AUDITING THEORY TEST BANKS

1. When an auditor believes that an understanding with the client has not been established, he or
she should ordinarily
a. Perform the audit with increase professional skepticism.
b. Decline to accept or perform the audit.
c. Assess control risk at the maximum level and perform a primarily substantive audit.
d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud.

2. An auditor should design the written audit program so that

a. All material transactions will be selected for substantive testing.
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of transactions.

3. Which of the following fraudulent activities most likely could be perpetrated due to the lack of
effective internal controls in the revenue cycle?
a. Fictitious transactions may be recorded that cause an understatement of revenues and
overstatement of receivables.
b. Claim received from customers for goods returned may be intentionally recorded in other
customers accounts.
c. Authorization of credit memos by personnel who receive cash may permit the misappropriation
of cash.
d. The failure to prepare shipping documents may cause an overstatement of inventory balances.

4. Accepting an engagement to examine an entitys financial projection most likely would be

appropriate if the projection were to be distributed to
a. All employees who work for the entity.
b. Potential stockholders who request a prospectus or a registration statement.
c. A bank with which the entity is negotiating for a loan.
d. All stockholders of record as of the report date.

5. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher
register to the supporting documents. Which assertion would this test of controls most likely
support?
a. Completeness c. Valuation or allocation
b. Existence or occurrence d. Rights and obligations

6. Which of the following comparisons would an auditor most likely make in evaluating an entitys
costs and expenses?
a. The current years accounts receivable with the prior years accounts receivable.
b. The current years payroll expense with the prior years payroll expense.
c. The budgeted current years sales with the prior years sales.
d. The budgeted current years warranty expense with the current years contingent liabilities.

7. An auditor is planning an audit engagement for a new client in a business that is unfamiliar to
the auditor. Which of the following would be the most useful source of information for the auditor
during the preliminary planning stage, when the auditor is trying to obtain a general
understanding of audit problems that might be encountered?
a. Client manuals of accounts and charts of accounts.
b. Industry Audit Guides.
c. Prior year documentation of the predecessor auditor.
d. Latest annual and interim financial statements issued by the client.

8. An auditors report on financial statements prepared in accordance with the financial reporting
provisions of a contract (that is, a special purpose framework) to comply with the provisions of
that contract should include all of the following, except
a. An opinion as to whether the financial statements are presented fairly, in all material respects,
in accordance with the financial reporting provisions of the contract.
b. A statement that indicates the basis of accounting used.
c. An opinion as to whether the basis of accounting used is appropriate under the circumstances.
d. Reference to the note to the financial statements that describes the basis of presentation.

9. An entitys management is responsible for the preparation and fair presentation of the financial
statements. Its responsibility includes the following, except
a. Designing, implementing, and maintaining internal control relevant to the preparation and
presentation of financial statements.
b. Making accounting estimates that are reasonable in the circumstances.
c. Selecting and applying appropriate accounting policies.
d. Assessing the risks of material misstatement of the financial statements.

10. Which of the following statements best expresses the objective of the traditional audit of
financial statements?
a. To express an opinion on the fairness with which the statements present financial position,
financial performance, and cash flows in accordance with Philippine Financial Reporting
Standards.
b. To express an opinion on the accuracy with which the statements present financial position,
financial performance, and cash flows in accordance with Philippine Financial Reporting
Standards.
c. To make suggestions as to the form or content of the financial statements or to draft them in
whole or in part.
d. To assure adoption of sound accounting policies and the establishment and maintenance of
internal control.