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Auditing Theory Review Questions, Quizzes of Auditing

Notre Dame College (NDC)Auditing

Review Questions for Auditing theory

Typology: Quizzes

2017/2018

Available from 01/09/2022

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Page 1 of 37
AUDITING THEORY
ASSURANCE SERVICES
1. Which of the following statements best describes assurance services?
A. Independent professional services that are intended to enhance the credibility of
information to meet the needs of an intended user.
B. Services designed to express an opinion on the fairness of historical financial statements
based on the results of an audit.
C. The preparation of financial statements or the collection, classification, and
summarization of other financial information.
D. Services designed for the improvement of operations, resulting in better outcomes.
2. Which of the following is not an assurance service?
A. Examination of prospective financial information
B. Audit of historical financial statements
C. Review of financial statements
D. Compilation of financial information
3. Suitable criteria are required for reasonably consistent evaluation or measurement of the
subject matter of an assurance engagement. Which of the following statements
concerning the characteristics of suitable criteria is correct?
A. Reliable criteria contribute to conclusions that are clear, comprehensive, and not subject
to significantly different interpretations.
B. Relevant criteria allow reasonably consistent evaluation or measurement of the subject
matter including, where relevant, presentation and disclosure, when used in similar
circumstances by similarly qualified practitioners.
C. Neutral criteria contribute to conclusions that are free from bias.
D. Criteria are sufficiently complete when they contribute to conclusions that are clear,
comprehensive, and not subject to different interpretations.
4. In an assurance engagement, the outcome of the evaluation or measurement of a subject
matter against criteria is called
A. Subject matter information
B. Subject matter
C. Assurance
D. Conclusion
5. In some assurance engagements, the evaluation or measurement of the subject matter is
performed by the responsible party, and the subject matter information is in the form of an
assertion by the responsible party that is made available to intended users. These
engagements are called
A. Direct reporting engagements
B. Assertion-based engagements
C. Non-assurance engagements
D. Recurring engagements
6. What type of assurance engagement is involved when the practitioner expresses a
positive form of conclusion?
A. Limited assurance engagement
B. Positive assurance engagement
C. Reasonable assurance engagement
D. Absolute assurance engagement
7. What type of assurance engagement is involved when the practitioner expresses a
negative form of conclusion?
A. Reasonable assurance engagement
B. Negative assurance engagement
C. Assertion-based assurance engagement
D. Limited assurance engagement
8. Which of the following statements is true concerning evidence in an assurance
engagement?
A. Sufficiency is the measure of the quantity of evidence.
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ASSURANCE SERVICES

  1. Which of the following statements best describes assurance services? A. Independent professional services that are intended to enhance the credibility of information to meet the needs of an intended user. B. Services designed to express an opinion on the fairness of historical financial statements based on the results of an audit. C. The preparation of financial statements or the collection, classification, and summarization of other financial information. D. Services designed for the improvement of operations, resulting in better outcomes.
  2. Which of the following is not an assurance service? A. Examination of prospective financial information B. Audit of historical financial statements C. Review of financial statements D. Compilation of financial information
  3. Suitable criteria are required for reasonably consistent evaluation or measurement of the subject matter of an assurance engagement. Which of the following statements concerning the characteristics of suitable criteria is correct? A. Reliable criteria contribute to conclusions that are clear, comprehensive, and not subject to significantly different interpretations. B. Relevant criteria allow reasonably consistent evaluation or measurement of the subject matter including, where relevant, presentation and disclosure, when used in similar circumstances by similarly qualified practitioners. C. Neutral criteria contribute to conclusions that are free from bias. D. Criteria are sufficiently complete when they contribute to conclusions that are clear, comprehensive, and not subject to different interpretations.
  4. In an assurance engagement, the outcome of the evaluation or measurement of a subject matter against criteria is called A. Subject matter information B. Subject matter C. Assurance D. Conclusion
  5. In some assurance engagements, the evaluation or measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form of an assertion by the responsible party that is made available to intended users. These engagements are called A. Direct reporting engagements B. Assertion-based engagements C. Non-assurance engagements D. Recurring engagements
  6. What type of assurance engagement is involved when the practitioner expresses a positive form of conclusion? A. Limited assurance engagement B. Positive assurance engagement C. Reasonable assurance engagement D. Absolute assurance engagement
  7. What type of assurance engagement is involved when the practitioner expresses a negative form of conclusion? A. Reasonable assurance engagement B. Negative assurance engagement C. Assertion-based assurance engagement D. Limited assurance engagement
  8. Which of the following statements is true concerning evidence in an assurance engagement? A. Sufficiency is the measure of the quantity of evidence.

