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Audit Theory Chapter 3 MCQ
Audit Theory Chapter 3 MCQ
1. Material misstatements may emanate from 5. The responsibility for the detection and
all of the following except prevention of errors, fraud and noncompliance
with laws
a. Fraud
and regulations rests with
b. Error
a. Auditor
c. Noncompliance with laws and regulations
b. Client‘s legal counsel
d. Inadequacy of accounting records.
c. Client management
D
d. Internal auditor
2. The level of assurance provided by an audit of
detecting a mammal misstatement is referred C
to as:
6. The responsibility for adopting sound
a. Reasonable assurance. accounting policies, maintaining adequate
internal control, and
b. Moderate assurance
making fair representation in the financial
c. Absolute assurance.
statement tests
d. Negative assurance.
a. With the management.
A
b. With the independent auditor.
3. An intentional act by one or more individuals
c. Equally with management and the auditor.
among management, employees, or third
parties d. With the internal audit department.
a. An error is unintentional, whereas fraud is c. All of the above statements are false
intentional.
d. Only statements II and IV are true
b. Frauds occur more often than errors in
C
financial statements.
16. Which of the following is an example of an
c. Errors are always fraud and frauds ate always
error?
errors.
a. Defalcation.
d. Auditors have more responsibility for finding
fraud than errors. b. Suppression or omission of the effects of
transactions from the records or documents.
A
c. Recording of transactions without substance.
14. The primary factor that distinguishes errors
from fraud is d. Misapplication of accounting policies.
a. Whether the underlying cause of D
misstatement relates to misapplication of
accounting principles 17. Which of the following is an “error" as
distinguished from “fraud”?
or to clerical processing
a. Embezzlement of company’s fund
b. Whether the misstatement is perpetrated by
an employee or by a member of management b. Window dressing
D C
15. The term “error” refers to unintentional 18. Which of the following could be an example
misrepresentation of financial information. of fraud
Examples of a. Mistakes in the application of the accounting
errors are when principles.
a. Theft of assets and employee fraud b. Outside members of the entity’s board of
b. The treasurer diverts customer payments to detecting errors and fraud that are material to
his personal due, concealing his actions by the financial statements.
debiting
b. An auditor is responsible to detect material
an expense account, thus overstating expenses. errors, but has no responsibility to detect
material
c. An employee steals small tools from the
company and neglects to return them; the cost frauds that are concealed through employee
is collusion or management override of the
internal
reported as a miscellaneous operating expense.
control structure.
d. An employee omitted an entry to record a
bank transfer to cover a cash shortage. c. An auditor has no responsibility to detect
errors and fraud unless analytical procedures or
A tests
of transactions identify conditions causing a 27. Professional skepticism dictates that when
reasonably prudent auditor to suspect that the management makes a statement to the
auditors, the
financial statements were materially misstated.
auditors should
d. An auditor has no responsibility to detect
errors and fraud because an auditor is not an a. Require that the statement be out in writing.
insurer
b. Disregard the statement because it ranks low
and an audit does not constitute a guarantee. of the evidence quality scale.
a. Statistical sampling techniques were not used 28. Which of the following statements is true?
on the audit engagement.
a. It is usually easier for the auditor to uncover
b. The auditor planned the audit in a negligent fraud than errors.
manner.
b. It is usually easier for the auditor to uncover
c. Accountants performing important parts of errors than fraud.
the work failed to discover a close relationship
c. It is usually equally difficult for the auditor to
between the treasurer and the cashier. uncover errors or fraud.
d. The fraud was perpetrated by one employee d. Usually, the auditor does not design
who circumvented existing internal controls. procedures to uncover fraud or errors.
B B
26. “The auditor would ordinarily expect to find 29. In comparing management fraud with
evidence to support management employee fraud, the auditor’s risk of failing to
representations and discover the
d. Greater for employee fraud because of the c. In planning an audit, the auditor should
larger number of employees in the organization. assess the risk that fraud or error may cause the
a. The responsibility for the prevention and c. Quality of managements’ business decisions
detection of fraud and error rests with d. Fairness of the financial statement amounts
management.
C of fraud
36. Which of the following is not an assurance d. It is the responsibility of the management to
that the auditors give to the parties who rely on detect fraud and the auditor’s responsibility is
the
confined only to the detection of material
financial statements? errors.
