1. The term “error” refers to unintentional misstatements of financial information.

The following are examples of error,

except
a. A mistake in gathering or processing data from which financial statements are prepared
b. An incorrect accounting estimate arising from oversight or misinterpretation of facts
c. A mistake in the application of accounting principles relating to measurement, recognition, classification, presentation
or disclosure
d. Misrepresentation in the financial statements of events, transaction or other significant information

2. The term “fraud” refers to an intentional act by one or more individuals among management, those charged with
governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Which
statement is correct regarding fraud?
a. Auditors make legal determinations of whether fraud has actually occurred
b. Misstatement of the financial statements may not be the objective of some frauds
c. Fraud involving one or more members of management or those charged with governance is referred to as “employee
fraud”
d. Fraud involving only employees of the entity is referred to as “management fraud”

3. What differentiates fraud from an error?

a. Materiality c. Intent
b. Effect on misstatements d. Frequency of occurrence

4. The types of intentional misstatements that are relevant to the auditor’s consideration of fraud include
I. Misstatements resulting from fraudulent financial reporting
II. Misstatements resulting from misappropriation of assets
a. I and II b. I only c. II only d. Neither I nor II

5. Fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosure in the financial
statements to deceive financial statements users. Fraudulent financial reporting least likely involve
a. Deception such as manipulation, falsification, or alteration of accounting records or supporting documents from which
the financial statements are prepared
b. Misrepresentation in, or intentional omission from, the financial statements of events, transaction or other significant
information
c. Intentional misapplication of accounting principles relating to measurement, recognition, classification, presentation, or
disclosure
d. Embezzling receipts, stealing physical or intangible assets, or causing an entity to pay for goods and services not
received

6. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material
misstatement resulting from error because
a. The effect of fraudulent act is likely omitted in the accounting records
b. Fraud is ordinarily accompanied by acts specifically designed to conceal its existence
c. Fraud is always a result of connivance between or among employees
d. The auditor is responsible to detect errors but not fraud

7. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is
a. Greater for employee fraud because of the higher crime rate among blue collar workers
b. Greater for management fraud because of management’s ability to override existing internal controls
c. Greater for employee fraud because of the larger number of employees in the organization
d. Greater for management fraud because managers are inherently smarter than employees

8. The primary responsibility for the prevention and detection of fraud and error rests with
a. The auditor c. The management of an entity
b. Those charged with governance d. Both b and c

9. Which statement (s) is (are) incorrect regarding the auditor’s responsibility to consider fraud and error in an audit of
financial statements?
a. The auditor is not and cannot be held responsible for the prevention of fraud and error
b. When planning and performing audit procedures and evaluating and reporting the results thereof, the auditor should
consider the risk of misstatements in the financial statements resulting from fraud
c. In planning the audit, the auditor should discuss with other members of the audit team the susceptibility of the entity to
material misstatements in the financial statements resulting from fraud or error
d. All of the above
10. Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to
I. Errors
II. Fraudulent financial reporting
III. Misappropriation of assets
a. I, II and III c. I and III
b. I and II d. II only

11. The following are examples of circumstances that may indicate the possibility that the financial statements may
contain a material misstatement resulting from fraud, except
a. Transactions that are recorded in a complete or timely manner or are improperly recorded as to amount, accounting
period, classification, or entity policy.
b. Unsupported or unauthorized balances or transactions.
c. Last-minute adjustments that significantly affect financial results.
d. Tips or complaints to the auditor about alleged fraud.

12. The following are examples of circumstances that may indicate the possibility that the financial statements may
contain a material misstatement resulting from fraud, except
a. Missing documents.
b. Documents that appear to have been altered.
c. Unavailability of other than photocopied or electronically transmitted documents when documents in original form are
expected to exist.
d. Significant explained items on reconciliations.