B. Appropriateness is the measure of the quality of evidence, that is, its reliability and persuasiveness. C. The reliability of evidence is influenced not by its nature but by its source. D. Obtaining more evidence may compensate for its poor quality.

  1. Assurance engagement risk is the risk A. That the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated. B. Of expressing an inappropriate conclusion when the subject matter information is not materially misstated. C. Through loss from litigation, adverse publicity, or other events arising in connection with a subject matter reported on. D. Of expressing an inappropriate conclusion when the subject matter information is either materially misstated or not materially misstated.
  2. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as a result of the following factors, except A. The use of selective testing. B. The fact that much of the evidence available to the practitioner is persuasive rather than conclusive. C. The practitioner may not have the required assurance knowledge and skills to gather and evaluate evidence. D. The use of judgment in gathering and evaluating evidence and forming conclusions based on that evidence.
  3. The Philippine Framework for Assurance Engagements A. Contains basic principles, essential procedures, and related guidance for the performance of assurance engagements. B. Defines and describes the elements and objectives of an assurance engagement, and identifies engagements to which PSAs, PSREs, and PSAEs apply. C. Provides a frame of reference for CPAs in public practice when performing audits, reviews, and compilations of historical financial information. D. Establishes standards and provides procedural requirements for the performance of assurance engagements.
  4. After accepting an assurance engagement, a practitioner is not allowed to change the engagement to a non-assurance engagement, or from a reasonable assurance engagement to a limited assurance engagement, except when there is reasonable justification for the change. Which of the following ordinarily will justify a request for a change in the engagement? I. A change in circumstances that affects the intended users’ requirements. II. A misunderstanding concerning the nature of the engagement. A. I only C. Both I and II B. II only D. Neither I nor II AUDITING AND RELATED SERVICES
  5. PSRE 2400 (Engagements to Review Financial Statements), as amended by the AASC in February 2008, applies to A. Reviews of any historical financial information of an audit client. B. Reviews of any historical financial information by a practitioner other than the entity’s auditor. C. Reviews of historical financial or other information by a practitioner other than the entity’s auditor. D. Reviews of historical financial or other information of an audit client.
  6. When performing a compilation engagement, the accountant is required to A. Assess internal controls. B. Make inquiries of management to assess the reliability and completeness of the information provided. C. Verify matters and explanations. D. Obtain a general knowledge of the business and operations of the entity.

A. A management fraud may exist and it is more likely to be detected by independent auditors. B. Different interests may exist between the company preparing the statements and the persons using the statements. C. A misstatement of account balances may exist and is generally corrected as the result of the independent auditors’ work. D. Poorly designed internal control may be in existence.

  1. Which of the following professionals has primary responsibility for the performance of an audit? A. The managing partner of the firm. B. The senior assigned to the engagement. C. The manager assigned to the engagement. D. The partner in charge of the engagement.
  2. What is the proper organizational role of internal auditing? A. To serve as an independent, objective assurance and consulting activity that adds value to operations. B. To assist the external auditor in order to reduce external audit fees. C. To perform studies to assist in the attainment of more efficient operations. D. To serve as the investigative arm of the audit committee of the board of directors.
  3. Operational audits generally have been conducted by internal and COA auditors, but may be performed by certified public accountants. A primary purpose of an operational audit is to provide A. A measure of management performance in meeting organizational goals. B. The results of internal examinations of financial and accounting matters to a company’s top-level management. C. Aid to the independent auditor, who is conducting the examination of the financial statements. D. A means of assurance that internal accounting controls are functioning as planned.
  4. Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also A. Accuracy. B. Evaluation. C. Compliance. D. Internal control.
  5. Which of the following terms best describes the audit of a taxpayer’s return by a BIR auditor? A. Operational audit. B. Internal audit. C. Compliance audit. D. Government audit.
  6. Which of the following statements concerning consulting services is false? A. The performance of consulting services for audit clients does not, in and of itself, impair the auditor’s independence. B. Consulting services differ fundamentally from the CPA’s function of attesting to the assertions of other parties. C. Consulting services ordinarily involve external reporting. D. Most CPAs, including those who provide audit and tax services, also provide consulting services to their clients.
  7. Which of the following is the most appropriate action to be taken by a CPA who has been asked to perform a consulting services engagement concerning the analysis of a potential merger if he/she has little experience with the industry involved? A. Accept the engagement but he/she should conduct research or consult with others to obtain sufficient competence. B. Decline the engagement because he/she lacks sufficient knowledge. C. Accept the engagement and issue a report that contains his/her opinion on the achievability of the results of the merger.

