor should express a qualified opinion or a disclaimer of opinion.
C
5. Which of the following nonfinancial information would an auditor most likely consider in performing analytical procedures during the planning phase of an audit? a. Turnover of personnel in the accounting department b. Objectivity of audit committee members c. Square footage of selling price d. Management's plans to repurchase stocks
C
7. Which of the following statements is a basic element of the auditor's standard report? a. The auditor evaluated the overall internal control. b. The financial statements are consistent with those of the prior period. c. An audit includes assessing significant estimates made by management. d. The disclosures provide reasonable assurance that the financial statements are free of material misstatement.
C
7. Why would the auditor assess control risk? a. Because it indicates where inherent risk may be the greatest. b. Because it determines whether sampling risk is sufficiently low. c. Because it affects the level of detection risk the auditor may accept. d. Because it includes the aspects of nonsampling risk that are controllable.
C
Analytical procedures used in planning an audit should focus on a. Reducing the scope of tests of controls and substantive tests b. Providing assurance that potential material misstatements will be identified c. Enhancing the auditor's understanding of the client's business d. Assessing adequacy of the available evidence
C
During which of the following phases of an audit is the performance of analysis not mandatory, but rather a matter of professional judgment? a. Internal control evaluation phase b. Planning phase c. Substantive testing phase d. Completion phase
C
10. In which of the following circumstances would an auditor not express an unqualified opinion? a. There has been a material change between periods in accounting principles. b. Quarterly financial data required by the SEC has been omitted. c. The auditor wishes to emphasize an unusually important subsequent event. d. The auditor is unable to obtain audited financial statements of a consolidated investee.
D
12. In considering materiality for planning purposes, an auditor believes that misstatements aggregating P10, 000 would have a material effect on an entity's profit and loss, but the misstatements would have to aggregate P20, 000 to materiality effect the statement of financial position. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate: a. P30,000 b. P20,000 c. P15,000 d. P10,000
D
13. The auditor's opinion a. Guarantees the credibility of the financial statements b. Is an assurance as to the future viability of the entity c. Certifies the correctness of the financial statements d. Is not an assurance as to the efficiency with which the management has conducted the affairs of the entity
D
14. Regardless of how the allocation of the preliminary judgment about materiality was done, when the audit is complete the auditor must be confident that the combined errors 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.
D
15. Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed? a. management fails to modify prescribed internal controls for changes in information technology. b. Internal control activities requiring segregation of duties are rarely monitored by management. c. Management is dominated by one person who is also the majority stockholder. d. There is substantial risk of intentional misapplication of accounting principles.
D
16. PSA 315 requires a. The auditor to obtain an understanding of the entity and its environment, including its internal control. b. Discussion among the engagement team about the susceptibility of the entity's financial statements to material misstatement. c. The auditor to identify and assess the risks of material misstatement at the financial statement and assertion levels. d. All of the above.
D
16. Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the CPA should a. Contact the predecessor auditor without advising the prospective client and request a complete report of the circumstances leading to the termination of the engagement with an understanding that all information disclosed will be kept confidential. b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures to verify the reason given by the client for the termination. c. Not communicate with the predecessor auditor because this would be in effect be asking the auditor to violate the confidential relationship between an auditor and the client. d. Advise the client of the intention to contact the predecessor auditor and request a permission for the contact.
D
17. Which of the following factors most likely would cause a CPA to not accept a new audit engagement? a. The prospective client has already completed its physical inventory count. b. The CPA lacks an understanding of the prospective client's operations and industry. c. The CPA is unable to review the predecessor auditor's audit documentation. d. The prospective client is unwilling to make all financial records available to the CPA.
D
17. Which of the following is incorrect regarding PSA 315? a. The purpose of this PSA is to establish standards and to provide guidance on obtaining an understanding of the entity and its environment, including its internal control, and on assessing the risks of material misstatement in a financial statement audit. b. This PSA requires the auditor to make risk assessments at the financial statement and assertion levels based on an appropriate understanding of the entity and its environment, including its internal control. c. The requirements and guidance of this PSA are to be applied in conjunction with the requirements and guidance provided in other PSAs. d. This PSA discusses the auditor's responsibility to determine overall responses and to design and perform further audit procedures whose nature, timing, and extent are responsive to the risk assessments.
