Auditing and Assurance Services 1)
Polytechnic University of the Philippines College of Accountancy Accountancy
Management assertions are
8)
Which of the following would an auditor least likely perform as part of the
a)
Stated as the footnoted to the financial statements
auditor’s preliminary engagement engagement activities?
b)
Implied or expressed representations about the accounts in the
a)
financial statements c)
Explicitly expressed representations about the financial statements
d)
Provided to the auditor in the Assertions Letter, but are not disclosed
b)
b)
c)
c)
Establish an understanding of the terms of the engagement
d)
Obtain understanding of the legal and r egulatory framework
It would be a violation of the completeness assertion if the management would record a sale that did not take place
applicable to the entity 9)
Which of the following is not one of the reasons why auditor should perform
The completeness assertion deals with matters opposite fr om those
preliminary engagement activities?
of the existence assertion
a)
The completeness assertion is concerned with the possibility of b)
included The existence assertion is concerned with the inclusion of amount
c)
5)
6)
Which of the following assertions does not relate to balances at period
d)
To ensure that sufficient appropriate evidence will be obtained to support the auditor’s opinion on the financial statements
a)
Existence
b)
Occurrence
engagement phase?
c)
Valuation or allocation
a)
Deciding whether to accept pr reject an audit engagement
d)
Rights and obligation
b)
Inquiring from predecessor auditor
Which of the assertions does not relate to classes of transactions and
c)
Preparing an engagement letter
events for the period?
d)
Making a preliminary estimate of materiality
a)
Completeness
b)
Cut-off
c)
Valuation
d)
Accuracy
10)
11)
Which of the following is not normally performed in the preplanning or pre-
In making a decision to accept or continue with a client the auditor should consider a.
b.
c.
d.
Its competence
Yes Yes Yes Yes
An assertion that transactions are recorded in the proper accounting period
Its independence
Yes No
is
Its ability to serve the client properly
Yes Yes Yes No
The integrity of client’s management
Yes Yes No Yes
a)
Classification
b)
Accuracy
c)
Occurrence
obtain
d)
Cut-off
a)
12)
b)
Yes No
Before accepting an engagement to audit a new client, a CPA is required to
Which of the following statements is not correct? a)
A preliminary understanding understanding of the prospective client’s industry industry and business
There are many ways an auditor can accumulate evidence to meet
b)
The prospective client’s signature to the engagement letter
the overall audit objectives
c)
An understanding of the prospective prospective client’s control environment
d)
A representation letter from the prospective client client
Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility
13)
Preliminary knowledge about the client’s business and industry must be
c)
The cost of accumulating the evidence should be minimized
obtained prior to the acceptance of the engagement primarily to
d)
Gathering evidence and minimizing costs are equally important
a)
considerations that affect the approach the auditors select 7)
To ensure that there is no misunderstanding with the client as to the terms of the engagement
end?
4)
To help ensure that there are no issues with management integrity that may affect the auditor’s willingness to continue the engagement
that should not have been 3)
To ensure that the auditor maintains the necessary independence and ability to perform the engagement
omitting items from the financial statements that should have been
d)
Evaluate compliance with ethical requirements, including independence
Which of the following statements is not correct? a)
Perform procedures regarding the continuance of the client relationship and the specific audit engagement
on the financial statements 2)
Accepting an Engagement
Which of the following is the correct order of steps in t he audit process? A. B.
Perform tests of control Develop an overall strategy for the expected conduct and scope of the audit
Determine the degree of knowledge and expertise required by the engagement
b)
Determine the integrity of management
c)
Determine whether the firm is independent with the client
d)
Gather evidence about the fairness of the financial statements
14) A CPA firm’s quality control procedures pertaining to the acceptance of a
C.
Obtain client’s written representation
prospective audit client would most likely include
D.
Prepare engagement letter
a)
E.
