University of Nueva Caceres

College of Business and Accountancy

AUDITING AND ASSURANCE PRINCIPLES

QUIZ #1
THE AUDITOR’S RESPONSIBILITY
1. Which of the following statements best describes the auditor’s responsibility regarding the
detection of material errors and frauds?
a. The auditor is responsible for the failure to detect material errors and frauds only when such
failure results from misapplication of PSA.
b. The audit should be designed to provide reasonable assurance that material errors
and frauds will be detected.
c. The auditor is responsible for the failure to detect material errors and fraud only when
the auditor fails to confirm receivables or observe inventories.
d. Extended auditing procedures are required to detect unrecorded transactions even if
there is no evidence that material errors and frauds may exist.

2. The following statements relate to the auditor’s responsibility for the detection of errors
and fraud. Identify the correct statements.
I. Due to inherent limitations of the audit, there is a possibility that material
misstatements in the financial statement may not be detected
II. The subsequent discovery of material misstatement of the financial information
resulting from fraud and error does not, in itself, indicate that the auditor failed to
follow the basic principles and essential procedures of an audit.
a. I only
b. II only
c. Both statements are correct
d. Both statements are incorrect

3. The term “error” refers to unintentional misrepresentation of financial information.

Examples of errors are when
I. Assets have been misappropriated
II. Transactions without substance have been recorded
III. Records and documents have been manipulated and falsified
IV. The effects of the transactions have been omitted from the records
a. All of the statements are true
b. Only statements I and III are true
c. All of the above statements are false

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 d. Only statements II and IV are true

4. Which of the following is an example of fraudulent financial reporting?

a. Company management changes inventory count tags and overstates ending
inventory, while understating cost of goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions
by debiting expense accounts, thus overstating expenses.
c. An employee steals small tools from the company and neglects to return them: the
cost is reported as a miscellaneous operating expense.
d. An employee omitted an entry to record a bank transfer to cover cash shortage.

5. Which of the following statements best describes an auditor’s responsibility to detect

errors and fraud?
a. An auditor should assess the risk that errors and fraud may cause the financial
statements to contain material misstatements and should design the audit to
provide reasonable assurance of detecting errors and fraud that are material to the
financial statement.
b. An auditor is responsible to detect material errors but has no responsibility to detect
material fraud that is concealed through employee collusion or management override
of the internal control structure.
c. An auditor has no responsibility to detect errors and fraud unless analytical
procedures or tests of transactions identify conditions causing a reasonably prudent
auditor to suspect that the financial statements were materially misstated.
d. An auditor has no responsibility to detect error and fraud because auditor is not an
insurer and an audit does not constitute a guarantee.

6. In comparing management fraud with employee fraud, the auditor’s risk of failing to
discover fraud is:
a. Greater for management fraud because mangers are inherently more deceptive than
the employees.
b. Greater for management fraud because of management’s ability to override existing
internal control
c. Greater for employee fraud because of the higher crime rate among blue collar
workers.
d. Greater for employee fraud of the larger number of employees on the organization

7. Which of the following best describe what is meant by the term “fraud risk factor?”
a. Factors whose presence indicates that the risk of fraud is high

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 b. Factors whose presence often has been observed in circumstances where fraud has
occurred
c. Factors whose presence requires modification of planned audit procedures.
d. Factor that indicates internal control weaknesses.
8. When considering fraud risk factor relating to management’s characteristics, which of the
following is least likely to indicate a risk of possible misstatement due to fraud?
a. Failure to correct known material internal control weaknesses on timely basis
b. Nonfinancial management’s preoccupation with the selection of accounting
principles.
c. Significant portion of management’s compensation represented by bonuses based
upon achieving unduly aggressive operating results
d. Use of manually conservative accounting practices

9. Which of the following characteristics most likely would heighten an auditor’s concern
about the risk of intentional manipulation of financial statements?
a. Turnover of senior accounting personnel
b. Insiders recently purchased additional shares of the entity’s stock
c. Management places substantial emphasis on meetings earnings projections
d. The rate of change in the entity’s industry is slow