D. Accept the engagement and perform it in accordance with Philippine Standards on Auditing (PSAs).

  1. An objective of a performance audit is to determine whether an entity’s A. Operational information is in accordance with government auditing standards. B. Specific operating units are functioning economically and efficiently. C. Financial statements present fairly the results of operations. D. Internal control is adequately operating as designed.
  2. Internal auditors should review the means of physically safeguarding assets from losses arising from A. Exposure to the elements. B. Underusage of physical facilities. C. Misapplication of accounting principles. D. Procedures that are not cost justified.
  3. The internal auditing department’s responsibility for deterring fraud is to A. Establish an effective internal control system. B. Maintain internal control. C. Examine and evaluate the system of internal control. D. Exercise operating authority over fraud prevention activities.
  4. Internal auditors review the adequacy of the company’s internal control system primarily to A. Help determine the nature, timing, and extent of tests necessary to achieve audit objectives. B. Determine whether the internal control system provides reasonable assurance that the company’s objectives and goals are met efficiently and economically. C. Ensure that material weaknesses in the system of internal control are corrected. D. Determine whether the internal control system ensures that financial statements are fairly presented.
  5. Which of the following services, if any, may a practitioner who is not independent provide? A. Compilations but not reviews. B. Reviews but not compilations. C. Reviews but not financial statement audits. D. Agreed-upon procedures but not compilations. THE ACCOUNTANCY PROFESSION
  6. The members of the Professional Regulatory Board of Accountancy shall be appointed by the A. Philippine Institute of CPAs (PICPA). B. Professional Regulation Commission (PRC). C. President of the Philippines. D. Association of CPAs in Public Practice (ACPAPP).
  7. The following statements relate to the submission of nominations to the Board of Accountancy. Which is correct? A. The Accredited National Professional Organization of CPAs (APO) shall submit its nominations to the president of the Philippines not later than sixty (60) days prior to the expiry of the term of an incumbent chairman or member. B. The APO shall submit its nominations to the PRC not later than thirty (30) days prior to the expiry of the term of an incumbent chairman or member. C. If the APO fails to submit its own nominee(s) to the PRC within the required period, the PRC in consultation with the Board of Accountancy shall submit to the president of the Philippines a list of five (5) nominees for each position. D. There should be adequate documentation to show the qualifications and primary field of professional activity of each nominee.
  8. The following statements relate to the term of office of the chairman and members of the Board of Accountancy (BOA). Which is false? A. The chairman and members of the BOA shall hold office for a term of three (3) years.

Industry (DTI) and other government offices and such firm name shall include the real name of the sole proprietor as printed in his/her CPA certificate (for example, Arnulfo Gumamela and Associates). C. In the case of a registered partnership, it shall do business under its name as indicated in its current Articles of Partnership and Certificate of Registration issued by the Securities and Exchange Commission (SEC) (for example, Tanya, Sam, and Jervi, CPAs). D. A CPA shall practice only under an individual, firm, or partnership name in accordance with Philippine laws and shall not include any fictitious name but may indicate specialization.

