Auditing Theory Test Bank
Auditing Theory Test Bank
20. When an auditor expresses an adverse opinion 27. For good internal control, the purchasing
he/sheshould disclose the substantive reasons for such department should not be responsible for
anopinion in an explanatory paragraph a) Authorizing the acquisition of goods
a) Within the notes to the financial statements b) Finding the lowest cost vendor
b) Preceding the opinion paragraph c) Reviewing the vendors catalog descriptions and
c) Following the opinion paragraph prices for standardized items
d) Preceding the introductory paragraph d) Designing the purchase order form
21. Tolerable error means 28. Involves tracing a few transactions through the
a) An error that arises from an isolated event that has accounting system
not recurred other than on specifically identifiable a) Test of controls
occasions and is therefore not representative of errors b) Walk-through test
in the population c) Analytical procedures
b) An error that the auditor expects to be present in d) Substantive procedures
the population
c) The maximum error in a population that the 29. This exists, when other information, not related to
auditor is willing to accept matters appearing in the financial statements, is
d) The possibility that the auditor's conclusion, based incorrectly stated or presented
on a sample may be different from the conclusion a) Material inconsistency
reached if the entire population were subjected to the b) Material misstatement
same audit procedure c) Material misstatement of fact
d) Material error affecting the other information
22. Examples of events or conditions, which
individually or collectively, may cast significant doubt 30. Who appoints the members of the Board of
about the going concern assumption include the Accountancy
following except a) The chairman of BOA
b) The president of the Philippines referred to as
c) The chairman of the PRC a) Special purpose financial statements
d) The president of PICPA b) Special purpose framework
c) General purpose financial statements
31. An auditor is required to obtain an understanding d) Specific purpose financial statements
of the entity's business, including business cycles and
reasons for business fluctuations. What is the audit 38. An auditor plans to apply substantive tests to the
purpose most directly served by obtaining this details of asset and liability accounts as of an interim
understanding? date rather than as of the balance sheet date. The
a) To enable the auditor to accurately identify auditor should be aware that this practice
significant deficiencies in internal control a) Eliminates the use of certain statistical sampling
b) To assist the auditor in accurately interpreting methods that would otherwise be available
information obtained during an audit b) Presumes that the auditor will reperform the tests of
c) To allow the auditor to more accurately perform the balance sheet date
tests of controls c) Should be especially considered when there are
d) To decide whether it will be necessary to perform rapidly changing economic conditions
analytical procedures d) Potentially increases the risk that errors that
exist at the balance sheet date will not be
32. Which of the following is not true about the report detected
release date?
a) It is defined as the date after which existing 39. Close family include the following, except
documentation must not be deleted, and a) Parent
additions to the documentation file must be b) Sibling
documented as such c) Non-dependent child
b) It is often the date on which the report is delivered d) Spouse
to the client
c) It is the date on which the auditor grants the client 40. A computer-assisted audit technique that is most
permission to use the report likely to be effective in a continuous auditing
d) It is used to define the beginning of the retention environment is
period a) Parallel simulation
b) Controlled reprocessing
33. An auditor should not issue a report on c) Embedded audit modules
a) Quarterly financial information d) Transaction tripping
b) Internal control
c) Management performance 41. Which of the following is not prohibited by the
d) The achievability of forecasts Code of Professional Ethics for CPAs?
a) Advertising and solicitation of clients
34. Which of the following procedures would an auditor b) Payment of commissions to obtain a client
most likely perform to obtain evidence about the c) Receiving a contingent fee on a tax case
occurrence of subsequent events? before the Bureau of Internal Revenue
a) Confirming a sample of material accounts receivable d) Offering employment to a staff member of another
established after year-end CPA without first informing the CPA
b) Comparing the financial statements being reported
on with those of the prior period 42. The management's assessment of the entity's
c) Investigating personnel changes in the accounting ability to continue as a going concern covers a period
department occurring after year-end of
d) Inquiring as to whether any unusual a) Not longer than 12 months from balance sheet date
adjustments were made after year-end b) At least 12 months from the balance sheet