Perform substantive tests
a)
DABEC
b)
DBAEC
c)
DBCAE
d)
DBEAC
Inquiry of management as to whether disagreements between the predecessor auditor and the prospective client were resolved satisfactorily
b)
Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable basis for an opinion
Page 1 of 9 eeb.6.30.2013
Auditing and Assurance Services c)
Polytechnic University of the Philippines College of Accountancy
Inquiry of third parties, such as the prospective client’s bankers ad
a)
attorneys, about information regarding the prospective client and its
d)
management
b)
Suggest that the incoming auditor ask the client
Consideration of whether the internal control structure is sufficiently
c)
Suggest that the incoming auditor obtain the client’s permission to discuss the reasons
Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the CPA should a)
d) 21)
Contact the predecessor auditor without advising the prospective
specific inquiries of the predecessor auditor regarding the predecessor’s
client and request a complete report of the circumstance leading to
a)
will be kept confidential
b)
Understanding as to the reasons for the change of auditors
Accept the engagement without contacting the predecessor auditor
c)
Awareness of the consistency in the application of GAAP between periods
by the client for the termination
d)
16)
Not communicate with the predecessor auditor because this would
d)
Evaluation of all matters of continuing accounting significance
22) An incoming auditor most likely would make specific inquiries of the
affect be asking the auditor to violate the confidential relationship
predecessor auditor regarding
between the auditor and client
a)
Specialized accounting principles of the client’s industry
Advise the client of the intention to contact the predecessor auditor
b)
The competency of the client’s internal audit staff
and request permission for the contact
c)
The uncertainty inherent in applying sampling procedures
d)
Disagreements with management as to auditing procedures
When a CPA is approached to perform an audit for the first time the CPA should make inquiries of the predecessor auditor. This is a necessary
23)
Which of the following should an auditor obtain from the predecessor
procedure because the predecessor may be able to provide the incoming
auditor prior to accepting an audit engagement
auditor with information that will assist the incoming auditor in determining
a)
Analysis of balance sheet accounts
a)
Whether the predecessor’s work should be utilized
b)
Analysis of income statement accounts
b)
Whether the company follows the policy of rotating its auditors
c)
All matters of continuing accounting significance
c)
Whether in the predecessor’s opinion internal control of the company
d)
Facts that might bear on the integrity of management
has been satisfactory d) 17)
Opinion of any subsequent events occurring since the predecessor’s audit report was issued
since the CPA can include audit procedures to verify the reason given
c)
Indicate that a misunderstanding occurred
Before accepting an audit engagement, an incoming auditor should make
the termination with the understanding t hat all information disclosed
b)
State that the found material misstatements that the client would not revise
effective to permit a reduction in the required substantive tests 15)
24)
Whether the engagement should be accepted
What information should an incoming auditor obtain during the inquiry of the predecessor auditor to acceptance of the audit?
Danny, CPA, has been retained to audit the financial statements if San
I.
Facts that bear on the integrity of management
Antonio, Co. San Antonio’s predecessor auditor was Gary, CPA, who has
II.
Whether statistical or non-statistical sampling was used to
been notified by San Antonio that Gary’s services have been terminated.
gather evidence
Under the circumstances, which party should initiate the communication
III.
Disagreement with management concerning auditing
between Danny and Gary?
18)
procedures
a)
Danny, the incoming auditor
IV.
b)
Gary, the predecessor auditor
c)
San Antonio’s controller or CFO
a)
I and II
d)
The chairman of San Antonio’s board o f directors
b)
I and III
c)
I and IV
d)
III and IV
In audit, communication between the predecessor and incoming auditor
20)
a)
Authorized in an engagement letter
b)
Acknowledged in a representation letter
c)
Either written or oral
d)
Written and included in the working papers
The effect of the client’s internal audit function on the scoped of the independent auditor’s examination
should be
19)
Accepting an Engagement
25) An incoming auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s Engagement letter
Working paper
a)
Yes
Yes
Gerry, CPA, is succeeding Rodel, CPA, on the audit engagement of CPAR
b)
Yes
No
Corporation. Gerry plans to consult Rodel and to review Rodel’s prior year
c)
No
Yes
working papers. Gerry may do so if
d)
No
No
a)
Rodel and CPAR consent
b)
CPAR consent
26)
Which of the following factors most likely would cause an auditor not to accept a new audit engagement?
c)
Rodel consent
a)
An inadequate understanding of the entity’s internal control
d)
Gerry and Rodel consent
b)
The close proximity to the end of the entity’s fiscal year
Upon discovering material misstatements in a client’s financial statements
c)
Concluding that the entity’s management probably lacks integrity
that the client would not revise, the auditor withdrew from the engagement.
d)
An inability to perform preliminary analytical procedures before
If asked by the incoming auditor about the termination the engagement, the
assessing control risk
predecessor auditor should
Page 2 of 9 eeb.6.30.2013
Auditing and Assurance Services 27)
28)
29)
Polytechnic University of the Philippines College of Accountancy
Which of the following factors most likely would influence an auditor’s
CPA’s responsibilities Client’s responsibilities Limitation of engagement
determination of the auditability of th e entity’s financial statements
a)
Yes
Yes
Yes
a)
The complexity of the accounting system
b)
Yes
No
Yes
b)
The existence of related party transactions
c)
Yes
No
No
c)
The adequacy of the accounting records
d)
No
No
No
d)
The operating effectiveness of control p rocedures
35)
Which of the following would be least likely to be included in t he auditor’s
Hawkins requested permission to communicate with the predecessor
engagement letter
auditor and review certain portions of the predecessor auditor’s work
a)
Forms of the report
papers. The prospective client’s refusal to permit this will bear directly on
b)
Extent of his responsibilities to his client
Hawkin’s decision concerning the:
c)
Objectives and scope of the audit
a)
Adequacy of the preplanned audit program
d)
Type of opinion to be issued
b)
Ability to establish consistency in application of accounting principles between years
engagement letter?