D
17. Which of the following will an auditor most likely discuss with the former auditors of a potential client prior to acceptance? a. Integrity of management b. Reasons for changing audit firms c. Disagreements with management regarding accounting principles d. All of the above must be discussed
D
18. Which statement is incorrect regarding obtaining an understanding of the entity and its environment? a. Obtaining an understanding of the entity and its environment is an essential aspect of performing an audit in accordance with PSAs. b. That understanding establishes a frame of reference within which the auditor plans the audit and exercises professional judgment about assessing risks of material misstatement of the financial statements and responding to those risks throughout the audit. c. The auditor's primary consideration is whether the understanding that has been obtained is sufficient to assess the risks of material misstatement of the financial statements and to design and perform further audit procedures. d. The depth of the overall understanding that is required by the auditor in performing the audit is equal to that possessed by management in managing the entity.
D
2. According to PSA 400 - Risk Assessments and Internal Control, audit risk means a. The susceptibility of an account balance or class of transactions to misstatement that could be material, individually or when aggregated with misstatements in other balances or classes, assuming that there were no related internal controls. b. The risk that a misstatement, that could occur in an account balance or class of transactions and that could be material, individually or when aggregated with misstatements in other balances or classes, will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems. c. The risk that an auditor's substantive procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, individually or when aggregated with misstatements in other balances or classes. d. The risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated.
D
21. The auditor should remain alert for evidence of events or conditions which may cast significant doubt on the entity's ability to continue as a going concern: a. During planning and consideration of internal controls. b. During interim audit work c. During year-end audit work d. All of the answers.
D
22. Which statement is incorrect regarding analytical procedures? a. Analytical procedures may be helpful in identifying the existence of unusual transactions or events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit implications. b. In performing analytical procedures as risk assessment procedures, the auditor develops expectations about plausible relationships that are reasonably expected to exist. c. When comparison of those expectations with recorded amounts or ratios developed from recorded amounts yields unusual or unexpected relationships, the auditor considers those results in identifying risks of material misstatement. d. When such analytical procedures use data aggregated at a high level (which is often the situation), the results of those analytical procedures provide a clear-cut indication about whether a material misstatement may exist.
D
22. Which statement is incorrect regarding audit evidence? a. The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion b. Accounting records alone do not provide sufficient audit evidence c. The auditor uses professional judgments and professional skepticism in evaluating the quantity and quality of audit evidence, and thus its sufficiency and appropriateness, to support the audit opinion d. The matter of difficulty or expense involved is a valid basis for omitting an audit procedure for which there is no alternative.
D
23. Which statement is incorrect regarding the discussion among the engagement team about the susceptibility of the entity's financial statements to material misstatements? a. The members of the engagement team should discuss the susceptibility of the entity's financial statements to material misstatements. b. The objective of this discussion is for members of the engagement team to gain a better understanding of the potential for material misstatements of the financial statements resulting from fraud or error in the specific areas assigned to them, and to understand how the results of the audit procedures that they perform may affect other aspects of the audit. c. The discussion provides an opportunity for more experienced engagement team members, including the engagement partner, to share their insights based on their knowledge of the entity, and for the team members to exchange information about the business risks. d. All the team members should have a comprehensive knowledge of all aspects of the audit.
D
25. A firm has obtained information that would have caused it to decline an engagement had the information been available earlier. Actions available to the auditor would include the following, except: a. Reporting the information and its implications to the person/s who appointed the CPA b. Withdraw from engagement c. Withdraw from the client relationship d. Issue a disclaimer of opinion
D
26. The establishment of the overall audit strategy involves: a. Determining the characteristics of the engagement that defines its scope. b. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required. c. Considering the important factors that will determine the focus of the engagement team's efforts. d. All of the answers.
