Auditing Questions Part 1

1. Which of the following would not be a consideration of a CPA firm in deciding whether to accept a new client? A The client’s probability of achieving an unqualified opinion. . B The client’s financial ability. . C The client’s relations with its previous CPA firm. . D The client’s standing in the business community. . 2. After accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding: A The predecessor’s evaluation of matters of continuing accounting significance. . B Disagreements which the predecessor had with the client concerning auditing . procedures and accounting principles. C The client’s ability to pay the fee for this engagement. . D The predecessor’s assessments of inherent risk and judgments about materiality. . 3. The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are best documented in a(n): A Client’s representation letter C Audit engagement letter. . . B Independent auditor’s report D Management letter . . 4. Which of the following is not a valid reason why an auditor sends to his client an engagement letter? A Avoid misunderstanding with respect to the engagement . B Confirms the auditor’s appointment . C Discloses the objective and scope of the audit . D Assures CPA’s compliance to PSAs . 5. The A . B . C . D . secondary purpose of the engagement letter is to: Remind management that the primary responsibility for the financial statements rests with management. Satisfy the requirements of the CPA’s liability insurance policy. Provide a written record of the agreement with the client as to the services to be provided. Provide a starting point for the auditor’s preparation of the preliminary audit program. 6. S1 The engagement letter will include identification of significant dates throughout the engagement. S2 The engagement letter will inform the client about the audit procedures to be performed. A. True, true B. False, false C. True, false D. False, true 7. Which of the following procedures is performed primarily during audit planning? A. Risk assessment procedures B. Tests of controls C. Substantive tests D. All of the above are performed primarily during audit planning 8. Which of the following is not a risk assessment procedure? A. Inquiries of management and others within the entity B. Analytical procedures C. External confirmation with customers D. Observation and inspection 9. S1 Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. S2 An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements. A. True, true B. False, false C. True, false D. False, true 10. S1 Analytical procedures are required to be used in planning a financial statement audit. S2 Analytical procedures are required to be used all throughout the audit. A. True, true B. False, false C. True, false D. False, true 11. S1 In a financial statement audit, audit risk represents the probability that internal controls fail and the failure is not detected by the auditor’s procedures. S2 Audit risk may be eliminated by 100% testing of the items in the population. A. True, true B. False, false C. True, false D. False, true 12. In a financial statement audit, detection risk represents: A. The susceptibility of an account balance to error that could be material. B. The risk that error could occur and not be prevented or detected by the internal control structure of the client. C. The risk that the auditor fails to modify materially misstated financial statements. D The risk that error could occur and not be detected by the auditor’s procedures. . 13. The following statements describe components of internal control. Which one describes risk assessment process? A This includes the governance and management functions and the attitudes, . awareness, and actions of those charged with governance and management concerning the entity’s internal control and its importance in the entity. B The process for identifying business risks relevant to financial reporting objectives . and deciding about actions to address those risks, and the results thereof. C The classes of transactions in the entity’s operations that are significant to the . financial statements. D The policies and procedures that help ensure that management directives are . carried out. 14. S1 The auditor assesses detection risk because it affects the level of control risk that the auditor may accept. S2 The auditor assesses control risk because it affects the level of detection risk that the auditor may accept. A. True, true B. False, false C. True, false D. False, true 15. Which of the following would not be a method used to conduct tests of controls? A . B . Inquiry and observation. Inspection. C . D . Reperformance. Analytical procedures 16. As the auditor plans to rely more on the client’s internal control structure, A Substantive tests should increase. C Substantive tests should decrease. . . B Tests of controls should increase. D Tests of controls should decrease. . . 