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AUDIT EVIDENCE

1. Which of the following types of audit evidence is the most persuasive?


a. prenumbered client purchase order forms
b. client worksheets supporting cost allocation
c. bank statements obtained form the client
d. client representation letter

2. Which of the following presumptions is correct about the reliability of evidential matter?
a. Information obtained directly from outside sources is the most reliable evidential matter
b. To be reliable, evidential matter should be convincing rather than persuasive
c. Reliability of evidential matter refers to the amount of corroborative evidence obtained
d. Effective internal control provide more assurance about the reliability of evidential matter

3. Which of the following statements relating to competence of evidential matter is always true?
a. Evidential matter gathered by an auditor from outside an enterprise is reliable
b. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under
unsatisfactory internal control conditions
c. Oral representations made by management are not valid evidence
d. Evidence gathered by auditor’s must be both valid and relevant to be considered competent

4. Which of the following types of audit evidence is the least persuasive?


a. Prenumbered purchase order forms
b. Bank statements obtain form client
c. Test counts of inventory performed by auditor
d. Correspondence from the client’s attorney about litigation

5. In evaluating the reasonableness of an entity’s accounting estimate, an auditor normally would be concerned about assumptions
that are:
a. Susceptible to bias
b. Consistent with prior periods
c. Insensitive to variations
d. Similar to industry guidelines

6. Which of the following procedures would an auditor ordinarily perform?


a. Develop independent expectations of management’s estimates
b. Consider the appropriateness of the key factors or assumptions used in preparing the estimates
c. Test the calculations used by management in developing the estimates
d. Obtain an understanding of how management developed the estimates

7. In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors that are:
a. Consistent with prior periods
b. Similar to industry guidelines
c. Objective and susceptible to bias
d. Deviations from historical patterns

8. In evaluating an entity’s accounting estimates, one of an auditor’s objective is to determine whether the estimates are:
a. Not subject to bias
b. Consistent with industry guidelines
c. Based on objective assumptions
d. Reasonable in the circumstances

9. In testing the existence assertion for an asset, an auditor ordinarily works from the:
a. Financial statements to the potentially unrecorded items
b. Potentially unrecorded items to the financial statements
c. Accounting records to the supporting evidence
d. Supporting evidence to the accounting records

10. The client uses suspense account for unresolved questions whose final accounting has not been determined. If balance remains
in the suspense account at year-end, the auditor’s would be most concerned about:
a. Suspense debits that management believes will benefit future operations
b. Suspense debits that the auditors verifies will have realizable value to the client
c. Suspense accounts that management believes should be classified as “Current Liability”
d. Suspense credits that the auditor determines to customer deposits

11. 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 current year sales based on the sales trend of prior the five years

12. What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts
when reviewing the financial statements of a nonpublic entity?
a. Trend analysis
b. Regression analysis
c. Ratio analysis
d. Risk analysis

13. An auditor achieve audit objectives related to particular assertions by:


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a. Performing analytical procedures
b. Adhering to a system of quality control
c. Preparing auditor working papers
d. Increasing the level of detection risk

14. In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information
because such methods:
a. influence the design of internal control
b. affect the auditor’s preliminary judgment about materiality levels
c. assist in evaluating the planned audit objectives
d. determine the auditor’s acceptable level of audit risk

15. An auditor obtains knowledge about a new client’s business and its industry to:
a. make constructive suggestions concerning improvements to the client’s internal control
b. develop an attitude of professional skepticism concerning management’s financial statement assertions
c. evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially
misstated
d. understand events and transactions that may have an effect on the client’s financial statements

16. Analytical procedures used in planning an audit should focus on:


a. reducing the scope of test of controls and substantive tests
b. providing assurance that potential misstatements will be identified
c. enhancing the auditor’s understanding of the client’s business
d. assessing the adequacy of the available evidential matter

