FINAL EXAM PDF

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The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes upon the auditor a duty toa. Provide reasonable assurance that material misstatements will be detected b. Be a guarantor of the fairness in the statements c. Be equal...

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80. The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes upon the auditor a duty to a. Provide reasonable assurance that material misstatements will be detected b. Be a guarantor of the fairness in the statements c. Be equally responsible with management for the preparation of the financial statements d. Be an insurer of the fairness in the statements ANSWER: A 81. The objective of the ordinary audit of financial statements is the expression of an opinion on: a. the fairness of the financial statements in all material respects. b. the accuracy of the financial statements c. the accuracy of the annual report d. the accuracy of the balance sheet and income statement. ANSWER: A 82. The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to: a. the auditor. b. management. c. both management and the auditor equally. d. management for the statements and the auditor for the notes. ANSWER: B 83. Auditors accumulate evidence to: a. defend themselves in the event of a lawsuit. b. justify the conclusions they have otherwise reached. c. satisfy the requirements of the Securities and Exchange Commission. d. enable them to reach conclusions about the fairness of the financial statements. ANSWER: D 84. Management assertions are: a. directly related to the financial reporting framework used by the company. b. stated in the footnotes to the financial statements. c. explicitly expressed representations about the company's financial condition. d. provided to the auditor in the assertions letter, but are not disclosed on the financial statements. ANSWER: A 85. Which of the following is not one of the five broad categories of management assertions? a. General or specific transaction objectives b. Existence or occurrence c. Valuation or allocation d. Presentation and disclosure ANSWER: A

86. This assertion addresses whether all transactions that should be included in the financial statements are in fact included. a. occurrence b. completeness c. rights and obligations d. existence ANSWER: B 87. Which of the following statements is not correct? a. It would be a violation of the completeness assertion if management would record a sale that did not take place. b. The completeness assertion deals with matters opposite from those of the existence assertion. c. The completeness assertion is concerned with the possibility of omitting items from the financial statements that should have been included. d. The existence assertion is concerned with inclusion of amount that should not have been ANSWER: A 88. Which of the following assertions does not relate to balances at period end? a. Existence b. Occurrence c. Valuation or Allocation d. Rights and Obligation ANSWER: B 89. Which of the following statements is correct? a. Existence relates to whether the amounts in accounts are understated. b. Completeness relates to whether balances exist. c. Existence relates to whether the balances are valid. d. Occurrence relates to whether the amounts in accounts occurred in the proper year. ANSWER: C 90. Which of the following management assertions is not associated with transaction-related audit objectives? a. Occurrence b. Classification and understandability c. Accuracy d. Completeness ANSWER: B 91. An assertion that transactions are recorded in the proper accounting period is: a. classification b. accuracy c. occurrence d. cut-off ANSWER: D 92. The auditor is determining that the recorded sales are for the amount of goods shipped are correctly billed and recorded. The auditor is gathering evidence about which transaction related audit objective? a. existence b. completeness c. accuracy d. cut-off ANSWER: C

93. In testing for cutoff, the objective is to determine: a. whether all of the current period's transactions are recorded. b. whether transactions are recorded in the correct accounting period. c. the cutoff between capitalizing and expensing proper expenditures. d. the proper cutoff between disclosing items in footnotes or in account balances. ANSWER: B 94. Which of the following statement is not correct? a. There are many ways an auditor can accumulate evidence to meet the overall audit objectives. b. Sufficient appropriate evidence must be accumulated to meet the auditor's professional responsibility. c. The cost of accumulating the evidence should be minimized. d. Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects. ANSWER: D 95. When the auditor examines the client's documents and records to substantiate information on the financial statements, it is commonly referred to as a. Inquiry b. Confirmation c. Vouching d. Physical examination ANSWER: C 96. When the auditor uses tracing as an audit procedure for tests of transactions, the auditor is primarily concerned with which audit objective a. Occurrence b. Completeness C. Cut-off d. Classification ANSWER: B 97. When the auditor used the audit procedure vouching, the auditor is primarily concerned with which of the following audit objectives when testing classes of transactions? a. Occurrence b. Completeness c. Authorization d. Classification ANSWER: A 98. Which of the following is an example of vouching? a. Trace inventory purchases from the acquisitions journal to supporting invoices b. Trace selected sales invoices to the sales journal c. Trace details of employee paychecks to the payroll journal d. All of the above are examples of vouching ANSWER: A 99. A document which the auditor receives from the client, but which was prepared by someone outside the client's organization, is a(n)