D
26. Which statement is correct regarding business risks? a. The risk of material misstatement of the financial statements is broader than business risk, though it includes the latter. b. The auditor should identify or assess all business risks. c. All business risks give rise to risks of material misstatement. d. A business risk may have an immediate consequence for the risk of misstatement for classes of transactions, account balances, and disclosures at the assertion level or the financial statements as a whole.
D
27. The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the a. Evidence to be gathered to provide a sufficient basis for the auditor's opinion. b. Procedures to be undertaken to be undertaken to discover litigation, claims, and assessments. c. Pending legal matters to be included in the inquiry of the client's attorney. d. Timing of inventory observation procedures to be performed.
D
28. Which of the following is not typically included in initial audit planning? a. Client acceptance/continuation decisions. b. Determination of the purpose of the audit. c. Obtain an understanding with the client. d. Perform analytical procedures as substantive tests.
D
29. Which of the following conditions and events may most likely indicate the existence of risks of material misstatement? a. Having personnel with appropriate accounting and financial reporting skills. b. Accounting measurements that involve simple processes. c. Significant amount of routine or systematic transactions. d. Constraints on the availability of capital and credit.
D
29. Which of the following is least likely considered by the auditor in establishing the overall audit strategy and developing the audit plan? a. Understanding of the accounting and internal control systems. b. Risk and materiality. c. The involvement of other auditors in the audit of major subsidiaries. d. The terms of payment pertaining to other auditors and their respective clients.
D
30. The following are the different techniques in documenting the auditors' understanding of the client's internal control system, except a. Narrative memorandum b. Questionnaires c. Flowchart d. Procedures manual
D
32. PSA 330 requires the auditor to a. Determine overall responses to address risks of material misstatement at the financial statement level. b. Design and perform further audit procedures, including tests of the operating effectiveness of controls, when relevant or required, and substantive procedures, whose nature, timing, and extent are responsive to the assessed risks of material misstatement at the assertion level. c. Evaluate whether the risk assessment remain appropriate and to conclude whether sufficient appropriate audit evidence has been obtained. d. All of the above.
D
33. In designing audit programs, an auditor should establish specific audit objectives that related primarily to the a. Timing of audit procedures. c. Selected audit techniques. b. Cost-benefit of gathering evidence. d. Financial statement assertions.
D
33. The auditor should determine overall responses to address the risks of material misstatement at the financial statement level. Such responses least likely include a. Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence. b. Assigning more experienced staff or those with special skills or using experts. c. Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed. d. Performing substantive procedures at an interim date instead of at period end.
D
34. In exercising judgment as to which risks are significant risks, the auditor shall consider at least the following: I. Whether the risk is a risk of fraud II. Whether the risk is related to recent significant economic, accounting or other developments and, therefore, requires specific attention; III. The complexity of transactions; IV. Whether the risk involves significant transactions with related parties V. The degree of subjectivity in the measurement of financial information related to the risk, especially those measurements involving a wide range of measurement uncertainty VI. Whether the risk involves significant transactions that are outside the normal course of business for the entity, or that otherwise appear to be unusual. a. I, II, III, and IV only b. I, II, III, IV, and V only c. I, II, and III only d. I, II, III, IV, V, and VI
D
34. The audit program should set out the: a. Nature of planned procedures. c. Extent of planned procedures. b. Timing of planned procedures. d. All of the answers.
D
36. The auditor's assessment of the identified risks at the assertion level provides a basis for considering the appropriate audit approach for designing and performing further audit procedures. Which of the following is incorrect? a. The auditor may determine that only by performing tests of controls may the auditor achieve an effective response to the assessed risk of material misstatement for a particular assertion. b. The auditor may determine that performing only substantive procedures is appropriate for specific assertions and, therefore, the auditor excludes the effect of controls from the relevant risk assessment. c. The auditor needs to be satisfied that performing only substantive procedures for the relevant assertion would be effective in reducing the risk of material misstatement to an acceptably low level. d. The auditor designs and performs substantive procedures for each material class of transactions, account balance, and disclosure only when the auditor uses the substantive approach.