13. The following are examples of circumstances that may indicate the possibility that the financial statements may
contain a material misstatement resulting from fraud, except
a. Fewer responses to confirmations than anticipated or a greater number of responses than anticipated.
b. Large numbers of debit entries and other adjustments made to accounts receivable records.
c. Missing inventory or physical assets of significant magnitude.
d. Unusual discrepancies between the entity’s records and confirmation replies

14. The following are examples of circumstances that may indicate the possibility that the financial statements may
contain a material misstatement resulting from fraud, except
a. Undue time pressures imposed by management to resolve complex or contentious issues.
b. Complaints by management about the conduct of the audit or management intimidation of engagement team members,
particularly in connection with the auditor’s critical assessment of audit evidence or in the resolution of potential
disagreements with management.
c. Usual delays by the entity in providing requested information
d. An unwillingness to address identified weaknesses in internal control on a timely basis.

15. The following are examples of circumstances that may indicate the possibility that the financial statements may
contain a material misstatement resulting from fraud, except
a. Unwillingness by management to permit the auditor to meet privately with those charged with governance.
b. Accounting policies that appear to be consistent with industry norms.
c. Frequent changes in accounting estimates that do not appear to result from changed circumstances.
d. Tolerance of violations of the entity’s Code of Conduct

16. Which of the following best describes what is meant by the term “fraud risk factor”?
a. Factors whose presence indicates that the risk of fraud is high
b. Factors whose presence often has been observed in circumstances where frauds have occurred
c. Factors whose presence requires modifications of planned audit procedures
d. Reportable conditions identified during an audit

17. Based on PSA 240 Redrafted, in a financial statement audit, the auditor should consider categories of fraud risk
factors relating to misstatements arising from (1) fraudulent financial reporting and (2) misappropriation of assets. Which
of the following is not a category of fraud risk factors?
a. Opportunities c. Attitudes/Rationalization
b. Pressures/Incentives d. Controls
18. Which of the following should the auditor likely to do when the application of planned audit procedures indicates the
possible existence of fraud or error?
a. The auditor should resign on order to avoid legal responsibility
b. He should discuss the matter with the person whom he believes is involved with the irregularities
c. He should consider the potential effect on the financial statements
d. He should refer the suspected fraud or error to the internal auditor

19. The auditor least likely obtains written representations from management that the management:
a. It acknowledges its responsibility for the implementation and operations of accounting and internal control systems that
are designed to prevent and detect fraud and error
b. It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity involving employees who
have significant roles in internal control only
c. It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud affecting the entity’s
financial statements communicated by employees, former employees, analysts, regulations or others
d. It has disclosed to the auditor the results of its assessment of the risk that the financial statements may be materially
misstated as a result of fraud

20. Communication of a misstatement resulting from fraud, or suspected fraud, or error to the appropriate level of
management on a timely basis is important because it enables management to take action as necessary. Ordinarily, the
appropriate level of management is
a. At least equal to level of persons who appear to be involved with misstatements or suspected fraud
b. At least one level above persons who appear to be involved with the misstatement or suspected fraud
c. The audit committee of the board of directors
d. The head of internal audit department

21. The auditor may encounter exceptional circumstances that bring into question the auditors ability to continue
performing the audit, including where
a. The entity does not take the remedial action regarding fraud that the auditor considers necessary in the circumstances,
even when the fraud is not material to the financial statements
b. The auditor’s consideration of the risk of material misstatement resulting from fraud and the results of audit tests
indicate a significant risk of material and pervasive fraud
c. The auditor has significant concern about the competence or integrity of management or those charged with governance
d. All of the above

22. Which statement is incorrect regarding audit evidence?

a. Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is
based.
b. Audit evidence includes the information contained in the accounting records underlying the financial statements and
other information.
c. Audit evidence is cumulative in nature.
d. Auditors are expected to address all information that may exist.

23. Accounting records least likely include

a. The records of initial entries and supporting records.
b. The general and subsidiary ledgers.
c. Work sheets and spread sheets supporting cost allocations.
d. Comparable data about competitors (benchmarking).

24. Other information that the auditor may use as audit evidence least likely includes
a. Minutes of meetings.
b. Confirmation from third parties.
c. Information obtained by the auditor from such audit procedures as inquiry, observation, and inspection.
d. Adjustments to the financial statements that are not reflected in formal journal entries.