17. S1 Audit evidence comprises all the information available to the auditor during an audit engagement. S2 Accounting records, on their own, constitute sufÏcient appropriate evidential matter. A. True, true B. False, false C. True, false D. False, true 18. Which I. II. III. A. of the following is an example of the auditor’s direct knowledge? Inspection Observation Computation I only B. I and III C. II and III D. I, II and III 19. S1 An auditor should recognize that the application of auditing procedures may produce evidential matter indicating the possibility of errors and irregularities and therefore should not depend on internal accounting control features that are designed to prevent or detect errors or irregularities. S2 Inquiries of the client’s internal audit staff, held in private, constitute one of the most reliable sources of evidence in testing the rights and obligations assertion related to land and buildings. A. True, true B. False, false C. True, false D. False, true 20. Which of the following is an example of fraud? A. Client personnel make mistakes in gathering or processing accounting data from which financial statements are prepared. B. Client personnel alter accounting records from which financial statements are prepared. C. Client personnel overlook or misinterpret facts, causing accounting estimates to be incorrect. D Client personnel make mistakes in the application of accounting principles. . 21. Which of the following situations are applicable to fraud as well as error? A. Mistakes in gathering or processing accounting data B. Suppression of the recording of accounting transactions C. Misinterpretation of facts, causing the classification of leases to be incorrect D Misapplication of accounting policies . 22. Which of the following best describes a portion of the auditor’s responsibility regarding illegal acts by clients? A. The auditors have a responsibility to discover all material illegal acts. B. C. D . If audit procedures reveal illegal acts, the auditors should take appropriate actions. If the auditors suspect that illegal acts have been performed, they should conduct a legal audit of the company The auditor’s responsibility for the detection of all illegal acts is the same as their responsibility regarding material errors and irregularities. 23. Which of the following is not generally included in the working papers file? A. Documentation of the auditor’s understanding of the accounting and internal control systems. B. Copy of the internal auditor’s audit program. C. Analyses of significant ratios and trends. D. An indication as to who performed the audit procedures and when they were performed. 24. The standard (unmodified) audit report includes the following: I. Emphasis of a matter paragraph II. Unqualified opinion A. I only B. II only C. I and II D. Neither I nor II 25. When restrictions that materially limit the scope of the audit are imposed by the client, the auditor generally should issue which of the following opinions? A “Except for” C Unqualified . . B Adverse D Disclaimer . . 26. An audit report should be dated no earlier than: A. Date the report is delivered to the entity audited. B. Date the auditee has obtained sufÏcient, appropriate audit evidence. C. Date of the completion of the audit. D. Date a letter of audit inquiry is received from the entity’s attorney of record. 27. Which of the following statements indicates an adverse opinion? A “The financial statements do not present fairly in all material respects the financial . position, results of operations, and cash flows in conformity with GAAP.” B “The auditor does not express an opinion on the financial statements.” . C “The financial statements present fairly in all material respects the financial position, . results of operations, and cash flows in conformity with GAAP.” D “Except for the effects of a matter, the financial statements present fairly in all . material respects the financial position, results of operations, and cash flows in conformity with GAAP.” 28. In which of the following paragraphs can you find the phrase “Philippine Financial Reporting Standards”? I. Opening paragraph II. Management responsibility paragraph III. Auditor’s responsibility paragraph IV. A. Opinion paragraph I only B. II and III C. II and IV D. II, III and IV 29. This means the application of audit procedures to less than 100% of items within an account balance or class of transactions, where all sampling units have a chance of being selected for testing. A. Audit sampling C. Haphazard testing B. Selecting specific items D. Statistical sampling 30. A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a A. Random sample. C. Judgment sample. B. Statistical sample. D. Representative sample. 31. S1 The documentary evidence which physically represents the sampling units in a given population, is known as sampling form. S2 Error that arises from an isolated event that has not recurred other than on specifically identifiable occasions and is therefore not representative of errors in the population is known as projected error. A. True, true B. False, false C. True, false D. False, true 32. S1 An advantage of statistical sampling over non-statistical sampling methods in tests of controls is that the statistical sampling methods provide an objective basis for qualitatively evaluating sampling risk. S2 Statistical sampling methods do not allow the auditor to eliminate the need to use judgment in determining the appropriate sample size. A. True, true B. False, false C. True, false D. False, true 33. One of the causes of sampling error is A . B . C . D . The use of inappropriate or ineffective audit procedures. Fatigue and lack of attention to detail Failure to draw a representative sample. The use of attributes sampling instead of variables sampling. 