10. Which of the following most likely to be considered a risk factor relating to fraudulent
financial reporting?
a. Domination of management top executives
b. Large amount of cash processed
c. Negative cash flows from operations
d. Small high-peso inventory items

11. Which of the following is most likely to be presumed to represent fraud risk on an audit?
a. Capitalization of repairs and maintenance into property, plant and equipment asset
account
b. Improper revenue recognition
c. Improper interest expense accrual
d. Introduction of significant new products

12. Which of the following circumstances would least likely cause an auditor to consider
whether material misstatements exist in an entity’s financial statements?
a. Management is dominated by several individuals
b. The industry in which the entity operates is declining

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 c. There is inadequate working capital due to declining profits
d. Supporting records that should be readily available are frequently not produced when
requested
13. Which of the following circumstances most likely would cause an auditor to believe that
material misstatement exists in an entity’s financial statement?
a. Operating and financing decisions are dominated by top management.
b. Audit trails of computer-generated transactions exist only for a short period of time.
c. The chief financial officer does not sign the management representation letter until
the last day of the auditor’s fieldwork
d. There were substantial payments for services that appear excessive in relation to
services provided
14. All of the following conditions are indicators of possible pressures on an entity except
a. The industry in which the entity operates is declining
b. There is inadequate working capital due to declining profits or too rapid expansion
c. The client is heavily dependent on or few products or customers
d. There is significant and prolonged understaffing of the accounting department
15. During the course of an audit engagement, the CPA discovers specific circumstances that
led him to the belief that employee fraud that has a material effect on the financial
statement may have occurred. In such case the CPA should
a. Tactfully approach the suspected employee and attempt to resolve the matter with
him
b. Ascertain that the client understand that the ordinary examination is not primarily
designed to disclose fraud or defalcations
c. Perform appropriate modified or additional procedures to confirm or dispel the
auditor’s suspicion
d. After advising the client of his finding, suggest that an investigation be made to
discover whether fraud has in fact occurred
16. If an auditor believed that material errors or fraud exist, the auditor should
a. Consider the implications and discuss the matter with appropriate levels of
management
b. Make the investigation necessary to determine whether errors or fraud have in fact
occurred
c. Request that management investigate whether errors or fraud have in fact occurred
d. Consider whether the errors or fraud were the results of employee’s failure to comply
with specific control
17. Which of the following is an incorrect statement?
a. The auditor cannot assume that fraud or error is an isolated occurrence unless there
is an evidence to the contrary

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 b. If the auditor suspects that error may exist, he should immediately communicate it
to the management even if the potential effect on financial statements is immaterial
c. Fraud and error should be reported to a level of management at least one level above
those involved.
d. Normally, the CPA does not have any responsibility to communicate confidential
information noted during the audit to the regulatory authorities
18. If the auditor believes that the fraud or error has a material effect on the financial
statements but the client is not willing to correct the misstatement, the auditor would
most likely issue a(n)
a. Unmodified opinion
b. Qualified or adverse opinion
c. Qualified or disclaimer of opinion
d. Unmodified opinion with emphasis of matter paragraph
19. If the auditor is precluded by the entity from obtaining evidence to evaluate whether
fraud or error that may be material to the financial statements has occurred, the auditor
should issue a report that contains
a. An adverse opinion
b. An unmodified opinion
c. Either qualified or adverse opinion
d. Either qualified opinion or a disclaimer of opinion
20. When a user sees that an unmodified opinion has been expressed by an external auditor,
he or she may correctly infer that:
a. No material errors were found during the engagement
b. No embezzlement remains undetected
c. Any system defects encountered during the engagement have been corrected to the
auditor’s satisfaction
d. Any differences between management and the auditor on accounting matters have
been resolved to the auditor’s satisfaction
21. Judgment about the increased risk of misstatement of the financial statements due to
fraud may influence the auditor’s professional judgements in the following ways except:
a. The auditor’s ability to assess control risk below the maximum may be reduced and
the auditor should be sensitive to the ability of management to override controls
b. The audit team may be selected in ways that ensure that the knowledge, skill and
ability of personnel assigned significant engagement responsibilities are
commensurate with the auditor’s assessment of the level of risk
c. The auditor should plan and audit to provide a guarantee that the financial
statements are free of material misstatements, whether due to fraud or error.