date
35. To which of the following matters would materiality c) Not longer than 12 months from the date of audit
limits not apply when obtaining written client report
representations? d) At least 12 months from the date of audit report
a) Violations of state labor regulations
b) Disclosure of line-of-credit arrangements
43. To obtain evidential matter about control risk, an
c) Information about related party transactions
auditor selects tests from a variety of techniques
d) Instances of fraud involving management
including
36. Who ultimately determines the scope of the audit?
a) Inquiry
a) The auditor
b) Analytical procedures
b) The client
c) Calculation
c) Both a and b
d) Confirmation
d) Neither a nor b
44. The need for independent audits of financial
37. Financial statements prepared in accordance with a statements can be attributed to all of the following
financial reporting framework designed to meet the conditions except
financial information needs of specific users are a) Remoteness
b) Consequence b) Reperformance
c) Complexity of subject matter c) Analytical procedures
d) Validity d) Observation and inspection
45. After issuing a report an auditor includes that an 50. The auditor should determine overall responses to
auditing procedure considered necessary at the time of address the risks of material misstatement at the
the examination was omitted from the examination. financial statement level. Such responses most likely
The auditor should first include
a) Undertake to apply the omitted procedure or a) Assigning less experienced staff
alternative procedures that would provide a b) Performing predictable further audit procedures
satisfactory basis for the auditor's opinion c) Performing substantive procedures at an interim
b) Assess the importance of the omitted date instead of at period end
procedure to the auditor's ability to support the d) Emphasizing to the audit team the need to
opinion expressed on the financial statements maintain professional skepticism in gathering
taken as a whole and evaluating audit evidence
c) Notify the audit committee or the board of directors 51. The need for assurance services arises for all of the
that the auditor's opinion can no longer be relied upon following reason except
d) Review the results of other procedures that were a) Potential bias in providing information
applied to compensate for the one omitted or to make b) Closeness between a user and the
its omission less important organization
c) Complexity of the processing systems
46. This quality control element requires a CPA firm to d) Remoteness between a user and the organization
establish policies and procedures to provide it with
reasonable assurance that engagements are performed 52. Which one of the following is not a key attribute
in accordance with professional standards and needed to perform assurance?
regulatory and legal requirements, and that the firm or a) Subject matter knowledge
b) Independence
the engagement partner issue reports that are
c) Established criteria or standards
appropriate in the circumstances d) Accounting skills
a) Ethical requirements
b) Engagement performance 53. Which one of the following is not part of the attest
c) Monitoring process?
d) Human resources a) Providing the accuracy of the books and
records
b) Gathering evidence about assertions
c) Evaluating evidence against objective criteria
47. Communication with a predecessor auditor is d) Communicating the conclusions reached
initiated by
a) Management 54. Users of the audit report can reasonably expect the
b) The successor auditor audited financial statements to be
c) The audit committee of the board of directors a) Complete and contain many of the important
d) The chair of the board of directors financial disclosures
b) Presented fairly according to the substance of
GAAP
c) Free from all errors
48. In which of the following may confidential d) All of the above
information not be disclosed?
a) To comply with the quality review of a member 55. Which of the following services is the broadest and
body or professional body most inclusive
b) To submit evidence in the course of legal a) Audit
b) Attestation
proceedings
c) Assurance
c) Acquiring information in the course d) Compliance
performing professional services and use that
information for personal advantages 56. One reason why an auditor makes an analytical
d) When consent to disclose information is given by review of the client’s operations is to identify
the client a) Improper separation of accounting and other
financial duties
49. The auditor should perform the following risk b) Weakness of a material nature in the system of
assessment procedures to obtain an understanding of internal accounting control
the entity and its environment, including its internal c) Unusual transactions
control, except d) Non-compliance with prescribed control procedures
a) Inquiries of management and others within the
entity 57. Analytical procedures used in planning an audit
should focus on identifying
a) Material weaknesses in the internal control structure 64. Proper segregation of functional responsibilities
b) The predictability of financial data from individual calls for separation of the functions of
transactions a) Authorization, execution, and payment
c) The various assertions that are embodied in the b) Authorization, recording, and custody
financial statements c) Custody, execution, and reporting
d) Areas that may represent specific risk relevant d) Authorization, payment, and recording
to audit
65. Control risk should be assessed in terms of
58. An integrated test facility (ITF) would be a) Specific controls
appropriate when the auditor needs to b) Types of potential fraud
a) Trace a complex logic path through an application c) Financial statement assertions
system d) Control environment factors
b) Verify processing accuracy concurrently with
processing 66. Which of the following is not a step in an auditor's
c) Monitor transactions in an application system assessment of control risk?
continuously a) Evaluate the effectiveness of internal control with
d) Verify load module integrity for production tests of controls
programs b) Obtain an understanding of the entity's information
system and control environment
59. The rotation of senior accounting personnel can be c) Perform tests of details of transactions to
regarded as a safeguard detect material misstatements in the financial
a) Created by the profession statements
b) Within the client’s systems and procedures d) Consider whether controls can have a pervasive
c) In the work environment effect on financial statement assertions
d) Created within the business community
67. Which of the following procedures would an auditor
60. If certain forms are not consecutively numbered ordinarily perform first in evaluating management's
a) Systematic sampling may be appropriate accounting estimates for reasonableness?
b) Selection of a random sample probably is not a) Develop independent expectations of management's
possible estimates
c) Stratified sampling should be used b) Consider the appropriateness of the key factors or
d) Random number tables cannot be used assumptions used in preparing the estimates
c) Test the calculations used by management in
61. A cash shortage may be concealed by transporting developing the estimates
funds from one location to another or by converting d) Obtain an understanding of how management
negotiable assets to cash. Because of this, which of the developed its estimates
following is vital?