34. Which risk? A . B . C . D . of the following comments best illustrates the concept of non- sampling A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. An auditor may select audit procedures that are not appropriate to achieve the specific objective. An auditor uses attributes sampling instead of variables sampling. The documents related to the chosen sample may not be available for inspection. 35. At times a sample may indicate that the auditor’s assessed level of control risk for a given control is reasonable when, in fact, the true compliance rate does not justify the “less than high” level. This situation illustrates the risk of A. Assessing control risk too low. C. Incorrect rejection. B. Assessing control risk too high. D. Incorrect acceptance. 36. The consequence of assessing control risk too high relates to the a. EfÏciency of the audit. b. Effectiveness of the audit. c . d . Preliminary estimates of materiality levels. Allowable risk of tolerable error. 37. The likelihood of assessing control risk too low is the risk that the sample selected to test controls: A. B. C. D. Does not support the auditor’s planned assessed level of control risk when the true operating effectiveness of the control structure justifies such an assessment. Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes. Contains proportionately fewer deviations from prescribed internal control structure policies or procedures than exist in the balance or class as a whole. Supports the auditor’s planned assessed level of control risk when the true operating effectiveness of the control structure does not justify such an assessment. 38. While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of A . B . 39. Incorrect rejection. Incorrect acceptance. C . D . Assessing control risk too low. Assessing control risk too high. A sampling method that is useful when testing controls is: A. Non-statistical sampling. C. Discovery sampling. B. Attribute estimation sampling. D. Stratified random sampling. 40. If the auditor is concerned that a population may contain exceptions, the determination of a sample size sufÏcient to include at least one such exception is a characteristic A. Random sampling C. PPS Sampling B. Discovery sampling D. Variable sampling 41. S1 Statistical sampling may be applied to test controls when a client’s control procedures leave an audit trail as evidence of compliance. S2 For purposes of audit sampling in tests of controls, errors refer to misstatements. A. True, true B. False, false C. True, false D. False, true 42. A decrease in the expected population deviation rate will cause the sample size to: A. Increase C. Remain unchanged B. Decrease D. Cannot be determined. 43. This is the deviation rate that an auditor will permit in the population and would still be willing to reduce the assessed level of control risk: A. Population deviation rate. C. Sample deviation rate. B. Tolerable misstatement. D. Tolerable deviation rate. 44. Which of the following sampling methods is used to estimate a numerical measurement of a population, such as a peso value? A. Attribute sampling. C. Variables sampling. B. Stop-or-go sampling. D. Random-number sampling. 45. When selecting samples, a decrease in the tolerable misstatement will cause the sample size to: A. Increase C. Remain unchanged B. Decrease D. Cannot be determined. 46. This is the misstatement that the auditor finds in the sample, adjusted to estimate the misstatement in the population. A. Tolerable misstatement. C. Projected misstatement. B. Sample misstatement. D. Anticipated misstatement. 47. When performing a test of a control with respect to control over cash receipts, an auditor may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population A Must be systematically replaced in the population after sampling. . B May systematically occur more than once in the sample. . C Must be recorded in a systematic pattern before the sample can be drawn. . D May occur in a systematic pattern, thus destroying the sample randomness. . 48. S1 A method of sampling in which all items in the population are divided into two or more sub-population is known as systematic sampling. S2 One of the disadvantages of haphazard sampling is the risk of conscious bias in the selection of samples. A. True, true B. False, false C. True, false D. False, true 49. According to PSA 560, “subsequent events” refer to: A. Events occurring between the period end and the date of the auditor’s report B. Facts discovered after the date of the auditor’s report. C. Events occurring between the week immediately before the end of the period and the date of the auditor’s report. D. Events occurring between the period end and the date of the auditor’s report and facts discovered after the date of the auditor’s report. 