25. Which statement is correct regarding the sufficiency and appropriateness of audit evidence?
a. Sufficiency is the measure of the quality of audit service.
b. Appropriateness is the measure of the quantity of audit evidence; that is, its relevance and its reliability in providing
support for or, detecting misstatements in, the classes of transactions, account balances, and disclosures and related
assertions.
c. The quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, the more audit
evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be
required).
d. Merely obtaining more audit evidence may compensate for its poor quality.
26. Which of the following generalizations in assessing the reliability of audit evidence is incorrect?
a. Audit evidence is more reliable when it is obtained from independent sources outside the entity.
b. Audit evidence that is generated internally is not affected by the effectiveness of the controls imposed by the entity.
c. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference.
d. Audit evidence is more reliable when it exists in documentary form.

27. Which of the following types of audit evidence is the most persuasive?
a. Prenumbered client purchase order forms
b. Client work sheets supporting cost allocations
c. Bank statements obtained from the client
d. Client representation letter

28. Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the
least persuasive type of evidence?
a. Bank statement obtained from the client c. Prenumbered client sales invoices
b. Oral representations of client d. Vendor’s invoices

29. Which statement is incorrect regarding audit evidence?

a. The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to
base the audit opinion.
b. Accounting records alone do not provide sufficient audit evidence.
c. The auditor uses professional judgments and exercises professional skepticism in evaluating the quantity and quality of
audit evidence, and thus its sufficiency and appropriateness, to support the audit opinion.
d. The matter of difficulty or expense involved is a valid basis for omitting and audit procedure for which there is no
alternative.

30. Which of the following is the best explanation of the difference, if any between audit objectives and audit procedures?
a. Audit procedures establish broad general goals while audit objectives specify the detailed work to be performed.
b. Audit objectives are tailor-made for each assignment while audit procedures are generic in application.
c. Audit objectives define specific desired accomplishments; audit procedures provide the means of achieving audit
objectives.
d. Audit procedures and audit objectives are essentially the same.

31. The auditor obtains audit evidence to draw reasonable conclusions on which to base the audit opinion by performing
a. Risk assessment procedures c. Both a and b
b. Further audit procedures d. Neither a nor b

32. Which of the following are considered further audit procedures that may be designed after assessing the risks of
material misstatement?
Substantive tests of details Tests of controls
a. Yes Yes
b. Yes No
c. No Yes
d. No No

33. Which statement is incorrect regarding inspection as an audit procedure?

a. Inspection consists of examining records or documents or physical examination of assets.
b. Inspection of tangible assets may provide reliable audit evidence with respect to their existence and about the entity’s
rights and obligations on the assets.
c. Inspection of individual inventory items ordinarily accompanies the observation of inventory counting.
d. Some documents represent direct audit evidence of the existence of an asset.

34. Evaluate whether each of the following statements qualifies as means of selecting items for testing:
I. Test performed on 100% of the items within a population
II. Selecting items over a certain amount
III. Selecting items for the total population on the basis that was expected to be representative
a. I, II and III c. III only
b. I and II d. None of the three
35. External confirmation
a. Consists of seeking information of knowledgeable persons, both financial and nonfinancial, throughout the entity or
outside party
b. Is the process of obtaining a representation of information or of an existing condition directly from a third party
c. Is the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s
internal control
d. Consists of checking the mathematical accuracy of documents or records

36. This consists of looking at a process or procedure being performed by others

a. Reperformance c. Observation
b. Recalculation d. Inspection

37. The strongest criticism of the reliability of audit evidence that the auditor physically observes is that
a. The client may conceal items from the auditor
b. The auditor may not be qualified to evaluate the items he is observing
c. Such evidence is too costly in relation to its reliability
d. The observation must occur at a specific time, which is often difficult to arrange

38. Which of the following audit procedures is used extensively throughout the audit and often is complementary to
performing other audit procedures?
a. Inspection c. Inquiry
b. Observation d. Confirmation