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 d. The audit team may approach the audit with a heightened level of professional
skepticism
22. What is an auditor’s responsibility who discovers the management is involved in a
potentially immaterial fraud?
a. Report the fraud to audit committee
b. Report the fraud to the SEC
c. Report the fraud to a level of management at least one level below those involved in
the fraud
d. Determine that the amounts involved are immaterial, and is so, there is no reporting
responsibility.
23. An auditor should recognize that the application of auditing procedures may produce
evidence indicating the possibility of errors or fraud and therefore should:
a. Plan and perform the engagement with an attitude of professional skepticism
b. Not rely on internal controls that are designed to prevent or detect errors or fraud
c. Design audit tests to detect unrecorded transactions
d. Extend the work to audit most recorded transactions and records of an entity.
24. These are acts of omission or commission by the entity being audited, either intentional
or unintentional, which are contrary to the prevailing laws and regulations.
a. Fraud
b. Misappropriation
c. Noncompliance
d. Defalcation
25. Most noncompliance affects the financial statements:
a. Directly
b. Only indirectly
c. Both directly and indirectly
d. Materially if direct, immaterial if direct
26. Which of the following is the auditor least likely to do when aware of noncompliance?
a. Discuss the matter with the client’s legal counsel
b. Obtain evidence about the potential effect of the noncompliance of the financial
statements
c. Contact the local law enforcement officials regarding potential criminal wrongdoing
d. Consider the impact of the noncompliance on the relationship with the company’s
management
27. Which of the following statements about noncompliance is incorrect?
a. An audit in accordance with PSA cannot be expected to detect all noncompliance with
laws and regulations

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 b. It is management’s responsibility to ensure that’s entity’s operations are conducted
in accordance with laws and regulations
c. An auditor cannot be held responsible for preventing noncompliance
d. The determination of whether a particular act constitutes noncompliance is
ultimately based on the judgment of the auditor.
28. Which of the following circumstances is not an indication of possible noncompliance?
a. Payment of fines and penalties
b. Payment for unspecified services to consultants, related parties, or government
employees
c. Purchasing at prices significantly above or below the market price
d. Payment for goods or services to the country from which the goods or services
originated
29. When an auditor becomes aware of information concerning a possible instance of
noncompliance, the auditor should
a. Notify the regulatory agencies
b. Determine who was responsible for the act
c. Obtain understanding of the nature of the act, and the circumstances in which it has
occurred and sufficient other information to evaluate the possible effect on the
financial statements
d. Modify the opinion on the client’s financial statement

30. Which of the following does not properly describe a procedure the auditor normally
performs in connection with noncompliance?
a. The auditor should obtain a general understanding of legal and regulatory framework
applicable to the entity
b. The auditor should perform procedures to identify instances of noncompliance with
laws and regulations
c. The auditor should obtain oral representation that management has disclosed to
the auditor all known actual or possible noncompliance with laws and regulations
d. The auditor should obtain sufficient appropriate evidence about compliance with laws
and regulations
31. Which of the following procedures would assist the auditor in identifying noncompliance
with laws and regulations?
a. Inquiring from the client’s lawyers
b. Inspecting correspondence with relevant regulatory agencies
c. Inquire of management concerning entity’s policies and procedures regarding
compliance with laws and regulations

