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MABALACAT CITY COLLEGEDolores, Mabalacat City, PampangaFor A. 2018-2019, 1st SemesterAuditing 1AUDITOR’S RESPONSIBILITYNovember 29, 2018Abalos, Mikaela Rae L.Austria, Krizza Renz T.Villanueva, Jervie B.Source: Auditing Theory 2018 (Jekell Salosagcol, Michael Tiu, Roel Hemorsilla) Chapter 3 Material ...

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MABALACAT CITY COLLEGE Dolores, Mabalacat City, Pampanga For A.Y. 2018-2019, 1st Semester

Auditing 1

AUDITOR’S RESPONSIBILITY

November 29, 2018

Abalos, Mikaela Rae L. Austria, Krizza Renz T. Villanueva, Jervie B.

Source: Auditing Theory 2018 (Jekell Salosagcol, Michael Tiu, Roel Hemorsilla) Chapter 3 1. Material misstatements may emanate from all of the following except a. Fraud c. Noncompliance with laws and regulations b. Error d. Inadequacy of accounting records 2. The level of assurance provided by an audit of detecting a material misstatement is referred to as: a. Reasonable Assurance c. Absolute Assurance b. Moderate Assurance d. Negative Assurance 3. The responsibility for the detection and prevention of errors, fraud and noncompliance with laws and regulations rests with a. Auditor c. Client management b. Client’s legal counsel d. Internal auditor 4. The responsibility for adopting sound accounting policies, maintaining adequate internal control, and making fair representation in the financial statement rests a. With the management c. Equally with management and the auditor b. With the independent auditor d. With the internal audit department 5. The management responsibility to detect and prevent fraud and error is accomplished by a. Implementing adequate quality control system b. Having an annual audit of financial statements c. Implementing adequate accounting and internal control system d. Issuing a representation letter 6. The primary responsibility for establishing and maintaining an internal control rests with a. The external auditors b. The internal auditors c. Management and those charged with governance d. The controller or the treasurer 7. The fundamental purpose of an internal control is to a. Safeguard the resources of the organization b. Provide reasonable assurance that the objectives of the organization are achieved c. Encourage compliance with organization objectives d. Ensure the accuracy, reliability and timeliness of information 8. Which of the following is not one of the three primary objectives of effective internal control? a. Reliability of financial reporting b. Efficiency and effectiveness of operations

c. Compliance with laws and regulations d. Assurance of elimination of business risk 9. Which of the following internal control objectives would be most relevant to the audit? a. Operational objective b. Compliance objective c. Financial reporting objective d. Administrative control objective 10. An act of two or more employee to steal assets and cover their theft by misstating the accounting records would be referred to as: a. Collusion b. A material weakness c. A control deficiency d. A significant deficiency 11. 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 12. The overall attitude and awareness of an entity’s board of director 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. Safeguard over access of assets 13. In evaluating the design of the entity’s internal control environment, the auditor considers the certain subcomponents of control environment and how they have been incorporated into the entity’s processes. Subcomponents of control environment would include a. Integrity and ethical values b. Commitment to competence c. Organizational structure d. Information and communications systems 14. 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

15. Which of 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 16. Which of the following is not one of the subcomponents of the control environment? a. Management philosophy and operating style b. Organizational structure c. Adequate separation of duties d. Commitment to competence 17. Which of the following deal with ongoing or periodic assessment of quality of internal control by management? a. Quality control activities b. Monitoring activities c. Oversight activities d. Management activities 18. The policies and procedures that help ensure that management directives are carried out are referred to as the: a. Control environment b. Control activities c. Monitoring of controls d. Information systems 19. Which of the following is not one of the specific control activities that are relevant to financial statement audit? a. Performance reviews b. Physical controls c. Segregation of duties d. Monitoring 20. Proper segregation of functional responsibilities in an effective structure of internal control calls for separation of functions of a. Authorization, execution, and payment b. Authorization, recording, and custody c. Custody, execution, and reporting d. Authorization, payment, and recording 21. Which of the following best describes the purpose of the control activities? a. The actions, policies and procedures that reflect the overall attitudes of the management b. The identification and analysis of risks and relevant to the preparation of the