17. The objective of performing analytical procedures in planning an audit is to identify existence of:
a. unusual transactions and events
b. illegal acts that went undetected because of internal control weaknesses
c. related party transactions
d. recorded transactions that were not properly authorized

18. Inherent risk and control risk differ from detection risk in that they:
a. arise form the misapplication of auditing procedures
b. may be assessed in either quantitative or non-quantitative terms
c. exist independently of the financial statement audit
d. can be changed at the auditor’s discretion

19. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from
that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the
auditor would:
a. decrease substantive testing
b. decrease detection risk
c. increase inherent risk
d. increase materiality levels

20. As the acceptable level of detection risk decreases, the assurance directly provided from:
a. substantive tests should increase
b. substantive tests should decrease
c. test of controls should increase
d. test of controls should decrease

21. Which of the following audit risk components may be assessed in non-quantitative terms?
a. Control Risk –Yes; Detection Risk –Yes ; Inherent Risk – No
b. Control Risk –Yes; Detection Risk –No ; Inherent Risk – Yes
c. Control Risk –Yes; Detection Risk –Yes ; Inherent Risk – Yes
d. Control Risk –No; Detection Risk –Yes ; Inherent Risk - Yes

22. 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

23. Which of the following statements is not correct about materiality?


a. the concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity
with GAAP, while other matters are not important
b. an auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be
material to any one of the financial statements
c. materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative
judgments
d. 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

24. In considering the materiality for planning purposes, an auditor believes that misstatements aggregating P10,000 would have a
material effect on an entity’s net income statement, but the misstatements would have to aggregate P20,000 to materially affect
the balance sheet. Ordinarily it would be appropriate to design auditing procedures that would be expected to detect
misstatements that aggregate:
a. P10,000
b. P15,000
c. P20,000
d. P30,000
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25. Which of the following is not generally considered a financial statement audit risk factor?
a. management financing decisions are made by top management
b. a new client
c. rapid change in industry
d. inconsistent profitability

26. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of
financial statements?
a. turnover of senior accounting personnel is low
b. insiders recently purchased additional shares of the entity’s stocks
c. management places substantial emphasis on meeting earnings projections
d. the rare of change in the entity’s industry is low

27. Which of the following statements reflects an auditor’s responsibility for detecting error and irregularities?
a. an auditor is responsible for detecting employee errors and simple fraud but not for discovering irregularities involving
employee collusion or management override
b. an auditor should plan the audit to detect errors and irregularities that are caused by departures from GAAP
c. an auditor is not responsible for detecting errors and irregularities unless the application of GAAS would result in such
detection
d. an auditor should design the audit to provide reasonable assurance of detecting errors and irregularities that are material to
the financial statements

28. Which of the following statements describes why a properly designed and executed audit may not detect a material irregularity?
a. audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional
misstatement that is concealed through collusion
b. an audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility
concerning material irregularities
c. the factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of
unintentional errors in the financial statements
d. the auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial
statements taken as a whole

29. Disclosures of irregularities to parties other than a client’s senior management and its audit committee or board of directors
ordinarily is not part of an auditor’s responsibility. However, to which of the following outside parties may a duty to disclose
irregularities exist?
To the SEC when the client To a successor auditor when To a government funding
reports an auditor change the successor makes agency from which the client
appropriate inquiries receives financial assistance
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

30. Which of the following would be classified as an error?


a. misappropriation of assets for the benefit of management
b. misinterpretation by management of facts that existed when the financial statements were prepared
c. preparation of records by employees to cover a fraudulent scheme
d. intentional omission of the recording of a transaction to benefit a third party

31. What assurance does the auditor provide that errors, iregfularities and the direct effect illegal acts that are material to the
financial statements will be detected?
Errors Irregularities Direct effect illegal acts
a. Limited Reasonable Limited
b. Limited Limited Reasonable
c. Reasonable Limited Limited
d. Reasonable Reasonable Reasonable