50. Which of the following procedures should an auditor most likely perform regarding subsequent events? A Comparing the financial statements being reported on with those of the prior period. . B Investigating changes in accounting department personnel occurring after the date of . the financial statements. C Confirming a sample of material accounts receivable established after the date of the . financial statements. D Inquiring as to whether any unusual adjustments were made after the date of the . financial statements 51. After the date of the audit report but before the financial statements are issued, the auditor becomes aware of a material subsequent event which requires adjustment in the financial statements. If management does not amend the financial statements, the audit opinion to be issued would be: A. Unqualified opinion with explanation C Adverse opinion . B. Qualified opinion or adverse opinion D Qualified opinion . 52. When obtaining evidence regarding litigation against a client, the CPA would be least interested in determining: A The period in which the underlying causes of litigation occurred. . B An estimate of when the matter will be resolved. . C An estimate of the potential loss. . D The probability of an unfavorable outcome. . 53. The secondary source of information to be reported about litigation, claims, and assessments is the A. Client’s lawyer C Client’s management . B. Court records D Independent auditor . 54. Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims and assessments most likely would cause the auditor to request clarification? A “I believe that the company will be able to defend this action successfully.” . B “The possible liability to the company is nominal in amount.” . C “This case against the company is without merit!” . D “The action can be settled for less than the damages claimed.” . 55. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the auditor should: A Honor the confidentiality of the client-lawyer relationship. . B Seek to obtain the corroborating information from management. . C Consider the refusal to be tantamount to a scope limitation. . D Disclose this fact in the notes to the financial statements. . 56. Audit inquiries with the client’s legal counsel should cover cases up to: A. The balance sheet date C The date when the . written B. The date of the audit report D Cannot be determined . 57. The A . B . C . D . letter was primary objective of analytical procedures used in the final review of an audit is to Obtain evidence from details tested to corroborate particular assertions. Identify areas that represent specific risks relevant to the audit. Assist the auditor in determining the reasonableness of the financial statements. Satisfy doubts when questions arise about a client’s ability to continue in existence. 58. The responsibility for the identification and disclosure of related parties and related party transactions rests with the: A. External auditor. C Internal audit department head B. . D . Entity management Controller 59. Which of the following events most likely indicates the existence of related parties? A Discussing terms of merger with a company that is a major competitor. . B Making a loan with scheduled terms for repayment . C Borrowing a large sum of money at a very low interest rate. . D Selling real estate at a price that differs significantly from its carrying value. . 60. An auditor searching for related party transactions should obtain an understanding of each subsidiary’s relationship to the total entity because: A This may permit the audit of intercompany account balances to be performed as of . concurrent dates. B The business structure may be deliberately designed to obscure related party . transactions. C This may reveal whether particular transactions would have taken place if the parties . had not been related. D Intercompany transactions may have been consummated on terms equivalent to . arms’ length transactions. 61. When auditing related-party transactions, an auditor places primary emphasis on A. Eliminating the effects of related party transactions. B. Substance over form of the transactions, and disclosure of the related-party transactions. C Testing the existence of the related parties. . D Determining the accuracy and classification of the related-party transactions. . 62. The responsibility to evaluate the cliednt’s assessment of an entity’s ability to continue as a going concern rests with: A. The auditor C The BOA . B. The entity’s management D The financial statement users . 63. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern? A Cash flows from operating activities are positive. . B Share dividends replace annual cash dividends. . C Significant related party transactions are pervasive. . D Interest payable in arrears for several months. . 