c)
Apparent scope limitation
a)
Objective of the financial statements
d)
Integrity of management
b)
Unrestricted access to records and documents
Before performing any audit procedures. The auditor and the client should
c)
Limitations of the engagement
agree on the
d)
Management’s responsibility for the financial statements
Type of opinion to be expressed a)
Yes
b) c) d)
Terms of engagement
36)
Which of the following is not one of the principal contents of an
37) An engagement letter would not normally include
Yes
a)
Billing arrangement
No
Yes
b)
Arrangement concerning client’s assistance
No
No
c)
Details of the procedure that will be performed
Yes
No
d)
Expectation of receiving a representation letter f rom management
30) According to PSA 210, the auditor and the client should agree on the terms
38)
The audit engagement letter should generally include a reference to each
of engagement. The agreed terms would need to be recorded in a (n):
of the following except
a)
a)
Memorandum to be placed in the permanent section of the audit working papers
31)
letter
Engagement letter
b)
A request for the client to confirm the terms of the engagement
c)
Client representation letter
c)
A description of the auditor’s method of sample selection
d)
Comfort letter
d)
The risk that material misstatements may remain undiscovered
Which of the following is (are) valid reasons why an auditor send to client
39) After preliminary audit, arrangements have been made, an engagement
an engagement letter?
confirmation letter should be sent to the client. The letter usually would not
I.
To avoid misunderstanding with respect to engagement
include
II.
To confirm the auditor’s acceptance of the appointment
a)
III.
To document the objective and scope of the audit
I, II only
b)
I, II and III only
c)
All of the above statements
d)
All of the above statements except III
A reference to the auditor’s responsibility for the detection of errors and irregularities
To ensure CPA’s compliance to PSA
a)
b)
An estimate of the time to be spent on the audit work by audit staff and management
c)
A statement that the management advisory services would be made available upon request
d)
A statement that a management letter will be issued outlining
If an auditor believes that an understanding with the client has not been
comments and suggestions as to any procedures requiring the
established, he or she should ordinarily
client’s attention
a)
Perform the audit with increased professional skepticism
40) Arrangements concerning which of the following are least likely to be
b)
Decline to accept or perform the audit
included in engagement letter
c)
Assess the control risk at the minimum level and perform a primarily
a)
Auditor’s responsibilities
substantive audit
b)
Fees and billing
Modify the scope of the audit to reflect an increased risk of material
c)
CPA investment in client securities
d)
Other forms of reports to be issued in addition to t he audit report
d)
misstatement due to fraud 33)
The expectation of receiving a written management representation
b)
IV.
32)
Accepting an Engagement
Engagement letter that documents and confirms the auditor’s acceptance of the engagement would normally be sent to the client a)
Before the audit report is issued
b)
After the audit report is issued
c)
At the end of fieldwork
d)
Before the commencement of the engagement
34) An engagement letter should ordinarily include information on the
41)
The use of an engagement letter is the best method of documenting I.
The required communication of significant deficiencies in internal control structure
II.
Significantly lower materiality levels that those used in th e prior audit
III.
The description of any letters or reports that the auditor expects to issue
objectives of the engagement and
Page 3 of 9 eeb.6.30.2013
Auditing and Assurance Services IV.
Polytechnic University of the Philippines College of Accountancy
Notification of any changes In the original arrangements of the
4)
audit
42)
43)
Which of the following procedures would a CPA ordinarily perform during audit planning?
a)
I and II
a)
Obtain understanding of the client’s business and industry
b)
I and IV
b)
Review the client’s bank reconciliation
c)
II and III
c)
Obtain client’s representation letter
d)
III and IV
d)
Review and evaluate client’s internal control
In which of the following situations would the auditor be unlikely to send a
5)
In developing the overall audit plan for a new client, factor not to be
new engagement letter to a continuing client?