  1. A partner surviving the death or withdrawal of all the other partners in a partnership may continue to practice under the partnership name for a period of not more than _____ years after becoming a sole proprietor. A. 1 C. 3 B. 2 D. 4
  2. The death or disability of an individual CPA and/or the dissolution and liquidation of a firm or partnership of CPAs shall be reported to the BOA not later than _____ days from the date of such death, dissolution or liquidation. A. 15 C. 60 B. 30 D. 90
  3. The following statements relate to CPE credit units. Which is incorrect? A. The total CPE credit units for registered accounting professionals shall be sixty (60) credit units for three (3) years, provided that a minimum of fifteen (15) credit units shall be earned in each year. B. Any excess credit units in one year may be carried over to the succeeding years within the three-year period. C. Excess credit units earned may be carried over to the next three-year period including credit units earned for doctoral and master’s degrees. D. One credit hour of CPE program, activity or source shall be equivalent to one (1) credit unit.
  4. Which of the following statements concerning a CPA’s disclosure of confidential client information is ordinarily correct? A. Disclosure may be made to any party on consent of the client. B. Disclosure should not be made even if such disclosure will protect the CPA’s professional interests in legal proceedings. C. Disclosure should be made only if there is a legal or professional duty to make the disclosure. D. Disclosure may be made to any government agency without subpoena.
  5. Listed below are names of four CPA firms and pertinent facts relative to each firm. Unless otherwise indicated, the individuals named are CPAs and partners, and there are no other partners. Which is a violation of the Implementing Rules and Regulations of RA 9298? A. Tin, Ton and Tan, CPAs (Tin died about five years ago; Ton and Tan are continuing the firm.) B. Pol and Bon, CPAs (The name of Cua, a third partner, is omitted from the partnership name.) C. Joni and Jona, CPAs (Joni died about three years ago; Jona is continuing the firm as a sole proprietor.) D. Elias and Co., CPAs (The firm has ten other partners who are all CPAs).
  6. The following statements relate to some of the provisions of RA 9298. Which is correct? A. Audit working papers are generally the property of the company whose financial statements were audited. B. After three (3) years, subject to certain conditions, the Board of Accountancy may order the reinstatement of a CPA whose certificate of registration has been revoked. C. The penal provision (Sec. 36) of RA 9298 applies only to the violation of any of the provisions of RA 9298 because its Implementing Rules and Regulations are unenforceable.

D. It shall be the primary duty of the PRC and the BOA to effectively enforce the provisions of RA 9298. THE CPA’S PROFESSIONAL RESPONSIBILITIES

  1. Which of the following statements best explains why the CPA profession has found it essential to establish ethical standards and means for ensuring their observance? A. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. B. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character. C. A distinguishing mark of a profession is its acceptance of responsibility to the public. D. A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues.
  2. Which part of the Code establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework that professional accountants shall apply to identify threats to compliance with the fundamental principles, evaluate the significance of the threats identified, and apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level? A. Part A. B. Part B. C. Part C. D. Part D.
  3. The threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures from the client is known as A. Intimidation threat B. Familiarity threat. C. Self-interest threat. D. Advocacy threat.
  4. Which of the following will not create self-interest threat for a professional accountant in public practice? A. The possibility of losing a significant client. B. Direct financial interest in the assurance client. C. Undue dependence on total fees from a client. D. Preparing the original data used to generate records that are the subject matter of the assurance engagement.
  5. Familiarity threat could be created under the following circumstances except A. A professional accountant accepting gifts from a client whose value is inconsequential or trivial. B. Senior personnel having a long association with the assurance client. C. A director or officer of the client or an employee in a position to exert significant influence over the subject matter of the engagement having recently served as the engagement partner. D. A member of the engagement team having a close or immediate family member who is a director or officer of the client.
  6. This threat to independence occurs when a member of the assurance team has recently performed services for an assurance client that directly affect the subject matter information of the assurance engagement (e.g., valuation services). A. Self-review threat. B. Advocacy threat. C. Self-interest threat. D. Familiarity threat.
  7. Which of the following circumstances may create advocacy threat for a professional accountant in public practice? A. The firm promoting shares in an audit client.

