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AUDIT EVIDENCE
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 auditors must be both valid and relevant to be considered competent
5. In evaluating the reasonableness of an entitys 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
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 entitys accounting estimates, one of an auditors 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 auditors 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
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
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 auditors preliminary judgment about materiality levels
c. assist in evaluating the planned audit objectives
d. determine the auditors acceptable level of audit risk
15. An auditor obtains knowledge about a new clients business and its industry to:
a. make constructive suggestions concerning improvements to the clients internal control
b. develop an attitude of professional skepticism concerning managements 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 clients financial statements
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 auditors 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 auditors preliminary judgment about materiality?
a. the anticipated sample size of the planned substantive tests
b. the entitys annualized interim financial statements
c. the results of the internal control questionnaire
d. the contents of the management representation letter
24. In considering the materiality for planning purposes, an auditor believes that misstatements aggregating P10,000 would have a
material effect on an entitys 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 auditors 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 entitys stocks
c. management places substantial emphasis on meeting earnings projections
d. the rare of change in the entitys industry is low
27. Which of the following statements reflects an auditors 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 clients senior management and its audit committee or board of directors
ordinarily is not part of an auditors 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
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
entitys 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 auditors 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 entitys 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 clients attorney
b. prior years audit program
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c. management representation
d. preliminary judgment about materiality levels
36. The most likely explanation why the auditors examination cannot reasonably be expected to bring all illegal acts by the client to
the auditors 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 clients 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 clients organization with access to both assets and the accounting
records
37. If specific information comes to an auditors 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 clients 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. Mondays predecessor auditor was Post, CPA, who
has been notified by Monday that Posts 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. Mondays controller or CFO
d. The chairman of Mondays 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 predecessors evaluation of matters of continuing accounting significance
c. the degree of cooperation the predecessor received concerning the inquiry of the clients lawyer
d. the predecessor auditors 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 predecessors:
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
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
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 clients 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 clients audit committee
48. Which of the following statements is correct concerning an auditors responsibilities regarding financial statements?
a. making suggestions that are adopted about the form and content of an entitys financial statements impairs an auditors
independence
b. an auditor may draft an entitys financial statements based on information from managements accounting system
c. the fair presentation of audited financial statements in conformity with GAAP is an implicit part of the auditors responsibility
d. an auditors responsibilities for audited financial statements are not confined to the expression of the auditors 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 auditors 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
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 auditors opinion
c. procedures to be undertaken to discover litigation, claims and assessments
d. pending legal matters to be included in the inquiry of the clients attorney
Prepared by:
GINA D. ACHACOSO
Instructor I