considered is
a)
Change in terms of the engagement
a)
Materiality levels
b)
Significant change in the nature or size of the client’s business
b)
The client’s business, including the structure of the organization and
c)
Recent change of the client management
d)
Recent change in the partner and/or staff in the audit engagement
accounting systems used
In a continuing engagement, the continuing auditor would most likely send
c)
The amount of estimated audit fee
d)
The audit risks and procedures to be performed to achieve audit
a new engagement letter when
objectives
a)
There is a change in the partner assigned to the engagement
6)
In planning the audit engagement, the auditor should consider each of the
b)
There is a recent change in client’s management
following except
c)
There are new accounting pronouncements affecting the client’s
a)
financial statements d)
44)
Matters relating to the entity’s business and the industries in which it operates
There are expected minor changes in the nature or size of the client’s
b)
The entity’s accounting policies and procedures
business
c)
Anticipated levels of control risk and materiality
d)
The kind of opinion that is likely to be expressed
When the auditor of a parent entity is also the auditor of its subsidiary, branch or division (component); which of the following factors would least
7)
A CPA is conducting the first examination of a client’s financial statements.
likely influence the auditor’s decision to send separate letter to a
The CPA hopes to reduce the audit work by consulting with the
component of a parent entity?
predecessor auditor and reviewing the predecessor ’s working papers. This
a)
Geographical location of the component
procedure is
b)
Legal requirements
a)
Acceptable if the client and the predecessor auditor agree to it
c)
Degree of ownership by parent
b)
Acceptable if the CPA refers in the audit report to reliance upon the
d)
Degree of independent of component’s management
predecessor auditor ’s work
Audit Planning 1)
Accepting an Engagement
c)
Required if the CPA is t o render an unqualified opinion
d)
Unacceptable because the CA should bring an independent viewpoint
This involves developing an overall strategy for the expected conduct and
to a new engagement
scope of the examination; the nature, extent, and timing of which vary with
2)
the size and complexity, and experience with and knowledge of the entity
Understanding the entity and its environment
a)
Audit planning
8)
b)
Audit program
CPA does not possess expertise in the industry in which the client
c)
Audit procedures
operates, the CPA should
d)
Audit working papers
a)
Reduce audit risk by lowering the preliminary levels of materiality
b)
Design special substantive tests to compensate for the lack of
Audit plans should
industry expertise
I.
Precede actions
II.
Be flexible
c)
Engage financial experts familiar with the nature of the industry
Be cost beneficial
d)
Obtain a knowledge of matters that relate to the nature of the entity’s
III.
3)
Prior to beginning the field work on a new audit engagement in which a
business
a)
II and III only
b)
I and III only
c)
All of the statements above
obtain a knowledge of the client’s business sufficient to
d)
All of the statements above except I
a)
9)
In performing an audit of financial statements, the auditor should have or
control
Adequate planning of the audit work helps ensure that I.
Appropriate attention is devoted to important areas
II.
All misstatements will be detected
Make constructive suggestions concerning improvements in internal
b)
Identify transactions and events that may affect the financial statements
III.
Potential problems are identified
c)
IV.
The work is completed expeditiously
d) 10)
Develop an attitude of professional skepticism Assess the level of control risk
Each of the following may be relevant to an auditor when obtaining
a)
All statements above
b)
II and IV only
knowledge about the client’s business and industry except
c)
I, III and IV
a)
Discussion with people within or outside the entity
d)
I and III
b)
Publications related to the industry
c)
Visits of the entity’s premises
d)
Performing a walkthrough tests
Page 4 of 9 eeb.6.30.2013
Auditing and Assurance Services 11)
Polytechnic University of the Philippines College of Accountancy
To obtain an understanding of a continuing client’s business in planning an
c)
audit, an auditor most likely would a)
Perform tests of details of transactions and balances
b)
Review prior years working papers and the permanent file for the
d)
perception of the needs of a reasonable person who will rely on the
Read specialized industry journals
17)
d)
Re-evaluate the client’s internal control system
In developing the preliminary level of materiality in an audit, the auditor will a)
Look to audit standards for specific materiality guidelines
Which of the following statements is correct, when obtaining understanding
b)
Increase the level of materiality if fraud is suspected
about the client’s business?
c)
Rely primarily on professional judgment to determine the materiality
The level of knowledge required of t he auditor is ordinarily more t han
level
the level of knowledge possessed by management b)
d)
Preliminary knowledge about the entity’ industry must be obtained after accepting the engagement to determine whether the auditor has
c)
d)
14)
An auditor ’s consideration of materiality is influenced by the auditors
financial statements
c)
a)
13)
Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments
client
12)
Accepting an Engagement
Use the same materiality level as that used for different clients in the same industry
18)
In making a preliminary judgment about materiality, the auditor initially
the necessary knowledge to perform the audit
determines the aggregate (overall) level of materiality for each statement.