42. Which of the following is a category of risk b. Perform analytical procedures rather than
factors that should be considered when taking test counts.
assessing risk of c. Request that inventories be counted prior to
misstatements arising from misappropriation of year-end.
assets? d. Request that inventory counts at the various
a. Condition of internal control locations be counted on different dates so as to
47. Which of the following most likely to be auditor’s assessment of the risk of
considered a risk factor relating to fraudulent misstatement due to fraud?
financial
a. Checks for significant amounts outstanding at
reporting? year end.
d. Small high-peso inventory items. 51. Which of the following would be last likely
to suggest to an auditor that the client’s
C financial
48. Which of the following is most likely to be statements are materially misstated.
presumed to represent, fraud risk on an audit?
a. There are numerous delays in preparing
a. Capitalization of repairs and maintenance timely internal financial reports
into the property, plant, and equipment asset
account b. Management does not correct material
internal control weaknesses that it knows about
b. Improper revenue recognition
c. Differences are reflected in the customers
c. Improper interest expense accrual ’confirmation replies
d. Introduction of significant new products. d. There have been two new controllers this
B year
B
52. Which of the following circumstances would b. Audit trails of computer-generated
least likely cause an auditor to consider transactions exist only for a short period of
whether time.
material misstatements exist in an entity’s c. The chief financial officer does not sign the
financial statements? management representation letter until the last
day
a. Management is dominated by several
individuals. of the auditor‘s fieldwork.
b. The industry in which the entity operates is d. There were substantial payments for services
declining. that appear excessive in relation to services
A B
57. Which of the following conditions or events 60. During the course of an audit engagement,
increases the risk of error or fraud? the CPA discovers specific circumstances that
led him
a. Management is dominated by several
individuals. to the belief that employee fraud that has a
material effect on the financial statements may
b. There are frequent changes of auditors or
have
legal counsel.
occurred in such a case the CPA should
c. There is a significantly low turnover of senior
accounting personnel. a. Tactfully approach the suspected employee
and attempt to resolve the matter with him.
d. The entity does not correct internal control
deficiencies that it knows about. b. Ascertain that the client understand that the
ordinary examination is not primarily designed
B
to
58. All of the following conditions are indicators
disclose fraud or defalcations.
of possible pressures on an entity except
c. Perform appropriate modified or additional
a. The industry in which the entity operates is
procedures to confirm or dispel the auditor’s
declining.
suspicion.
b. There is inadequate working capital due to
declining profits or too rapid expansion. d. After advising the client of his findings,
suggest that an investigation he made to
c. The client is heavily dependent on one or a
discover
few products or customers
whether fraud has in fact occurred.
d. There is a significant and prolonged
understaffing of tin accounting department. C
a. Supervise members of the audit team less b. Make the investigation necessary to
closely and rely more upon judgment. determine whether errors or fraud have in fact
occurred.
b. Use less predictable audit procedures.
c. Request that management investigate
c. Only use certified public accountants on the
whether errors or fraud have in fact occurred.
engagement.
d. Consider whether errors or fraud were the noted during the audit to the regulatory
result of employee's failure to comply with authorities.
specific
B
controls
64. If the auditor believes that the fraud or
A error has a material effect on the financial
statements but
62. When the auditor believes a misstatement is
or may be the result of fraud but that the effect the client is not willing to correct the
of the misstatement, the auditor would most likely
issue a(n)
misstatements is not material to the financial
statements, which of the following steps is a. Unmodified report
required?
b. Qualified on adverse opinion
a. Consider the implications for other aspects
c. Qualified or disclaimer of opinion
of the audit.
d. Unmodified opinion with emphasis of matter
b. Resign from the audit. paragraph
d. Contact regulatory authorities. 65. If the auditor is precluded by the entity from
obtaining evidence to evaluate whether fraud
A
or error
63. Which of the following is an incorrect
that may be material to the financial statements
statement?
has occurred, the auditor should issue a report
a. The auditor cannot assume that fraud or that
error it an isolated occurrence unless there is an
contains
evidence to the contrary
a. An adverse opinion
b. If the auditor suspects that an error may
b. An unmodified opinion
exist, he should immediately communicate it to
the c. Either qualified or adverse opinion
should be sensitive to the ability of a. The auditor is responsible for the failure to
management to override controls. detect fraud only when such failure dearly
results
b. The audit team may be selected in ways that
ensure that the knowledge, skill, and ability of from nonperformance of audit procedures
specifically described in the engagement letter.
b. The auditor is required to provide reasonable A
assurance that the both material errors and
73. These are acts of omission or commission by
fraud
the entity being audited, either intentional or
are detected.
unintentional, which are contrary to the
c. The auditor is not and cannot be held prevailing laws and regulations.
responsible for the detection of fund or error.
a. Fraud b. Misappropriation c. Noncompliance
d. The auditor is responsible for the failure to d. Defalcation
detect fraud only when an unmodified opinion
C
is
74. Most noncompliance affect the financial
issued.
statements:
B
a. Directly
71. The auditor's evaluation of the likelihood of
b. Only indirectly
material employee fraud is normally done
initially as a c. Both directly and indirectly
part of: d. Materially if direct; immaterially if
a. Tests of controls. indirect
b. Tests of transactions. B
c. Understanding the entity's internal control. 75. When then auditor knows that a
noncompliance with laws and regulation has
d. The assessment of whether to accept the
occurred, the auditor
audit engagement.
must
C
a. Issue an adverse opinion.