D
36. Theoretically, which of the following would not have an effect on the amount of audit evidence gathered by the auditor? a. The type of opinion to be issued. b. The auditor's evaluation of internal control. c. The types of audit evidence available to the auditor. d. Whether or not the client reports to the Securities and Exchange Commission.
D
38. Audit information is usually considered relevant when it is a. Derived through valid statistical sampling. b. Objective and unbiased. c. Factual, adequate, and convincing. d. Consistent with the audit objectives.
D
38. Which statement is incorrect regarding the timing of further audit procedures? a. Timing refers to when audit procedures are performed or the period or date to which the audit evidence applies. b. The auditor may perform tests of controls or substantive procedures at an interim date or at period end. c. If the auditor performs tests of controls or substantive procedures prior to period end, the auditor considers the additional evidence required for the remaining period. d. All audit procedures can be performed prior to period end.
D
39. Which of the following statements is not a reason for utilizing analytical review procedures? a. To assess the entity's ability to continue as a going concern. b. To identify areas with no unusual fluctuations so that fewer detailed tests may be performed on those accounts. c. To highlight changes from the prior year to the current year so that trends can be identified which will influence audit planning. d. To determine the magnitude of errors in the financial statements.
D
4. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are a. Elements of audit risk while detection risk is not. b. Changed at the auditor's discretion while detection risk is not. c. Considered at the individual account-balance level while detection risk is not. d. Functions of the client and its environment while detection risk is not.
D
40. Which statement is incorrect regarding tests of controls? a. Tests of controls are required under certain circumstances. b. Tests of controls are required when an entity conducts its business using IT and no documentation of transactions is produced or maintained, other than through the IT system. c. Tests of the operating effectiveness of controls are performed only on those controls that the auditor has determined are suitably designed to prevent, or detect and correct, a material misstatement in an assertion. d. Testing the operating effectiveness of controls is the same as obtaining audit evidence that controls have been implemented.
D
5. The extent of planning will vary according to the following: a. Size of the audit client. b. Auditor's experience with the entity and knowledge of the business. c. The nature and complexity of the audit engagement. d. All of these affect the extent of planning.
D
5. Which of the following is an incorrect statement? a. Detection risk is a function of the effectiveness of an auditing procedure and its application. b. Detection risk arises partly from uncertainties that exists when the auditor does not examine 100 % of the population. c. Detection risk arises partly because of other uncertainties that exist even if the auditor were to examine 100 % of the population. d. Detection risk exists independently of the audit of the financial statements.
D
6. PSA 315 requires: a. Obtaining an understanding of the entity and its environment. b. Discussion among engagement team members about the risk of material misstatement in the financial statements. c. Identifying and assessing the risks of material misstatement d. All of the answers.
D
7. The auditor's understanding of the entity and its environment consists an understanding of the following aspects: a. Industry, regulatory and other external factors, including the applicable financial reporting framework. b. Nature of the entity, including the entity's selection and application of accounting policies. c. Objectives and strategies and the related business risks that may result in a material misstatement of the financial statements. d. All of these.
D
8. An auditor obtains an understanding of the entity and its environment in order to a. Make constructive suggestions concerning improvements to the client's internal control. b. Develop an attitude of professional skepticism concerning management's financial statement assertions. c. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. d. Understand the events and transactions that may have an effect on the client's financial statements.
D
8. If a company's external auditor expresses an unqualified opinion as a result of the audit of the company's financial statements, reader of the audit report can assume that a. Internal control is effective b. The external auditor found no fraud c. The company is financially sound and the financial statement are accurate d. All material disagreements between the company and the auditor about the application of accounting principles were resolved in the satisfaction of the external auditor.
D
8. Other information that the auditor may use as audit evidence least likely includes a. Minutes of meetings. b. Confirmation from third parties. c. Information obtained by the auditor from such audit procedures as inquiry, observation, and inspection. d. Adjustments to the financial statements that are not reflected in formal journal entries.
D
When making a client continuance decision, the auditor should evaluate client based upon which of the following? a. Client entity characteristics b. Independence risk factors c. Financial reporting issues d. All of the above
D