Following the acceptance of the engagement, the auditor should
For planning purposes, the auditor should use the
obtain detailed knowledge about the client’s business preferably at
a)
Levels separately
the start of the engagement
b)
Average of these levels
For continuing engagements, the auditor may no longer obtain
c)
Largest aggregate level
knowledge about the client’s business
d)
Smallest aggregate level
Information about the client’s business appropriately assists the auditor in:
19)
In planning the audit, the auditor should assess materiality at two levels
I.
Assessing risk and identifying potential problems
a)
The preliminary level and the final level
II.
Planning and performing the audit effectively and ef ficiently
b)
The company level and the divisional level
III.
Evaluating audit evidence
c)
The account balance level and the detailed item level
d)
The financial statement level and the account balance level
a)
All of the above statements
b)
I and III only
c)
II nad III only
a)
Balance sheet level
d)
I and II only
b)
Account balance level
For initial engagements, PSA 510 does not required the auditor to obtain
c)
Income statement level
evidence
d)
Company-wide level
a)
20)
That the opening balances do not contain material misstatements that
b)
c)
21) All else being equal, as the level of materiality decreases, the amount of
materially affect the current period’s financial statements
evidence required will
That the prior period’s ending balances have been correctly brought
a)
Remain the same
forward to the current period or when appropriate, have been restated
b)
Change in an unpredictable fashion
That appropriate accounting policies are consistently applied or
c)
Decrease
d)
Increase
changes in accounting policies have been properly accounted for and adequately disclosed d)
“Tolerable misstatement” is the term used t o indicate materiality at the
22)
In considering materiality for planning purposes, an auditor believes that
That the prior period financial statements were audited by an
misstatements aggregating P 100,000 would have a material effect on an
independent CPA
entity’s income statement, but those misstatements would have to aggregate P 200,000 to materially affect the balance sheet. Ordinarily, it
Materiality
would be appropriate to design auditing procedures that would be expected
15) According to PSA 320, materiality should be considered by the auditor
to detect misstatements that aggregate
when: Determining the nature,
Evaluating the effects
timing and extent of audit procedures of misstatements
16)
a)
P 100,000
b)
P 200,000
c)
P 150,000
d)
P 300,000
a)
Yes
Yes
b)
Yes
No
c)
No
No
auditor ’s preliminary judgment about materiality?
d)
No
Yes
23)
Which of the following would an auditor most likely use in determining the
a)
The anticipated sample size of the planned substantive tests
Which of the following statements is not correct about materiality?
b)
The entity annualized interim financial statements
a)
c)
The results of the internal control questionnaire
d)
The contents of the management representation letter
The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with acceptable financial reporting framework, while other matters are
b)
24)
The concept of materiality with respect to the attest f unction
not important
a)
Applies only to publicly held firms
An auditor considers materiality for planning purposes in terms of the
b)
Has greater application to the standards of reporting than the other
largest aggregate level of misstatements that could be material to any
generally accepted auditing standards
one of the financial statements
Page 5 of 9 eeb.6.30.2013
Auditing and Assurance Services c)
d)
Polytechnic University of the Philippines College of Accountancy
Requires that relatively more effort be directed to those assertions
c)
The auditor will apply an inappropriate audit procedure
that are more susceptible to misstatements
d)
The auditor will apply an inappropriate measure of audit materiality
Requires the auditor to make judgment as to whether misstatements
33)
affect the fairness of the financial statements 25)
26)
When planning a financial statement audit, t he auditor should assess inherent risk at the
The relationship between materiality and risk is ordinarily
Financial statement level
Account balance or
a)
Direct
transaction class level
b)
Parallel
a)
Yes
Yes
c)
Inverse
b)
Yes
No
d)
None
c)
No
No
d)
No
Yes
When comparing level of materiality used f or planning purposes and the level of materiality used for evaluating evidence, one would most likely
34)
Risk in auditing means that the auditor accepts some level of uncertainty in
expect
performing the audit function. An effective auditor will
a)
The level of materiality to be always similar
a)
b)
The level of materiality for planning purposes to be smaller
c)
The level of materiality for planning purposes to be higher
b)
Set the risk level between 5% and 10%
d)
The level of materiality for planning purposes to be based on total
c)
Perform the audit procedures first and quantitatively set the risk level before forming an opinion and writing the report
on net income
d)
When assessing materiality levels for audit purposes, the auditor should consider the Amount involved
Take any means available to reduce the risk to the lowest possible level
assets while the level materiality for evaluating purposes to be based
27)
Accepting an Engagement
Recognize that risk exists and deal with them in an appropriate manner
35) Nature of misstatement
The audit risk model is used primarily a)
For planning purposes in determining how much evidence to
a)
Yes
Yes
accumulate
b)
Yes
No
b)
While doing tests of controls
c)
No
No
c)
To determine the type of opinion to express