a) Simultaneous confirmations 68. An entity's income statements were misstated due
b) Simultaneous bank reconciliations to the recording of journal entries that involved debits
c) Simultaneous verification and credits to an unusual combination of expense and
d) Simultaneous surprise cash count revenue accounts. The auditor most likely could have
detected this fraudulent financial reporting by
62. Which of the following is most likely to indicate a a) Tracing a sample of journal entries to the general
significant deficiency relating to a client's anti-fraud ledger
programs? b) Evaluating the effectiveness of internal control
a) A broad scope of internal audit activities c) Investigating the reconciliations between controlling
b) A "whistle-blower" program that encourages accounts and subsidiary records
anonymous submissions d) Performing analytical procedures designed to
c) Audit committee passivity when conducting disclose differences from expectations
oversight functions
d) Lack of performance of criminal background 69. Which of the following is most likely to be unique
investigations for likely customers to the audit work of CPAs as compared to work
performed by practitioners of other professions?
63. Which of the following is not an attestation a) Due professional care
standard? b) Competence
a) Sufficient evidence shall be obtained to provide a c) Independence
reasonable basis for the conclusion that is expressed in d) Complex body of knowledge
the report
b) The report shall identify the subject matter on the 70. Which of the following would an auditor most likely
assertion being reported on and state the character of use in determining the auditor's preliminary judgment
the engagement about materiality?
c) The work shall be adequately planned and a) The anticipated sample size of the planned
assistants, if any, shall be properly supervised substantive tests
d) A sufficient understanding of internal control b) The entity's annualized interim financial
shall be obtained to plan the engagement statements
c) The results of the internal control questionnaire important.
d) The contents of the management representation d) Is responsible for expressing an opinion on the
letter financial statements, which arc the responsibility of
management.
71. Which of the following conditions identified during
fieldwork of an audit is most likely to affect the 77. Which of the following services would be most
auditor's assessment of the risk of misstatement due likely to be structured as an attest engagement?
to fraud? a) Advocating a client's position in tax matter.
a) Checks for significant amounts outstanding at year- b) A consulting engagement to develop a new
end database system for the revenue cycle.
b) Computer generated documents c) An engagement to issue a report addressing
c) Missing documents an entity's compliance with requirements of
d) Year-end adjusting journal entries. specified laws.
d) The compilation of a client's forecast information.
72. An auditor ordinarily uses a working trial balance
78. Which of the following is ordinarily considered to
resembling the financial statements without footnotes,
be a fraud risk factor?
but containing columns for
a) The company's financial statements include a
a) Cash flow increases and decreases
number of last minute material adjustments.
b) Audit objectives and assertions
b) Management regularly informs investors of forecast
c) Reclassifications and adjustments
information.
d) Reconciliations and tick marks
c) The company has experienced increasing earnings
over the previous five years.
d) The company's president is included as a member of
73. The risk that an auditor will conclude, based on the board of directors.
substantive tests, that a material misstatement does
not exist in an account balance when in fact such
79. Which is least likely to be a question asked of
misstatement does exist is referred to as
client personnel during a walk-through in an audit of
a) Detection risk
the internal control of an issuer (public) company?
b) Sampling risk
a) What do you do when you find an error'?
c) Non-sampling risk
b) Who is most likely to commit fraud among
d) Inherent risk
your coworkers?
c) What kind of errors have you found?
74. The usefulness of the standard bank confirmation
d) Have you ever been asked to override the process
request may be limited because the bank employee
or controls?
who completes the form may
a) Be unaware of all the financial relationships
that the bank has with the client 80. An auditor who uses the work of a specialist may
b) Not believe that the bank is obligated to verify refer to and identify the specialist ill the auditor's
confidential information to a third party report if the
c) Sign and return the form without inspecting the a) Specialist is also considered to be a related party.
accuracy of the client's bank reconciliation b) Auditor indicates a division of responsibility related
d) Not have access to the client's cutoff bank to the work of the specialist.
statement c) Specialist's work provides the auditor greater
assurance of reliability.
d) Auditor expresses an "except for" qualified
75. A material weakness is a significant deficiency (or
opinion or an adverse opinion related to the work
combination of significant deficiencies) that results in a
of the specialist.
reasonable possibility that a misstatement of at least
'what amount will not be prevented or detected?
a) An amount greater than zero 81. Which of the following statements concerning
b) An amount greater than zero, but at least evidential matter is correct?
inconsequential a) Appropriate evidence supporting management's
c) An amount greater than inconsequential assertions should be convincing rather than merely
d) A material amount persuasive.