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 d. Discuss with the client management the policies or procedures adopted for
identifying, evaluating and accounting for litigation, claims and assessment
32. During the annual audit of Joax Corp., a publicly held company, Joy, CPA, a continuing
auditor, determined that illegal political contributions had been made during each of the
past seven years, including the year under audit. Joy notified the board of directors about
the illegal contributions, but they refused to take any action because the amounts
involved were immaterial to the financial statements. Joy should reconsider intended
degree of reliance to be place on the
a. Letter of audit inquiry to the client’s attorney
b. Prior years’ audit programs
c. Management representation letter
d. Preliminary judgement about materiality levels
33. If the client refuse to accept an audit report that is qualified due to noncompliance with
laws and regulations, the auditor should:
a. Withdraw from the engagement and indicate the reasons to the audit committee in
writing
b. Issue an adverse opinion if management agrees to fully disclose the matte
c. Withdraw from the engagement and indicate the reasons to the SEC or other
regulatory body in writing
d. Issue a disclaimer of opinion instead

34. Individuals may have an incentive or be under pressure to commit fraud, or circumstances may
provide an opportunity. Also, certain individuals may have an attitude, character, or set of values
that allow them to rationalize fraud. The auditor’s concern about the risk of material
misstatement is least likely to be increased if management:
a. Is interested in inappropriate means of minimizing reported earnings for tax purposes
b. Commits to unduly aggressive forecasts
c. Operating and financing decisions are made by numerous individuals
d. Has an excessive interest in increasing the entity’s share price through the application of
unduly aggressive accounting practices

35. Which of the following is a required audit planning procedure concerning potential fraud?
a. Consider whether estimates prepared and recorded by management could indicate a biased
reporting.
b. Consider the nature of journal entries, particularly those made near the end of the reporting
period.
c. Document the results of procedures used to address the risk of fraud.
d. Conduct discussions among the members of the audit team regarding the risks of material
misstatement due to fraud or error.

36. Which of the following is a false statement concerning fraud?

a. Fraud generally involves incentive or pressure to commit fraud, a perceived opportunity to do
so, and some rationalization of the act.

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 b. Two types of misstatements relevant to the auditor include material misstatements arising
from fraudulent financial reporting and material misstatements arising from
misappropriation of assets.
c. Fraud involves actions of management but excludes the actions of employees or third
parties.
d. An audit rarely involves the authentication of documentation; thus, fraud may go undetected
by the auditor.

37. When planning an audit, the auditor should make inquiries of management. Such inquiries should
address the following, except
a. Management’s assessment of the risk that the financial statements may be misstated due to
fraud.
b. Management’s process for identifying and responding to the risks of fraud in the entity.
c. Management’s consideration of how an element of unpredictability will be incorporated
into the nature, timing, and extent of the audit procedures to be performed.
d. Management’s communication, if any, to those charged with governance regarding its
processes for identifying and responding to the risks of fraud in the entity.

38. The following statements relate to communication of misstatements resulting from fraud to
management and to those charged with governance. Which is false?
a. The auditor need not bring to the attention of those charged with governance any material
weaknesses in internal control related to the prevention and detection of fraud.
b. If the auditor has identified a fraud, whether or not it results in a material misstatement in
the financial statements, the auditor should communicate these matters to the appropriate
level of management on a timely basis, and consider the need to report such matters to those
charged with governance.
c. If the auditor has obtained evidence that indicates that fraud may exist (even if the potential
effect on the financial statements would not be material), the auditor should communicate
these matters to the appropriate level of management on a timely basis, and consider the
need to report such matters to those charged with governance.
d. The auditor’s communication with those charged with governance may be made orally or in
writing.

39. If the auditor concludes that the noncompliance has a material effect on the financial statements,
and has not been properly reflected in the financial statements, the auditor should express
a. A qualified or an adverse opinion
b. A qualified opinion or a disclaimer of opinion
c. A disclaimer of opinion
d. An unmodified opinion

40. If the auditor is precluded by the entity from obtaining sufficient appropriate audit evidence to
evaluate whether non-compliance that may be material to the financial statements has, or is likely
to have occurred, the auditor should express
a. A qualified or an adverse opinion
b. A qualified opinion or a disclaimer of opinion
c. An unmodified opinion
d. An adverse opinion or a disclaimer of opinion

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Prepared by:

Maria Carla R. Mañago, CPA

Instructor

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