A. I and II only. B. I and III only. C. II and III only. D. I, II, and III.

  1. The concept of materiality is least important to an auditor when considering the A. Effects of a direct financial interest in the client upon the auditor’s independence. B. Decision whether to use positive or negative confirmations of accounts receivable. C. Adequacy of disclosure of a client’s illegal act. D. Discovery of weaknesses in a client’s internal control.
  2. A direct financial interest or a material indirect financial interest in the audit client of a member of the audit team or his immediate family member may create a significant self- interest threat. Which of the following safeguards would be least likely considered to eliminate the threat or reduce it to an acceptable level? A. Discuss the matter with those charged with governance of the audit client. B. Dispose of the direct financial interest prior to the individual becoming a member of the audit team. C. Dispose of the indirect financial interest in total or dispose of a sufficient amount of it so that the remaining interest is no longer material prior to the individual becoming a member of the audit team. D. Remove the member of the audit team from the audit engagement.
  3. Jayson, CPA, was offered the engagement to audit W Corporation for the year ended December 31, 2016. He had served as a director of W Corporation until December 31, 2014, and his spouse currently owns 6,000 of the 100,000 outstanding share capital of W Corporation. Jayson disassociated from W Corporation prior to being offered the engagement. Moreover, the engagement does not cover any period that includes Jayson’s association or employment with W Corporation. Under the code of ethics, Jayson should A. Accept the engagement. B. Let a partner from the same office accept and conduct the engagement. C. Refuse the engagement because he had served as a director. D. Refuse the engagement because of his spouse’s stock ownership.
  4. A loan, or guarantee of a loan, to the firm from an audit client that is a bank or a similar institution, would not create a threat to independence provided I. The loan, or guarantee, is made under normal lending procedures, terms and requirements. II. The loan is immaterial to both the firm receiving the loan and the audit client. A. I only B. II only C. Neither I nor II D. Both I and II
  5. A close business relationship between a firm or a member of the audit team, or a member of that individual’s immediate family, and the audit client or its management may create A. Self-interest and intimidation threats B. Self-review and familiarity threats C. Advocacy and self-review threats D. Self-interest and self-review threats
  6. When an immediate family member of a member of the assurance team is a director, an officer, or an employee of the assurance client in a position to exert direct and significant influence over the subject matter information of the assurance engagement, or was in such a position during the period covered by the engagement, the threats to independence can only be reduced to an acceptable level by A. Where possible, structuring the responsibilities of the assurance team so that the professional does not deal with matters that are within the responsibility of the immediate family member. B. Withdrawing from the assurance engagement. C. Removing the individual from the assurance team. D. Discussing the issue with those charged with governance, such as the audit committee.
  1. Which of the following threats to independence is created when a member of the assurance team participates in the assurance engagement while knowing, or having reason to believe, that he is to, or may, join the assurance client sometime in the future? A. Intimidation threat B. Self-interest threat C. Self-review threat D. Familiarity threat
  2. Which of the following would not generally create a threat to independence? A. The purchase of goods and services from an assurance client by the firm (or from a financial statement audit client by a network firm) or a member of the assurance team provided that the transaction is in the normal course of business and on an arm’s length basis. B. A partner or employee of the firm or a network firm serves as Company Secretary for a financial statement audit client. C. Determining which recommendations of the firm should be implemented. D. Reporting, in a management role, to those charged with governance.
  3. The following forms of assistance to a financial statement audit client do not generally threaten the firm’s independence, except A. Analyzing and accumulating information for regulatory reporting. B. Assisting in resolving account reconciliation problems. C. Authorizing or approving transactions. D. Assisting in the preparation of consolidated financial statements.
  4. As defined in the Code, “a valuation comprises the making of assumptions with regard to future developments, the application of certain methodologies and techniques, and the combination of both in order to compute a certain value, or range of values, for an asset, a liability or for a business as a whole.” Which of the following threats may be created when a firm or a network firm performs valuation for an audit client that is to be incorporated in the client’s financial statements? A. Advocacy threat B. Familiarity threat C. Self-review threat D. Intimidation threat
  5. The following statements relate to the provision of taxation, internal audit or IT Systems services to audit clients. Which is false? A. Preparing calculations of current and deferred tax liabilities (or assets) for an audit client for the purpose of preparing accounting entries that will be subsequently audited by the firm creates a self-interest threat. B. A self-review threat may be created when a firm, or network firm, provides internal audit services to an audit client. C. The provision of services by a firm or network firm to an audit client that involve the design and implementation of financial information technology systems that are used to generate information forming part of a client’s financial statements may create a self- review threat. D. The provision of services in connection with the assessment, design, and implementation of internal accounting controls and risk management controls does not create a threat to independence provided that firm or network firm personnel do not perform management functions.
  6. What threat to independence is created when the litigation support services provided to an audit client include the estimation of the possible outcome and thereby affects the amounts or disclosures to be reflected in the financial statements? A. Self-review threat B. Advocacy threat C. Intimidation threat D. Familiarity threat

professional accountants in public practice, or of any alteration in the address of a practice. D. A professional accountant may develop and maintain a website in the Internet in such suitable length and style which may also include announcements, press releases, publications and such other necessary and factual information.