32. Because of the risk of material misstatement, an audit of financial statements in accordance with GAAS should be planned and
performed with an attitude of:
a. objective judgment
b. independent integrity
c. professional skepticism
d. impartial conservatism

33. Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an
entity’s financial statements?
a. accounts receivable confirmation requests yield significantly fewer responses than expected
b. audit trails of computer-generated transactions exist only for a short time
c. the chief financial officer does not sign the management representation letter until the last day of the auditor’s fieldwork
d. management consults with other accountants about significant accounting matters

34. Which of the following relatively small misstatements most likely could have a material effect on an entity’s financial statements?
a. an illegal payment to a foreign official that was not recorded
b. a piece of obsolete office equipment that was not retired
c. a petty cash disbursement that was not properly authorized
d. an uncollectible account receivable that was not written off

35. During an annual audit of Ajax Corp., a publicly-held company, Jones, CPA, a continuing auditor, determined that illegal political
contributions has been made during each of the past seven years including the year under audit. Jones notified the board of
directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the
financial statements. Jones should consider the intended degree of reliance to be placed to the:
a. letter of audit inquiry to the client’s attorney
b. prior year’s audit program
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c. management representation
d. preliminary judgment about materiality levels

36. The most likely explanation why the auditor’s examination cannot reasonably be expected to bring all illegal acts by the client to
the auditor’s attention is that:
a. illegal acts are perpetrated by management override of internal control
b. illegal acts by clients often relate to operating aspects rather than accounting aspects
c. the client’s internal control may be strong that the auditor performs only minimal substantive testing
d. illegal acts may be perpetrated by the only person in the client’s organization with access to both assets and the accounting
records

37. If specific information comes to an auditor’s attention that implies the existence of possible illegal acts that could have a material,
but indirect effect on the financial statements, the auditor should next:
a. apply audit procedures specifically directed to ascertaining an illegal act has occurred
b. seek to advice of an informed expert qualified to practice law as to possible contingent liabilities
c. report the matter to an appropriate level of management at least one level above those involved
d. discuss the evidence with the client’s audit committee, or others with equivalent authority and responsibility

38. An auditor who discovers that client employees have committed an illegal act that has a material effect on the client ’s financial
statements most likely would withdraw from the engagement of:
a. the illegal act is a violation of GAAP
b. the client does not like the remedial action that the auditor considers necessary
c. the illegal act was committed during a prior year that was not audited
d. the auditor has already assessed control risk at the maximum level

39. Hill, CPA has been retained to audit the financial statements of Monday Co. Monday’s predecessor auditor was Post, CPA, who
has been notified by Monday that Post’s services have been terminated. Under these circumstances, which party should initiate
the communications between Hill and Post?
a. Hill, the successor auditor
b. Post, the predecessor auditor
c. Monday’s controller or CFO
d. The chairman of Monday’s board of directors

40. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding:
a. disagreements the predecessor auditor had with the client concerning auditing procedures and accounting principles
b. the predecessor’s evaluation of matters of continuing accounting significance
c. the degree of cooperation the predecessor received concerning the inquiry of the client’s lawyer
d. the predecessor auditor’s assessment of inherent risk and judgments about materiality

41. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding
the predecessor’s:
a. opinion of any, subsequent events occurring since the predecessor’ audit report was issued
b. understanding as to the reasons for the change of auditors
c. awareness of the consistency in application of GAAP between periods
d. evaluation of all matters of continuing accounting significance

42. Which of the following is most likely to require special planning considerations related to asset valuation?
a. inventory is comprised of diamond rings
b. the client has recently purchased an expensive copy machine
c. assets consisting less than P250 are expensed even when the expected life exceeds one year
d. accelerated depreciation methods are used for amortizing the costs of factory equipment