d)
No
Yes
d)
To evaluate the evidence which has been gathered
36)
Inherent risk and control risk differ from detection risk in that inherent and
Audit Risk
control risks
28)
The risk that the auditor may express an incorrect opinion on the financial
a)
Arise from the misapplication of auditing procedures
statements is called
b)
May be assessed in either quantitative or non-quantitative terms
a)
Inherent risk
c)
Exist independently of the financial statement audit
b)
Detection risk
d)
Can be changed at the auditor ’s discretion
c)
Control risk
d)
Audit risk
29)
37)
The susceptibility of an account to misstatements assuming no internal
Which of the following is 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
control is referred to as the a)
Inherent risk
b)
Detection risk
c)
Control risk
d)
Audit risk
30) Audit risk consists of all but the following components
31)
32)
inverse relationship to inherent & control risks c)
The greater the inherent & control risks the auditor believes exist, the less detection risk that can be accepted
d)
The auditor might make separate or combined assessments of inherent risk and control risk
38)
The acceptable level of detection risk is inversely related to the
a)
Inherent risk
a)
Assurance provided by substantive tests
b)
Substantive risk
b)
Risk of misapplying auditing procedures
c)
Detection risk
c)
Preliminary judgment about materiality levels
d)
Control risk
d)
Risk of failing to discover material misstatements
For a particular assertion, control risk is the risk that
39)
Relationship between control risk and detection risk is ordinarily
a)
A material misstatement will occur in the accounting process
a)
Parallel
b)
Controls will not detect a material misstatement that occurs
b)
Direct
c)
Audit procedures will fail to detect a weak control system
c)
Inverse
d)
The prescribed control procedures will not be applied
d)
Equal
The audit risk against which the auditor and those who rely on his/her
40)
Which of the following conditions supports an increase in detection risk?
opinion require reasonable protection is a combination of three separate
a)
Internal control over cash receipts is excellent
risks at the account balance or class of transactions level. The first is
b)
Application of analytical procedures reveals a significant increase in
inherent risk. The second risk is that material misstatements will not be prevented or detected by internal control. The third risk is a)
The auditor will reject a correct account balance as incorrect
b)
Material misstatements that occur will not be detected by the audit
sales revenue in December, the last month of the fiscal year c)
Internal control over shipping, billing, and recording of sales revenue is weak
Page 6 of 9 eeb.6.30.2013
Auditing and Assurance Services d)
Polytechnic University of the Philippines College of Accountancy
Study of the business reveals that the client recently acquired a new
b)
company in an unrelated industry c)
Evaluate the effectiveness of the entity’s internal control policies and d)
Identify transactions and account balances whether inherent risk is at
a)
Indicate whether materiality thresholds for planning and evaluation b)
Determine the acceptable level of detection risk for financial c)
Which of the following would be considered the most conservative settings d) 49)
Lower the assessed level of control risk
Inherent risk
Control risk
a)
1.0
1.0
decides to increase the assessed level of control risk from that originally
b)
1.0
0.0
planned. To achieve an overall audit risk level is substantially the same as
c)
0.0
0.0
the planned audit risk level, the auditor would
d)
0.5
0.5
a)
Decrease substantive testing
What is the magnitude of audit risk if inherent risk is .50, control risk is .40
b)
Increase inherent risk
and detection risk .10?
c)
Decrease detection risk
a)
.20
d)
Increase materiality levels
b)
.04
c)
.10
of inherent risk when planning a financial statement audit?
d)
.02
a)
50)
On the basis of the audit evidence gathered and evaluated, an auditor
Which of the following statement is not true about the auditor ’s assessment
44) An inherent risk (IR) of 40% and a control risk of (CR) 60% affect planned
a)
IR of 60% and CR of 40%
b)
IR of 80% and CR of 30%
c)
IR of 100% and 24%
d)
IR of 70% and CR of 30%
b)
c)
d)
c)
51)
The auditor should obtain sufficient understanding of the entity and its environment, including its internal control order to Identify and assess the risk
The client has entered numerous related party transactions during the
of material misstatement
Design appropriate audit procedures
year under audit
a)
Yes
Yes
Internal control over shipping, billing, and recoding of sales revenue
b)
Yes
No
is weak
c)
No
No
d)
No
Yes
The client has lost a major customer accounting for approximately 30% of annual revenue
d)
The auditor assessment of inherent risk is influenced by the condition of the client’s accounting and internal control system
increase inherent risk?
b)
The auditor can make a separate or combined assessment of inherent and control risk
related internal controls. Of the following conditions which one does not
a)
In developing an audit program, the auditor should assess inherent risk at the account balance or transaction class level
Inherent risk is defined as the susceptibility of an account balance or class of transactions to error that could be material assuming that there were no
In developing the overall audit plan, t he auditor should assess inherent risk at the financial statement level
detection risk and planned evidences differently than an
45)
Eliminate the assessed level of inherent risk from considerations as a planning factor
for inherent risk and control risk?