  1. The holding of media-covered events undertaken only to commemorate a professional accountant’s anniversaries in public practice does not violate the rules on advertising and solicitation provided that such undertaking should be done only every _____ years of celebration. A. 5 B. 10 C. 20 D. 25
  2. A professional accountant in public practice is allowed to A. Refer to, use or cite actual or purported testimonials by third parties. B. Publish services in billboard (e.g., tarpaulin, streamers, etc.) advertisements. C. Publish and compare fees with other CPAs or CPA firms or compare those services with those provided by another firm or CPA practitioner. D. Inform interested parties through any medium that a partnership or salaried employment of an accountancy nature is being sought.
  3. After evaluating the significance of the threat created by an actual or threatened litigation, the following safeguards should be applied to reduce the threat to an acceptable level, except A. Disclosing to the audit committee, or others charged with governance, the extent and nature of the litigation. B. If the litigation involves a member of the assurance team, removing that individual from the assurance team. C. Involving an additional professional accountant in the firm who was not a member of the assurance team to review the work or otherwise advise as necessary. D. Withdraw from, or refuse to accept, the assurance engagement.
  4. When a firm obtains an assurance engagement at a significantly lower fee level than that charged by the predecessor firm, or quoted by other firms, the self-interest threat created will not be reduced to an acceptable level unless I. The firm is able to demonstrate that appropriate time and qualified staff are assigned to the task. II. All applicable assurance standards, guidelines, and quality control procedures are being complied with. A. I only B. II only C. Both I and II D. Neither I nor II
  5. What threat to independence may be created when the fees generated by the assurance client represent a large proportion of the revenue of an individual of the firm? A. Self-review threat B. Familiarity threat C. Self-interest threat D. Advocacy threat
  6. The following statements relate to the provision of legal services to an audit client. Which is incorrect? A. The provision of legal services to an audit client involving matters that would not be expected to have a material effect on the financial statements may create a self-review threat. B. Legal services to support an audit client in the execution of a transaction (e.g., contract support) may create a self-review threat. C. Acting for an audit client in the resolution of a dispute or litigation in such circumstances when the amounts involved are material in relation to the financial statements of the

audit client would create advocacy and self-review threats so significant no safeguards could reduce the threats to an acceptable level. D. The appointment of a partner or an employee of the firm or network firm as General Counsel for legal affairs to an audit client would create self-review and advocacy threats that are so significant no safeguards could reduce the threats to an acceptable level.