a. Confirmation b. Internal document c. External document d. Inquiry ANSWER: C 100. Traditionally, confirmations are used to verify a. Individual transactions between organizations, such as sales transactions b. Bank balances and accounts receivables c. Fixed asset additions d. All three of the above ANSWER: B 101. For initial engagements, PSA 510 does not require the auditor to obtain evidence: a. That the opening balances do not contain material misstatements that materially affect the current period financial statements. b. That the prior period's ending balances have been correctly brought forward to the current period or, when appropriate, have been restated. c. That appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for and adequately disclosed. d. That the prior period financial statements were audited by an independent CPA ANSWER: D 102. The preliminary judgment about materiality and the amount of audit evidence accumulated are _________related a. directly b. indirectly c. not d. inversely ANSWER: D 103. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not___________ are detected. a. important to the financial statements b. statistically significant to the financial statements c. material to the financial statements d. identified by the client ANSWER: C 104. According to PSA 320, materiality should be considered by the auditor when:

a. b. c. d.

Determining the nature, timing and extent of audit procedures. YES YES NO NO

Evaluating the effects of misstatements. YES NO NO YES

ANSWER: A 105. If an auditor establishes a relatively high level for materiality then the auditor will: a. accumulate more evidence than if a lower level had been set.

b. accumulate less evidence than if a lower level had been set. c. accumulate approximately the same evidence as would be the case were materiality lower. d. accumulate an undetermined amount of evidence. ANSWER: B 106. 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 the applicable financial reporting framework, 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. ANSWER: B 107. In developing the preliminary level of materiality in an audit, the auditor will a. Look to audit standards for specific materiality guidelines b. Increase the level of materiality if fraud is suspected c. Rely primarily on professional judgment to determine the materiality level d. Use the same materiality level as that used for different clients in the same industry ANSWER: C 108. In making a preliminary judgment about materiality, the audit initially determines the aggregate (overall) level of materiality for each statement. For planning purposes, the auditor should use the a. levels separately. b. largest aggregate level. c. average of these levels. d. smallest aggregate level. ANSWER: D 109. In planning the audit, the auditor should assess materiality at two levels a. the preliminary level and the final level b. the company level and the divisional level. c. the account balance level and the detailed item level. d. the financial statement level and the account balance level ANSWER: D

110. "Performance materiality" is the term used to indicate materiality at the: a. balance sheet level. b. account balance level. c. income statement level d. company-wide level. ANSWER: B

111. All else being equal, as the level of materiality decreases, the amount of evidence required will: a. remain the same b. decrease. c. change in an unpredictable fashion d. increase ANSWER: D 112. In considering materiality for planning purposes, an auditor believes that misstatements aggregating P 100,000 would have a material effect on an entity's income statement, but those misstatements would have to aggregate P 200,000 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. P 100,000 b. P 200,000 c. P 150,000 d. P 300,000 ANSWER: A 113. 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. ANSWER: B 114. Which of the following is the primary basis used to decide materiality for a profit oriented entity? a. net sales b.net assets C. net income before tax d. all of the above ANSWER: C 115. The concept of materiality a. Applies only to publicly held firms b. Has greater application to the standards of reporting than the other generally accepted auditing standards c. Requires that relatively more effort be directed to those assertions that are more susceptible to misstatement d. Requires the auditor to make judgments as to whether misstatements affect the fairness of the financial statements. ANSWER: D 116. The relationship between materiality and risk is ordinarily a. Direct b. Parallel c. Inverse d. None ANSWER: C

117. When comparing level of materiality used for planning purposes and the level of materiality used for evaluating evidence, one would most likely expect a. The level of materiality to be always similar. b. The level of materiality for planning purposes to be smaller c. The level of materiality for planning purposes to be higher. d. The level of materiality for planning purposes to be based on total assets while the level of materiality for evaluating purposes to be based on net income. ANSWER: B 118. When assessing materiality levels for audit purposes, the audit should consider the

a. b. c. d.

Amount Involve YES YES NO NO

Nature of misstatement YES NO NO YES

ANSWER: A 119. Auditors are responsible for determining whether financial statements are materially misstated, so upon discovering a material misstatement they must bring it to the attention of a. the regulators b. the audit firm's managing partner c. the client shareholders. d. the client's management. ANSWER: D 120. Auditing standards___________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files a. permit b. do not allow c. require d. strongly encourage ANSWER: C 121. Which of the following is correct about internal control? a. Accounting and internal control systems provide management with conclusive evidence that objective are reached. b. One of the inherent limitations of accounting and internal control systems is the possibility that the procedures may become inadequate due to changes in conditions, and compliance with procedures may deteriorate. c. Most internal controls tend to be directed at non-routine transactions. d. d. Management does not consider costs of the accounting and internal control systems. ANSWER: B

