Auditing Theory Test Bank - Audit Planning - Audit Planning PDF

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Mindanao State University College of Business Administration and Accountancy DEPARTMENT OF ACCOUNTANCYMarawi CityAUDITING THEORYAccounting 151MULTIPLE CHOICE. Read carefully the questions below and choose the best statement among the choices.Shade the letter corresponding to your answer on the sheet...

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Mindanao State University College of Business Administration and Accountancy DEPARTMENT OF ACCOUNTANCY Marawi City

AUDITING THEORY Accounting 151

MULTIPLE CHOICE. Read carefully the questions below and choose the best statement among the choices. Shade the letter corresponding to your answer on the sheet provided along with this questionnaire. Erasures are strictly not allowed. 1. The ordinary examination of financial statements is not primarily defalcations and other irregularities although their discovery may procedures are more likely to detect a fraud arising from a. Collusion on the part of several employees. b. Failure to record cash receipts for services rendered. c. Forgeries on company checks. d. Theft of inventories.

designed to disclose result. Normal audit

2. A principal purpose of a letter of representation from management is to a. Serve as an introduction to company personnel and an authorization to examine the records. b. Discharge the auditor from legal liability for his examination. c. Confirm in writing management's approval of limitations on the scope of the audit. d. Remind management of its primary responsibility for financial statements. 3. Which of the following statements is true? a. It is usually easier for the auditor to uncover irregularities than errors. b. It is usually easier for the auditor to uncover errors than irregularities. c. It is usually equally difficult for the auditor to uncover errors or irregularities. d. Usually, none of the given statements is true. 4. Generally, the decision to notify parties noncompliance with laws and regulations a. Independent auditor. b. Management. c. Outside legal counsel. d. Internal auditors.

outside

the

client's

organization

regarding

a

5. An audit made in accordance with Philippine Standards on Auditing generally should a. Be expected to provide assurance that noncompliance with laws and regulations will be detected if the internal control is effective. b. Be relied upon to disclose indirect-effect noncompliance with laws and regulations. c. Encompass a plan to search actively for noncompliance with laws and regulations which relate to operating aspects. d. Not be relied upon to provide assurance that all noncompliance with laws and regulations will be detected. 6. An auditor who believes that a material irregularity may exist should initially a. Discuss the matter with those believed to be involved in the perpetration of material irregularity. b. Discuss the matter with a higher level of management. c. Withdraw from the engagement. d. Consult legal counsel. 7. When management refuses to disclose in regulations which are identified by the unethical conduct for a. Withdrawing from the engagement. b. Issuing a disclaimer of opinion. c. Failure to uncover the noncompliance to d. Reporting these activities to the audit

the financial statements noncompliance to laws and independent auditor, the CPA may be charged with

laws and regulations during the prior audits. committee.

8. A procedure in which a quality control partner periodically tests the application of quality control procedures is most directly related to which quality control element? a. Engagement performance b. Independence, integrity, and objectivity

c. Monitoring d. Personnel management 9. The work of each assistant needs to be reviewed by personnel of at least equal competence. Which of the following is not one of the objectives of this requirement? a. The conclusions expressed are consistent with the result of the work performed and support the opinion. b. The work performed and the results obtained have been adequately documented. c. The audit objectives have been achieved. d. All available evidences have been obtained, evaluated and documented. 10. Which of the following is incorrect regarding the professional accountants' tax practice? a. A professional accountant rendering professional tax services is entitled to put forward the best position in favor of a client, or an employer. b. Doubt may be resolved in favor of the client or the employer if there is a reasonable support for the position. c. A professional accountant may hold out to a client or an employer the assurance that the tax return prepared and the tax advice offered by him are beyond challenge. d. Professional accountants should ensure that the client or the employer is aware of the limitations attaching to tax advice and services so that they do not misinterpret an expression of opinion as an assertion of fact. 11. Which of the following is least likely an application of maintaining an attitude of professional skepticism? a. The auditor does not consider representations from management as substitute for obtaining sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. b. In planning and performing an audit, the auditor assumes that management is dishonest. c. The auditor is alert to audit evidence that contradicts or brings into question the reliability of documents or management representations. d. The auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained. 12. Which of the following statements is true when the CPA has been engaged to do an attestation engagement? a. The CPA firm is engaged and paid by the client; therefore, the firm has primary responsibility to be an advocate for the client. b. The CPA firm is engaged and paid by the client, but the primary beneficiaries of the audit are the statement users. c. Should a situation arise where there is no convincing authoritative standard available, and there is a choice of actions which could impact client's financial statements either positively or negatively, the CPA is free to endorse the choice which is best in the client's interest. d. As long as CPA firms are competent, it is not required that they remain unbiased. 13. When CPAs are able to maintain an independent attitude in fulfilling their responsibility, it is referred to as independence in a. Fact. b. Appearance. c. Conduct. d. Total. 14. When determining whether independence is impaired because of an ownership interest in client company, materiality will affect whether ownership is a violation of rule of independence a. In all circumstances. b. Only for direct ownership. c. Only for indirect ownership. d. Under no circumstances. 15. A professional accountant has a professional duty or right disclose confidential information in each of the following, except: a. To comply with technical standards and ethics requirements. b. To disclose to the Bureau of Internal Revenue any fraudulent scheme committed by the client on payment of income tax. c. To comply with the quality review of a member body or professional body d. To respond to an inquiry or investigation by a member body or regulatory body. 16. Which of the following best describes the passing of confidential information from a client to its auditor? The information: a. Should in no circumstances be conveyed to third parties. b. Is not legally protected and can be subpoenaed by a competent court.