43)
Postpone the planned timing of substantive tests from interim dates to the year-end
statements 42)
Reduce substantive testing by relying on the assessment of inherent risk and control risk
purposes are sufficiently high d)
Assessed level of inherent risk to a higher level
48) As the acceptable level of detection risk decreases, an auditor may
high level c)
Timing of tests of controls by performing them at several dates rather than at one time
procedures b)
Nature of substantive tests from a less effective to a more effective procedure
41) An auditor uses the assessed level of control risk to a)
Accepting an Engagement
52) According to PSA 315, “Risk assessment procedures” means
The board of directors approved a substantial bonus for the president
a)
and chief executive office and also approved an attractive stock
Identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks
option plan for themselves
b)
46) According to auditing standards, the auditor uses the assessed level of
Obtaining understanding of entity and its environment, including its internal control
control risk (together with the assessed level of inherent risk) to determine
c)
the acceptable level of detection risk for financial statement assertions. As
Performing substantive tests and testing the operating effectiveness of the entity’s internal control
the acceptable level of detection risk decreases, the auditor may do one or
d)
more of the following except change the
Discussing with the members of the audit team the susceptibility the entity’s financial statements to material misstatements
a)
Nature of substantive tests to more effective procedures
53)
b)
Timing of substantive tests, such as using larger sample sizes
a)
Inquiries of management and others within the entity
c)
Assurance provided by substantive tests to a lower level
b)
Analytical procedures
c)
Observation and inspection
d)
Reperformance of client’s procedures
47) As the acceptable level of detection risk decreases, an auditor may change the a)
Timing of substantive tests by performing them at an interim date rather that at year-end
54)
Risk assessment procedures would include all of the f ollowing except
Which of the following is incorrect about the auditor ’s risk assessment procedures?
Page 7 of 9 eeb.6.30.2013
Auditing and Assurance Services a)
Polytechnic University of the Philippines College of Accountancy
Obtaining understanding control, is a continuous, dynamic process of
d)
gathering, updating and analyzing information throughout the audit b)
In performing risk assessment procedures, the auditor may obtain
61) Analytical procedures are used for the following purposes except a)
To assist the auditor in planning the nature, timing and extent of other
b)
As a substantive test to obtain evidential matter about particular
effectiveness of controls, even though such procedures are not
auditing procedures
specifically planned as substantive tests or test of controls The auditor should perform substantive procedures and tests of
assertion related to account balances or classes of transactions
controls after the risk assessment procedures are performed d)
c)
Obtaining understanding of internal control is not normally sufficient d) 62)
Analytical procedures These consists of the analysis of significant ratios and trends including the
For all audits of fi nancial statements made in accordance with PSAs, the
In the planning stage As substantive test In the review stage
resulting investigation of fluctuation and relationship that are inconsistent
a)
Yes
No
Yes
with other relevant information or deviate from predictable amount
b)
Yes
Yes
No
a)
Financial statement analysis
c)
Yes
Yes
Yes
b)
Variance analysis
d)
Yes
No
No
c)
Analytical procedures
d)
Regression analysis
63) Analytical procedures used in planning an audit should focus on identifying: a)
Material weaknesses in the internal control structure
b)
The predictability of financial data from individual transactions
performed primarily to assist the auditor in
c)
The various assertions that are embodied in the financial statements
a)
Identifying areas that may represent specific risks
d)
Areas that may represent specific risk relevant to the audit
b)
Obtaining knowledge about the design of internal control
c)
Obtaining knowledge about the operating effectiveness of the client’s
procedures, preliminary analytical procedures should focus
internal control
a)
d)
64)
To help plan the nature, timing and extent of substantive auditing
Gathering corroborative evidence about the validity of an account b)
Developing plausible relationships that corroborate anticipated r esults
c)
Applying ratio analysis to externally generated data such as
57) A basic premise underlying analytical procedure is that a)
These procedures cannot replace tests of balances and transactions
b)
Statistical tests of financial information may lead to the discovery of
with a measurable amount of precision
published industry statistics or price indices
material misstatements in the financial statements c)
d)
d)
The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations
Comparing recorded financial information to the results of other tests of transactions and balances
65) Analytical procedures enable the auditor to predict the balance or quantity
Plausible relationships among data may reasonably be expected to
for an item under audit, information to develop this estimate can be