72. An auditor should recognize that the
application of auditing procedures may produce b. Withdraw from the engagement.
evidence
c. Consider the effects on the financial
indicating the possibility of errors or fraud and statements, including the adequacy of
therefore should: disclosure.
a. Plan and perform the engagement with an d. Report the matter to the proper government
attitude of professional skepticism. authorities.
b. Not rely on internal controls that are C
designed to prevent or detect errors or fraud.
76. Generally the decision to notify parties
c. Design audit tests to detect unrecorded outside the client's organization regarding
transactions. noncompliance
d. Extend the work to audit most recorded with laws and regulations is the responsibility of
transactions and records of an entity the
a. Independent auditor 79. Which of the following circumstances is not
an indication of possible noncompliance?
b. Client’s legal counsel
a. Payment of fines or penalties
c. Management
b. Payment for unspecified services to
d. Internal auditors
consultants, related parties, or government
C employees.
77. Which of the following is the auditor least c. Purchasing at prices significantly above or
likely to do when aware of noncompliance? 1 below market price.
a. Discuss the matter with the client's legal d. Payment for goods or services to the country
counsel. from which the goods or services originated.
c. An auditor cannot he held responsible for b. Purchasing land for a price significantly
preventing noncompliance. different from the seller's recorded amount.
D
82. According to PSA 250, the risk of not effect on the financial statements most likely
detecting material misstatement due to would withdraw from the engagement if the
noncompliance is high.
a. Noncompliance was a violation of PFRS. .
This can be attributed to all of the following
b. Client does not take remedial action that the
factors, except:
auditor considers necessary.
a. There are many laws and regulations, relating
c. Noncompliance was committed last year
principally to the operating aspects of the
what financial statements were not audited.
entity,
d. Auditor has already assessed control risk at
that typically do not have a material effect on
the maximum level.
the financial statements.
B
b. Auditors usually rely on lawyers’
representations to detect noncompliance. 85. If specific information comes to an auditor’s
attention that implies an existence of
c. The effectiveness of audit procedures may be
noncompliance
affected by the limitations of the audit.
with laws that could result in a material but
d. Noncompliance may involve conduct
indirect effect on the financial statements, the
designed to conceal it.
auditor
B
should next
83. When the auditor becomes aware of
a. Apply audit procedures specifically directed
information concerning a possible instance of
to ascertaining whether noncompliance has
noncompliance,
occurred.
the auditor should
b. Seek the advice of an informed expert
a. Notify the regulatory agencies.
qualified to practice law as to possible
b. Determine who was responsible for the act. contingent
to the entity. D
b. The auditor should perform procedures to 88. After obtaining sufficient level of
identify instances of noncompliance with laws understanding about the client’s legal and
and regulatory framework,
c. The auditor should obtain oral representation a. Develop a code of conduct and ensure that
that management has disclosed to the auditor these employees comply with such code.
all
b. Perform procedures to help identify instances
known actual or possible noncompliance with of noncompliance with laws and regulations.
laws and regulations.
c. Monitor entity‘s legal requirements and
d. The auditor should obtain sufficient ensure that operating procedures are designed
appropriate evidence about compliance with to meet
laws and
these requirements.
regulations.
d. Inquire of management as to the laws or
C regulations that may be expected to have a
87. Which of the following procedures would an fundamental effect on the operations of the
auditor be unlikely to perform when obtaining a entity.
general
B
understanding about the laws and regulations
89. Which of the following procedures would
affecting the client’s business?
assist the auditor in identifying noncompliance
a. Inquire of management concerning the with laws
entity’s policies and procedures regarding
and regulations?
compliance
a. Inquiring from the client’s lawyers.
with laws and regulations.
b. Inspecting correspondence with relevant
b. Inquire of management as to the laws or
regulatory agencies.
regulations that may be expected to have a
c. Inquire of management concerning entity’s
fundamental effect on the operations of the
policies and procedures regarding compliance
entity.
with
laws and regulations. attorney.
d. Discuss with the client management the b. Prior years' audit programs.
policies or procedures adopted for identifying,
c. Management representation letter.
evaluating and accounting for litigation, claims
d. Preliminary judgment about materiality
and assessments.
levels.
B
C
90. If the client refuses to accept an audit report
that is qualified due to noncompliance with 92. An auditor who discovers that a client’s
laws and employees have paid small bribes to public
officials most
regulations the auditor should:
likely would withdraw from the engagement if
a. Withdraw from the engagement and indicate
the
the reasons to the audit committee in writing.
a. Client receives financial assistance from
b. Issue an adverse opinion if management
various government agencies.
agrees to fully disclose the matter.
b. Evidence that is necessary to prove that the
c. Withdraw from the engagement and indicate
illegal acts wire committed does not exist.
the reasons to the SEC or other regulatory body
in c. Employees’ actions affect the auditor’s ability
to rely on management’s representations.
writing.
d. Notes to the financial statements fail to
d. Issue a disclaimer of opinion instead.
disclose the employees’ actions.
A
C
91. During the annual audit of Joax Corp., a
publicly held company, Joy, CPA, a continuing
auditor,