c. Can only be released for peer reviews after receiving permission from the client. d. Should be conveyed to the public if it affects the "correctness" of the financial statements. 17. A member in public practice may perform for a contingent fee any professional services for a client for whom the member or member's firm performs a. An audit. b. A review. c. A compilation used only by management. d. An audit of prospective financial information. 18. Which one of the following contingent fee is allowed? a. All services performed by a CPA film. b. Non-attestation services. c. Non-attestation services, unless the CPA firm was also performing attestation services for the same client. d. Attestation services. 19. When the auditor issues an erroneous opinion as a consequence of an underlying failure to comply with the requirements of generally accepted auditing standards, it results to a. Business failure. b. Audit failure. c. Audit risk. d. All of them 20. When preparing the financial statements, it is acceptable for the auditor to prepare a. The footnotes for client. b. The statement for client. c. A draft of the statements and footnotes for client. d. A draft of the statements for client. 21. Which of the following statements best describes the auditor's responsibility regarding the detection of material errors and frauds? a. The auditor is responsible for the failure to detect material errors and frauds only when such failure results from the misapplication of generally accepted accounting principles. b. The auditor is responsible for the failure to detect material errors and frauds only when the auditor fails to confirm receivables or observe inventories. c. The audit should be designed to provide reasonable assurance that material errors and frauds are detected. d. Extended auditing procedures are required to detect unrecorded transactions even if there is no evidence that material errors and frauds may exist. 22. The reason why an auditor accumulates evidence is to a. Defend himself in the event of a lawsuit. b. Justify the conclusions he has otherwise reached. c. Satisfy the requirements of the bureau of internal revenue. d. Enable him to reach conclusions about the fairness of the financial statements and issue an appropriate audit report. 23. The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with them when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead a. A prudent user. b. Management. c. The reader. d. Investors. 24. The probability that an auditor's procedures leading to the conclusion that a material error does not exist in an account balance when, in fact, such error does exist is referred to as a. Prevention risk. b. Inherent risk. c. Control risk. d. Detection risk. 25. Which of the following is not included in an audit engagement letter? a. Objectives of the engagement b. Representations that the financial statements were prepared in accordance with PFRS c. Management's responsibilities d. A clear explanation of the services to be performed on the engagement 26. Which of the following is least likely included in an auditor’s inquiry of management while obtaining information to identify the risks of material misstatement due to fraud? a. Are financial reporting operations controlled by and limited to one location?

b. Does it have knowledge of fraud or suspect fraud? c. Does it have programs to mitigate fraud risks? d. Has it reported to the audit committee the nature of the company's internal control? 27. Which of the following should the auditors normally interview as part of their assessment of fraud risk? a. Senior management b. Audit committee c. Various employees whose duties financial reporting responsibilities d. Only two of the choices e. All of the given choices 28. An audit plan is a a. Detailed plan of analytical procedures and all substantive tests to be performed in the course of the audit. b. Document that provides an overview of the company and a general plan for the audit work to be accomplished, timing of the work, and other matters of concern to the audit. c. Generic document that auditing firms have developed to lead the process of the audit through a systematic and logical process. d. Budget of the time that should be necessary to complete each phase of the audit procedures. 29. If the auditor sets the preliminary judgment about materiality level at a relatively low peso amount, a. More evidence will be required than for a high level. b. Less evidence will be required than for a high level. c. The same amount of evidence will be required as for a high level. d. The amount of evidence required will not be affected. 30. Which of the following statements is true with regard to the relationship among audit risk, audit evidence, and materiality? a. The lower the inherent risk and control risk, the lower the aggregate materiality threshold. b. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining external evidence and should reduce reliance on internal evidence. c. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk. d. Aggregate materiality thresholds should not change under conditions of changing risk levels. 31. Which of the following is most likely to be an overall response to fraud risks identified in an audit? a. Supervise members of the audit team less closely and rely more upon judgment. b. Use less predictable audit procedures. c. Use only certified public accountants on the engagement. d. Place increased emphasis on the audit of objective transactions rather than subjective transactions. 32. Which of the following statements is incorrect regarding obtaining an understanding of the entity and its environment? a. Obtaining an understanding of the entity and its environment is an essential aspect of performing an audit in accordance with PSAs. b. Understanding of the entity and its environment establishes frame of reference within which the auditor plans the audit and exercises professional judgment about assessing risks of material misstatement in the financial statements and responding to those risks throughout the audit. c. The auditor's primary consideration is whether the understanding that has been obtained is sufficient to assess the risks of material misstatement in the financial statements and to design and perform further audit procedures. d. The depth of the overall understanding that is required by the auditor in performing the audit is at least equal to that possessed by management in managing the entity. 33. Inquiries directed towards those charged with governance may most likely a. Relate to their activities concerning the design, and effectiveness of the entity's internal control and whether management has satisfactorily responded to any findings from these activities. b. Help the auditor understand the environment in which the financial statements are prepared. c. Relate to changes in the entity's marketing strategies, sales trends, or contractual arrangements with its customers. d. Help the auditor in evaluating the appropriateness of the selection and application of certain accounting policies. 34. The underlying reason for a code of professional conduct for any profession is a. That it is required by congress. b. The need for public confidence in the quality of service of the profession. c. That it provides a safeguard to keep unscrupulous people out.