exist and continue in the absence of known conditions to the contrary
obtained from all of the following except
One reason why an auditor makes an analytical review of the client’s
a)
operations is to identify
Tracing transactions through the system to determine whether procedures are being applied or prescribed
a)
Improper separation of accounting and other financial duties
b)
Weakness of material nature in the system of internal accounting
anticipated results(e.g., budgets and forecasts), and similar data for
control
the industry in which the entity operates
c)
Unusual transactions
d)
Non-compliance with prescribed control procedures
b)
c)
Significant unexpected differences identified by analytical procedures will
a)
Consistency explanatory paragraph added to the audit report
b)
Review of the internal control structure
c)
Explanation in the representation letter
d)
Auditor investigation
Comparison of financial data with data for comparable prior periods,
Study of the relations of elements of financial data that would be expected to confirm to a predictable patter based upon the entity’s experience
usually necessitate a (an)
60)
Enhancing the auditor ’s understanding of the client’s business and events that have occurred since the last audit date
balance
59)
To evaluate the effectiveness of the client’s internal control
use of analytical procedures is required to some extent
56) Analytical procedures used as of risk assessment procedures are
58)
As an overall review of financial information in the final review stage of the audit
to serve as testing the operating effectiveness of the control
55)
Analytical procedures may be performed in the planning, testing and completion phases of the audit
disclosures and related assertions, and about the operating
c)
Accepting an Engagement
d)
Study of the relationships of financial data with relevant non-financial data
66) An example of an analytical procedure is the comparison of a)
Financial information with similar information regarding the industry in which the entity operates
Which of the following statements about analytical procedures is incorrect?
b)
Recorded amounts of major disbursements with appropriate invoices
a)
Analytical procedures are required to be performed in the planning
c)
Results of statistical sample with the expected characteristics of the
b)
Analytical procedures are required to be done during the testing
phase of the audit
actual population d)
phase of the audit c)
Analytical procedures are required to be done during the completion
CIS generated data with similar data generated by a manual accounting system
67)
Which of the following is not a typical analytical review procedure?
phase of the audit
Page 8 of 9 eeb.6.30.2013
Auditing and Assurance Services a)
Polytechnic University of the Philippines College of Accountancy
Accepting an Engagement
Study of relationships of the financial information with relevant nonfinancial information
b)
Comparison of the financial information with similar information regarding the industry in which the entity operates
c)
Comparisons of recorded amounts of major disbursements with appropriate invoices
d)
Comparison of the financial information with budgeted amounts
Planning documentation 68)
In developing the overall audit plan and audit program, the auditor should assess inherent risk at the: Audit plan
69)
Audit program
a)
Financial statement level
Account balance level
b)
Account balance level
Financial statement level
c)
Account balance level
Account balance level
d)
Financial statement level
Financial statement level
In developing written audit programs, an auditor should establish specific audit objectives that relate primarily to the a)
Timing of audit procedures
b)
Selected audit techniques
c)
Cost-benefit of gathering evidence
d)
Financial statements assertions
70) An auditor should design the written audit program so that a)
All material transactions will selected for substantive testing
b)
Substantive tests prior to the balance sheet data will be minimized
c)
The audit procedures selected will achieve specific audit objectives
d)
Each account balance will be tested under tests of controls or tests of transactions
71) An audit program should be designed for each individual audit and should include audit steps and procedures to
72)
a)
Detect and eliminate all fraud
b)
Increase the amount of management information available
c)
Provide assurance that the objectives of the audit are met
d)
Insure that only material items are audited
Which of the following statement is incorrect about the planning documentation? a)
The audit plan and related programs should no longer be changed once the audit is stated
b)
Although the precise form and consent of the audit plan may vary, it should be sufficiently detailed to guide the development of an audit program
c)
The audit program should set out the nature, timing and extent of planned audit procedures required to implement overall audit plan
d)
In preparing an audit program, the auditor should consider the specific assessments of inherent and control risks and the required level of assurance to be provided by substantive tests
73)
Which of the following matters would least likely appear in the audit program? a)
Specific procedures that will be performed
b)
Specific audit objectives
c)
Estimated time that will be spent in performing certain procedures
d)
Documentation of the accounting and internal control systems being reviewed
Page 9 of 9 eeb.6.30.2013