122. Internal control, no matter how well designed and operated can only provide an entity with reasonable assurance about achieving the entity's objectives. The likelihood of achievement is affected by limitations inherent to internal control. These limitations do not include: a. Collusion among employees b. Inappropriate management override of internal control c. Human failures. d. Incompatible functions. ANSWER: D 123. Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system, its effectiveness depends on the a. adequacy of the computer system. b. proper implementation by management. c. ability of the internal audit staff to maintain it. d. competency and dependability of the people using it. ANSWER: D 124. Internal controls can never be considered as absolutely effective because a. Their effectiveness is highly dependent on the competence and integrity of Company's employees b. Controls always have inherent weaknesses that can be exploited c. Controls are designed to prevent and detect only material misstatements d. None of the above ANSWER: A 125. Which of the of the following best describes the interrelated components of internal control? a. Organizational structure, management, philosophy, and planning b. Control environment, risk assessment, control activities, information and communication systems, and monitoring c. Risk assessment, backup facilities, responsibility accounting, and natural laws d. Internal audit and management's philosophy and operating style. ANSWER: B 126. Which of the following is not one of the components of an entity's internal control? a. Control risk b. Control activities c. Information and communication d. The control environment ANSWER: A 127. The overall attitude and awareness of an entity's board of directors concerning the importance of the internal control usually is reflected in its a. Computer-based controls

b. System of segregation of duties c. Control environment d. Safeguards over access to assets ANSWER: C 128. When obtaining an understanding of an entity's control environment, an auditor should concentrate on the substance of management's policies and procedures rather than their form because a. The auditor may believe that the policies and procedures are inappropriate for that particular entity b. The board of directors may not be aware of management's attitude toward the control environment c. Management may establish appropriate policies and procedures but not act on them d. The policies and procedures may be so ineffective that the auditor may assess control risk at a high level ANSWER: C 129. Basic to a proper control environment are the quality and integrity of personnel who must perform the prescribed procedures. Which is not a factor in providing for competent personnel? a. Segregation of duties b. Hiring practices c. Training programs d. Performance evaluations ANSWER: A 130. In evaluating the design of the entity's internal control environment, the auditor considers the certain subcomponents of control environment and now they have been incorporated into the entity's processes. Subcomponents of control environment would not include a. Integrity and ethical values b. Commitment to competence c. Organizational structure d. Information and communications systems ANSWER: D 131. It is important for the auditor to consider the competence of the audit client's employees, because their competence bears directly and importantly upon the a. Cost-benefit relationship of internal control b. Achievement of the objectives of internal control c. Comparison of recorded accountability with assets d. Timing of the tests to be performed ANSWER: B

132. Which of the following components of an entity's internal control structure includes the development of employee promotion and training policies? a. Control activities b. Control environment c. Information and communication d. Quality control system ANSWER: B 133. Which the following subcomponents of the control environment define the existing lines of responsibility and authority? a. Organizational Structure b. Management philosophy and operating style c. Human resource policies and practices d. Management integrity and ethical values ANSWER: A 134. Which of the following is not one of the subcomponents of the control environment? a. management's philosophy and operating style b. organizational structure c. adequate separation of duties d. commitment to competence ANSWER: C 135. Management philosophy and operating style most likely would have a significant influence on an entity's control environment when a. The internal auditor reports directly to management b. Management is dominated by one individual c. Accurate management job descriptions delineate specific duties. d. The audit committee actively oversees the financial reporting process ANSWER: B 136. A proper segregation of duties requires a. an individual authorizing a transaction records it b. an individual authorizing a transaction maintains a custody of the asset that resulted from the transaction c. an individual maintaining custody of an asset be entitled to access the accounting records for the asset d. an individual recording a transaction not compare the accounting record of the asset with the asset itself ANSWER: D 137. The single most effective control procedure established to allowing any person to be in a position to perpetrate and conceal errors or fraud is

a. The separation of the functional responsibility custodianship, record keeping, operations, authorization b. Require each employee to take a vacation each year. c. Establish an internal audit department. d. Require the bonding of personnel in positions the necessitate handling of cash and other universal desirable valuables. ANSWER: A 138. Which of the following statements is most correct with respect to separation of duties? a. Employees should not have temporary and permanent custody of assets. b. Employees who authorize transactions should not have custody of related assets. c. It is permissible to allow an employee to open cash receipts and record those receipts. d. Employees who authorize transactions should have recording responsibility for these transactions. ANSWER: B 139. Which of the following would contribute most to the safeguarding of assets? a. Access to computer facilities and records is limited to authorized personnel. b. Training programs are conducted to develop competence of newly hired personnel c. Control and subsidiary accounts are reconciled on a regularly scheduled basis d. Blank stock of all purchase orders and sales invoices are prenumbered ANSWER: A

140. Account Accounting information system:

a. b. c. d.

Initiates Transactions YES YES NO NO

Processes Transactions YES YES YES NO

Monitors transactions YES NO NO YES

ANSWER: C 141...