  1. When a close family member of a member of the assurance team is a director, an officer, or an employee of the assurance client in a position to exert direct and significant influence over the subject matter information of the assurance engagement, threats to independence may be created. If the threats are other than clearly insignificant, which of the following safeguards can be applied to reduce the threats to an acceptable level? I. Removing the individual from the assurance team. II. Where possible, structuring the responsibility of the assurance team so that the professional does not deal with matters that are within the responsibility of the close family member. III. Policies and procedures to empower staff to communicate to senior levels within the firm any issue of independence and objectivity that concerns them. A. I and II only B. II and III only C. I and III only D. I, II, and III
  2. Which of the following threats to independence may be created by family and personal relationships between a member of the assurance team and a director, an officer, or an employee of the assurance client in a position to exert direct and significant influence over the subject matter information of the assurance engagement? A. Self-interest, familiarity or intimidation threats B. Self-review, familiarity, or advocacy threats C. Advocacy, familiarity or self-review threats D. Self-interest, advocacy or self-review threats
  3. The following circumstances create advocacy threats for a professional accountant in public practice except A. Promoting shares in an audit client. B. Acting as an advocate on behalf of an audit client in litigation or disputes with third parties. C. Acting as campaign manager for the president of a client who is running for a public office. D. A member of the assurance team having a significant close business relationship with an assurance client.
  4. Which of the following are elements of a CPA firm’s quality control that should be considered in establishing its quality control policies and procedures? Ethical Human Engagement Requirements Resources Performance A. No Yes No B. Yes No No C. Yes Yes Yes D. No No Yes
  5. The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to A. Anticipate before performing any fieldwork whether an unqualified opinion can be expressed. B. Enable the CPA firm to attest to the reliability of the client. C. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients. D. Minimize the likelihood of association with clients whose management lacks integrity.
  6. As defined in PSQC 1, __________ is a process comprising an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a
  1. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality? A. The anticipated sample size of the planned substantive tests. B. The entity’s annualized interim financial statements. C. The results of the internal control questionnaire. D. The contents of the management representation letter.
  2. The auditor is required to determine three different levels of materiality: (1) materiality for the financial statements as a whole, (2) performance materiality, and (3) A. Overall materiality B. Planning materiality C. General materiality D. Specific materiality
  3. Which of the following statements concerning materiality is not correct? A. When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole. B. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements, the auditor shall also determine the materiality level or levels to those particular classes of transactions, account balances or disclosures. C. Determining materiality involves the exercise of professional judgment. D. The materiality level for the financial statements as a whole determined in the planning stage of the audit should not be affected by changes in the circumstances of the engagement.
  4. Analytical procedures used in planning an audit should focus on A. Reducing the scope of tests of controls and substantive tests. B. Providing assurance that potential material misstatements will be identified. C. Enhancing the auditor’s understanding of the client’s business and identifying areas of potential risk. D. Assessing the adequacy of the available evidential matter.
  5. Which of the following would not be considered an analytical procedure? A. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked. B. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics. C. Computing accounts receivable turnover by dividing credit sales by the average net receivables. D. Developing the expected sales based on the sales trend of the prior five years.
  6. Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions? A. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities. B. Vouching accounting records for recurring transactions recorded just after the balance sheet date. C. Reviewing confirmations of loans receivable and payable for indications of guarantees. D. Performing analytical procedures for indications of possible financial difficulties.
  7. Which of the following most likely would indicate the existence of related parties? A. Writing down obsolete inventory just before year-end. B. Failing to correct previously identified internal control deficiencies. C. Depending on a single product for the success of the entity. D. Borrowing money at an interest rate significantly below the market rate.
  8. Which of the following is an incorrect statement concerning the relationship of the internal auditor and the scope of the external audit of an entity’s financial statements? A. The external auditor is not required to give consideration to the internal audit function beyond obtaining a sufficient understanding to identify and assess the risks of material

misstatement of the financial statements and to design and perform further audit procedures. B. The internal auditors may determine the extent to which audit procedures should be employed by the external auditor. C. Under certain circumstances, the internal auditors may assist the external auditor in performing substantive tests and tests of controls. D. The nature, timing, and extent of the external auditor’s substantive tests may be affected by the work of internal auditors.