64. Travis, CPA, believes there is substantial doubt about the ability of Alice Co. to continue as a going concern for a reasonable period of time. In evaluating Alice Co.’s plans for dealing with the adverse effects of future conditions and events, Travis most likely would consider, as a mitigating factor, Alice Co.’s plans to: A Postpone or cancel research and development projects related to future products . B Accumulate treasury stock at prices favorable to Alice Co.’s historic price range . C Purchase equipment and production facilities currently being leased . D Negotiate increases in required dividends being paid on preference shares . 65. The auditor should obtain evidence of management’s acknowledgment of responsibility for I. The fair presentation of the financial statements in accordance with PSAs II. Approval of the financial statements A. I only B. II only C. Both I and II D. Neither I nor II 66. Which of the following documentation is required for Standards on Auditing (PSAs)? A. An internal control questionnaire. C . B. A planning memorandum or checklist. D . an audit in accordance with Philippine A client engagement letter. A management letter. representation 67. S1 Management representation letters are substitutes for substantive test procedures. S2 All members of the client’s management are to sign the management representation letter. A. True, true B. False, false C. True, false D. False, true 68. Written client representation letters are normally signed by the: A president and the chairperson of the board. . B treasurer and the internal auditor. . C chief executive ofÏcer and the chief financial ofÏcer. . D corporate counsel and the audit committee chairperson. . 69. Management representation letters should be dated as of the date of the: A. Statement of financial position. C. Completion of the audit B. Latest interim financial statements. D Latest related party transaction. . 70. Management’s refusal to furnish a written representation letter on a matter, which the auditor considers essential, may lead the auditor to choose between the issuance of: A. Unqualified or qualified opinion C. Adverse opinion or disclaimer of opinion B. Qualified opinion or Adverse opinion D Qualified opinion or disclaimer of . opinion 71. Which of the following statements is incorrect? a. PSA 100 states that when an expert is used in the collection and evaluation of evidence, the practitioner and the expert should on a combined basis, possess sufÏcient knowledge of the subject matter and have adequate proficiency in the subject matter for the practitioner to determine that sufÏcient, appropriate evidence has been obtained. (x) b. Compilation engagements ordinarily entails reducing detailed data to a manageable and understandable form without a requirement to test the assertions underlying that information. c. According to PSA 200, Objective and General Principles Governing an Audit of Financial Statements, the professional responsibilities of an auditor include independence, integrity, objectivity, confidentiality, professional behavior, technical standards, and professional competence and due care. d. PSA 210, Terms of Audit Engagements, applies to audits, reviews, and other related services. 72. Assurance services are independent professional services that a. Include a written communication that expresses a conclusions b. Improve the quality of information, or its context for decision makers. (x) c. Include audit services, attest services, and consulting services. d. Involve the examination of the credibility of a written assertion that is the responsibility of another party. 73. Which of the following services would be most likely to be structured as an attest engagement? a. Advocating a client’s position in tax matter. b. A consulting engagement to develop a new data-base system for the revenue cycle. c. An engagement to issue a report addressing an entity’s compliance with requirements of specified laws. (x) d. The compilation of client’s forecast information. 74. Which of the following statements is incorrect? a. Attendance consists of being present during all or part of a process being performed by others. b. Audit evidence will comprise source documents and accounting records underlying financial statements and corroborating information from other sources. c. The characteristics for determining whether criteria are suitable are relevance, reliability, neutrality and consistency. (x) d. Governance describes the role of persons entrusted with the supervision, control and direction of an entity. 75. The Constitution of the Philippines requires this OfÏce to “keep the general accounts of the Government and for such period as may be provided by law, preserve the vouchers pertaining thereto” a. National Accounting OfÏce b. Ministry of Finance c. Auditing units to each bureau or ofÏce. d. Commission on Audit. (x) 76. Which of the following is not required by PSA 200, which states that professional competence and due care is one of the ethical responsibilities of an auditor in an audit engagement? a. observance of the relevant Philippine Standards on Auditing b. critical review of the audit work performed at every level of supervision c. degree of skill commonly possessed by others in the profession d. responsibility for losses because of errors of judgment (x) 77. The term testing alludes to the concept of a. A guarantee b. A certificate c. Accuracy d. Sampling (x)