43. Which of the following is not a type of attest engagement?


a. agreed upon procedures
b. compilation
c. examination
d. review

44. Which of the following is not required when an attest engagement is performed?
a. written communication
b. report with a conclusion
c. reasonable criteria established by a recognized body
d. independence

45. An attestation engagement is one in which a CPA is engaged to:


a. issue a written communication expressing a conclusion about the reliability of a written assertion that is the responsibility of
another party
b. provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed
c. testify as an expert witness in accounting
d. assemble prospective financial statements based on the assumptions of the entity’s management without expressing any
assurance

46. Which of the following is most likely to be unique to the audit work of CPAs as compared to work performed by practitioners of
other professions?
a. due professional care
b. competence
c. independence
d. complex body of knowledge

47. After fieldwork audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a
second wrap-up working paper review. This second review usually focus on:
a. the fair presentation of the financial statements in conformity with GAAP
b. irregularities involving the client’s management and its employees
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c. the materiality of the adjusting entries proposed by the audit staff
d. the communication of internal control weaknesses to the client’s audit committee

48. Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?
a. making suggestions that are adopted about the form and content of an entity’s financial statements impairs an auditor’s
independence
b. an auditor may draft an entity’s financial statements based on information from management’s accounting system
c. the fair presentation of audited financial statements in conformity with GAAP is an implicit part of the auditor’s responsibility
d. an auditor’s responsibilities for audited financial statements are not confined to the expression of the auditor’s opinion

49. The primary reason why a CPA firm establishes quality control policies and procedures for professional development of staff
members is to:
a. comply with the continuing educational requirements imposed by PICPA for all staff accountants in CPA firms
b. establish in fact as well as in appearance, that staff accountants are increasing their knowledge of accounting and auditing
matters
c. provide a forum for staff accountants to exchange their experiences and views concerning firm policies and procedures
d. provide reasonable assurance that staff personnel will have the knowledge required to enable them to fulfill responsibilities

50. In pursuing its quality control objectives with respect to assigning personnel engagements, a CPA firm may use policies and
procedures such as:
a. rotating employees from assignment to assignment on a random basis to aid in the staff training effort
b. requiring timely identification of the staffing requirements of specific engagements so that enough qualified personnel can be
made available
c. allowing staff to select the assignments of their choice to promote better client relationships
d. assigning a number of employees to each engagement in excess of the number required so as not to overburden the staff and
interfere with the quality of the audit work performed

51. This involves developing an overall strategy for the expected conduct and scope of the examination, on the nature, extent and
timing of which vary with the size and complexity and experience with and knowledge of the entity:
a. audit planning
b. audit procedure
c. audit program
d. audit working papers

52. The auditor’s obligation to prepare an effective plan is established by the first standard of fieldwork which says:
a. the work is to be adequately planned and assistants, if any, are to be properly supervised
b. the examination is to be performed by one having adequate training and proficiency
c. the report shall state whether the financial statements are presented in accordance with GAAP
d. the audit report shall contain an expression of opinions

53. Audit plan should:


a b c d
Precede actions No Yes Yes No
Be flexible Yes No Yes Yes
Be cost beneficial Yes Yes Yes No

54. Which of the following is an effective audit planning and control procedures that help prevent misunderstanding and inefficient
use of audit personnel?
a. make copies for inclusion in the working papers, of those client supporting documents examined by the auditor
b. provide the client with copies of the audit programs to be used during the audit
c. arrange a preliminary conference with the client to discuss audit objectives, fees, timing and other information
d. arrange to have auditor prepare and post any necessary adjusting or reclassification entires prior to final closing

55. The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit
strategy is the determination of the:
a. timing of inventory observation procedures to be performed
b. evidence to be gathered to provide a sufficient basis for the auditor’s opinion
c. procedures to be undertaken to discover litigation, claims and assessments
d. pending legal matters to be included in the inquiry of the client’s attorney

*****END OF EXERCISE NO. 8*****

Prepared by:

GINA D. ACHACOSO
Instructor I

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