  1. If the results of the auditor’s expert’s work do not provide sufficient appropriate audit evidence or are not consistent with other audit evidence, the auditor should A. Report the matter to the appropriate regulatory agency of the government. B. Resolve the matter. C. Withdraw from the engagement. D. Express an unqualified opinion with reference to the work of the expert.
  2. Which of the following matters should be considered by the auditor in developing the overall audit strategy? A. Important characteristics of the entity, its business, its financial performance and its reporting requirements including changes since the date of the prior audit. B. Conditions requiring special attention, such as the existence of related parties. C. The setting of materiality levels for audit purposes. D. All of the above. RISK ASSESSMENTS AND INTERNAL CONTROL
  3. A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified opinion has been issued is the A. Inherent risk. B. Acceptable audit risk. C. Control risk. D. Detection risk.
  4. When inherent risk is high, there will need to be A lower More evidence assessment of audit risk. accumulated by the auditor. A. Yes Yes B. No No C. Yes No D. No Yes
  5. Which of the following is not one of the three primary objectives of effective internal control? A. Reliability of financial reporting. B. Efficiency and effectiveness of operations. C. Compliance with laws and regulations. D. Assurance of elimination of business risk.
  6. Which of the following are considered control environment elements? Commitment Detection Organizational to Competence Risk Structure A. No Yes No B. Yes Yes Yes C. Yes No Yes D. No No Yes
  7. Which of the following statements concerning the relevance of various types of controls to a financial statement audit is correct? A. All controls are ordinarily relevant to a financial statement audit. B. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant.
  1. Your client, a merchandising concern, has annual sales of P30,000,000 and a 40% gross profit rate. Tests reveal that 2% of the peso amount of purchases do not get into inventory because of breakage and inventory pilferage by employees. The company estimates that these losses could be reduced to 0.5% of purchases by designing and implementing certain controls costing approximately P350,000. Should the controls be designed and implemented? A. Yes, regardless of cost-benefit considerations, because the situation involves employee theft. B. Yes, because the ideal system of internal control is the most extensive one. C. No, because the cost of designing and implementing the added controls exceeds the projected savings. D. Yes, because the expected benefits to be derived exceed the cost of the added controls.
  2. After gaining an understanding of internal control and assessing the risks of material misstatement, an auditor decided to perform tests of controls. The auditor most likely decided that A. Additional evidence to support a further reduction in control risk is not available. B. It is not possible or practicable to reduce the risks of material misstatement at the assertion level to an acceptably low level with audit evidence obtained only from substantive test procedures. C. There were many internal control weaknesses that could allow misstatements to enter the accounting system. D. An increase in the assessed level of control risk is justified for certain financial statement assertions.
  3. An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believes A. Controls are unlikely to pertain to the assertions. B. The entity’s control components are interrelated. C. Sufficient appropriate audit evidence to support the assertions is likely to be available. D. More emphasis on tests of controls than substantive tests is warranted.
  4. Which of the following statements is correct concerning an auditor’s assessment of control risk? A. Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity’s internal control. B. Evidence about the operation of controls in prior audits may not be considered during the current year’s assessment of control risk. C. The basis for an auditor’s conclusions about the assessed level of control risk need not be documented unless control risk is assessed at the maximum level. D. The lower the assessed level of control risk, the less assurance the evidence must provide that the controls are operating effectively.
  5. According to PSA 330 (The Auditor’s Procedures in Response to Assessed Risks), an auditor who plans to rely on controls that have not changed since they were last tested should test the operating effectiveness of such controls at least once every A. Second audit B. Third audit C. Fourth audit D. Fifth audit
  6. In performing tests of the operating effectiveness of an entity’s controls, an auditor selects from a variety of techniques, including A. Reperformance and observation. B. Inquiry and analytical procedures. C. Comparison and confirmation. D. Inspection and verification.
  7. An auditor intends to perform tests of control on a client’s cash disbursements procedures. If the control procedures leave no audit trail of documentary evidence, the auditor most likely will test the procedures by A. Inquiry and analytical procedures. B. Inquiry and observation.

C. Analytical procedures and confirmation. D. Confirmation and observation.

  1. Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A. Scan the sales journal for sequential and unusual entries. B. Examine shipping documents for matching sales invoices. C. Compare the accounts receivable ledger to daily sales summaries. D. Inspect unused sales invoices for consecutive prenumbering.
  2. When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs A. Tests of controls and extensive tests of property and equipment balances at the end of the year. B. Analytical procedures for current year property and equipment transactions. C. Tests of controls and limited tests of current year property and equipment transactions. D. Analytical procedures for property and equipment balances at the end of the year. FRAUD AND ERROR
  3. Misstatements in the financial statements can arise from fraud or error. The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is I. Intentional or unintentional. II. Rational or irrational. A. I only C. Both I and II B. II only D. Neither I nor II.
  4. “Error” includes A. Engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity. B. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial statements. C. An incorrect accounting estimate arising from oversight or misinterpretation of facts. D. Intentional misapplication of accounting policies relating to amounts, classification, manner of presentation, or disclosure.
  5. Fraud involving one or more members of management or those charged with governance is referred to as A. Management fraud. C. Fraudulent financial reporting. B. Employee fraud. D. Misappropriation of assets.
  6. The auditor is concerned with fraud that causes a material misstatement in the financial statements. There are two types of intentional misstatements that are relevant to the auditor: misstatements resulting from fraudulent financial reporting and misstatements resulting from A. Management fraud. B. Employee fraud. C. Misappropriation of assets. D. Collusion within the entity or with third parties.
  7. Fraudulent financial reporting involves intentional misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users. It may be accomplished in a number of ways, including A. Embezzling receipts. B. Stealing physical assets or intellectual property. C. Using an entity’s assets for personal use. D. Manipulation, falsification, or alteration of accounting records or supporting documentation from which the financial statements are prepared.
  8. Which of the following conditions are generally present when misstatements due to fraud occur?