d. That it allows Professional Regulation Commission to have a yardstick to measure deficient performance. 35. The auditor should determine overall responses to address the risks of material misstatement at the financial statement level. Such responses least likely include a. Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence. b. Assigning more experienced staff or those with special skills or using experts. c. Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed. d. Performing substantive procedures at an interim date instead of at period end. 36. While assessing the risk of material misstatement, the auditors identity risks, relate risk to what could go wrong, consider the magnitude of risks and: a. Assess the risk of misstatements due to noncompliance to laws and regulations. b. Consider the complexity of the transactions involved. c. Consider the likelihood that the risks could result in material misstatements. d. Determine materiality level. 37. Which of the following is least likely considered a financial statement audit risk factor? a. Management operating and financing decisions are dominated by top management. b. A new client with no prior audit history. c. Rate of change in the entity's industry is rapid. d. Profitability of the entity relative to its industry is inconsistent. 38. Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting? a. Low turnover of senior management. b. Extreme degree of competition within the industry. c. Capital structure including various operating subsidiaries. d. Sales goals in excess of any of the preceding three years. 39. Which of the following is correct concerning requirements about auditor's communications about fraud? a. Fraud that involves senior management should be reported directly to the audit committee regardless of the amounts involved. b. All fraud with a material effect on the financial statements should be reported directly by the auditor to the SEC c. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor through the use of an emphasis of a matter paragraph added to the audit report. d. The auditor has no responsibility to disclose fraud outside the entity under any circumstances. 40. Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? a. Large amounts of liquid assets that are easily convertible into cash. b. Low growth and profitability as compared to other entity's in the same industry. c. Financial management's participation in the initial selection of accounting principles. d. An overly complex organizational structure involving unusual lines of authority. 41. Which of the following is correct? a. The evidence which the auditor accumulates remains the same from audit to audit, but the general objectives vary, depending on the circumstances. b. The general audit objectives remain the same from audit to audit, but the evidence varies, depending on the circumstances. c. The circumstances may vary form audit to audit, but the evidence accumulated remains the same. d. The general audit objectives may vary from audit to audit, but the circumstances remain the same. 42. The auditor is not liable to his client for a. Negligence. b. Bad faith. c. Errors of judgment d. Dishonesty. 43. A basic objective of a CPA firm is to provide professional services that conform to professional standards. Reasonable assurance of achieving this basic objective is provided through a. A system of peer review. b. Continuing professional education. c. Compliance with generally accepted reporting standards. d. A system of quality control. 44. Which

of

the

following

statements

regarding

quality

control

policies

and

procedures

is

incorrect? a. Quality control policies and procedures should be implemented at both the level of the audit firm and on an individual audits. b. The audit firm should implement quality control policies and procedures designed to ensure that all audits are conducted in accordance with PSAs or relevant national standards or practices. c. Quality control policies are objectives and goals while quality control procedures are steps to be taken to accomplish the policies adopted. d. The policies and procedures adopted by individual audit firms should not vary since there is an applicable PSA that prescribes quality control policies and procedures that must be adopted by all auditing firms. 45. A principal purpose of a letter of representation from management is to a. Remind management of its primary responsibility for financial statements. b. Serve as an introduction to company personnel and an authorization to examine the records. c. Discharge the auditor from legal liability for his examination. d. Confirm in writing management's approval of limitations on the scope of the audit. 46. Should the auditor uncover circumstances during the audit that may cause suspicions of management fraud, the auditor must a. Withdraw from engagement. b. Issue an adverse opinion. c. Issue a disclaimer. d. Evaluate their implications and consider the need to modify audit evidence. 47. Most accounting and auditing professionals agree that when an audit has failed to uncover mat...