b) Effective internal control contributes little to the
76. The existence of audit risk is recognized by the reliability of the evidence created within the entity.
statement in the auditor's standard report that the c) The cost of obtaining evidence is not an important
auditor consideration to an auditor in deciding what evidence
a) Obtains reasonable assurance about whether should be obtained.
the financial statements are free of material d) A client's accounting data cannot be
misstatement. considered sufficient audit evidence to support
b) Assesses the accounting principles used and also the financial statements.
evaluates the overall financial statement presentation.
c) Realizes some matters either individually or in the 82. Confirmations of accounts receivable address
aggregate, are important while other matters are not which assertion most directly?
a) Completeness
b) Existence c) Compilation
c) Valuation
d) Classification 88. Which of the following should an auditor obtain
from the predecessor auditor prior to accepting an
83. When performing a review of an issuer company, audit engagement?
which is least likely to be included in the CPA's inquires a) Analysis of balance sheet accounts
of management members with responsibility for b) Analysis of income statement accounts
financial and accounting matters? c) All matters of continuing accounting significance
a) Subsequent events d) Facts that might bear on the integrity of
b) Significant journal entries and other adjustments management
c) Communications with related parties
d) Unusual or complex situations affecting the financial
statements d) Facts that might bear on the integrity of
management
84. The adverse effects of events causing an auditor to
believe there is substantial doubt about an entity's 89. Which is least likely to be a response when an
ability to continue as a going concern would most likely auditor has obtained evidence indicating a risk of
be mitigated by evidence relating to the material misstatement in the area of inventory?
a) Ability to expand operations into new product lines a) Request inventory counts at the end of each month.
in the future. b) Discuss questions of inventory valuation with any
b) Feasibility of plans to purchase leased equipment at other auditors involved with the audit.
Jess than market value. c) Make oral inquiries of major suppliers in addition to
c) Marketability of assets that management plans written confirmations.
to sell. d) Perform inventory observations on an unannounced
d) Committed arrangements to convert preferred stock basis.
to long-term debt.
85. One reason that an auditor only obtains a) Request inventory counts at the end of each
reasonable, and not absolute, assurance that financial month.
statements are free from material misstatement is
a) Comprehensive basis reporting 90. The independent auditor selects several
b) Employee collusion transactions in each functional area and traces them
c) Material misstatements through the entire system, paying special attention to
d) Professional skepticism evidence about whether or not the controls are in
operation. This is an example of a(n)
a) Application test
86. When an auditor concludes there is substantial
b) Test of controls
doubt about a continuing audit client's ability to
c) Substantive test
continue as a going concern for a reasonable period of
d) Test of a function
time, the auditor's responsibility is to
a) Issue a qualified or adverse opinion, depending
upon materiality, due to the possible effects on the
financial statements. b) Test of controls
b) Consider the adequacy of disclosure about the 91. Accounting control procedures within computer
client's possible inability to continue as a going processing may leave no visible evidence indicating
concern. that the procedures were performed. In such
c) Report to the client's audit committee that instances, the auditor should test these controls by
management's accounting estimates may need to be a) Making corroborative inquiries.
adjusted. b) Observing the separation of duties of personnel.
d) Reissue the prior year's auditors report and add an c) Reviewing transactions submitted for processing and
explanatory paragraph that specifically refers to comparing them to related output.
"substantial doubt" and "going concern." d) Reviewing the run manual.
c) An unqualified opinion
a) All goods owned at year-end are included in
the inventory balance. 99. Which of the following is not typically performed
when accountants are performing a review of the
95. A company has changed its method of inventory financial statements of a nonissuer?
valuation from an unacceptable one toone in a) Analytical procedures applied to financial data
conformity with generally accepted accounting b) Inquiries about significant subsequent events
principles. The auditor's report on the financial c) Inquiries of the client's attorney about legal matters
statements of the year of the change should include d) Obtaining an understanding of the accounting
a) No reference to consistency. principles followed by the client's industry
b) A reference to a prior period adjustment in the
opinion paragraph.
c) An explanatory paragraph explaining the change. c) Inquiries of the client's attorney about legal
d) A justification for making the change and the impact matters.
of the change on reported net income.
100. Which of the following is least likely to be a
restricted use report?
c) An explanatory paragraph explaining the a) A report on financial statements prepared following
change. a comprehensive basis of accounting other than
generally accepted accounting principles.
96. An abnormal fluctuation in gross profit that might b) A report on internal control significant deficiencies
suggest the need for extended audit procedures for noted in an audit.
sales and inventories would most likely be identified in c) A required communication with the audit committee.
the planning phase of the audit by the use of d) A report on compliance with aspects of contractual
a) Tests of transactions and balances agreements.
b) A preliminary review of internal control
c) Specialized audit programs
d) Analytical procedures a) A report on financial statements prepared
following a comprehensive basis of accounting
other than generally accepted accounting
principles.