financial statements c. The policies and procedures that help ensure that necessary actions aretaken in order to achieve the entity’s objectives d. Activities that deal with the ongoing assessment of the quality of internal control by management 22. When the auditor attempts to understand the operation of the accounting system by tracing a few transactions through the accounting system, the auditor is said to be: a. Tracing b. Vouching c. Performing a walk through d. Testing controls 23. Which of the following is not a medium that can normally be used by an auditor to record information concerning a client’s internal control policies and procedures? a. Narrative memorandum b. Flowchart c. Procedures manual d. Questionnaire 24. An auditor uses the knowledge provided by the understanding of internal control and the final assessed level of control risk primarily to determine the nature, timing and extent of the a. Attribute tests b. Tests of control c. Compliance tests d. Substantive tests 25. Based on the requirement of PSA 3330, how frequently must an auditor test operating effectiveness of controls that appear to functions as they have in past years and on which the auditor wishes to rely in the current year? a. Monthly b. Each audit c. At least every second audit d. At least every third audit 26. 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 an frauds only when such failure results from the misapplication of PSA. b. The audit should be designed to provide reasonable assurance that material errors and frauds will be detected. c. The auditor is responsible for the failure to detect material errors and fraud

only when the auditor fails to confirm receivables or observe inventories. d. Extended auditing procedures are required to detect unrecorded transactions even if there is no evidence that material errors and frauds may exists. 27. The auditor’s best defense when material misstatements in the financial statements are not uncovered in the audit is that

a. The audit was conducted in accordance with generally accepted accounting principles b. Client is guilty of contributory negligence

c. The audit was conducted in accordance with PSA d. The financial statements are client’s responsibility 28. The auditor’s responsibility for failure to detect fraud arises a. When the failure clearly results from non-compliance to PSA b. Whenever the amounts involved are material c. Only when the examination was specifically designed to detect fraud d. Only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor 29. An intentional act by one or more individuals among management, employees, or third parties which results in misrepresentation of financial statements refer to a. Error b. Noncompliance c. Fraud d. Illegal acts 30. Which of the following statements is correct regarding errors and fraud? a. An error is unintentional, whereas fraud is intentional. b. Frauds occur more often than errors in financial statements. c. Errors are always fraud and frauds are always errors. d. Auditors have more responsibility for finding fraud than errors. Source: CPA Review School of the Philippines Manila 31. The primary responsibility for the prevention and detection of fraud and error rests with a. The auditor b. Those charged with governance c. The management of an entity d. Both b and c 32. When planning and performing audit procedures and evaluating and reporting the results thereof, the auditor should a. Search for errors that would have a material effect and for fraud that would

have either material or immaterial effect on the financial statements b. Consider the risk of misstatements in the financial statements resulting from fraud or error. c. Search for fraud that would have a material effect and for errors that would have either material or immaterial effect on the financial statements. d. Consider the risk of material misstatements in the financial statements resulting from fraud or error. 33. The following are examples of error, except a. A mistake in gathering or processing data from which financial statements are prepared. b. An incorrect accounting estimate arising from oversight or misinterpretation of facts. c. A mistake in the application of accounting principles relating to measurement, recognition, classification, presentation, or disclosure. d. Misrepresentation in the financial statements of events, transactions or other significant information. 34. The term “fraud” refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Which statement is correct regarding fraud? a. Auditors make legal determinations of whether fraud has actually occurred. b. Misstatement of the financial statements may not be the objective of some frauds. c. Fraud involving one or more members of management or those charged with governance is referred to as “employee fraud”. d. Fraud involving only employees of the entity is referred to as “management fraud”. 35. The types of intentional misstatements that is relevant to the auditor’s consideration of fraud include I. Misstatements resulting from fraudulent financial reporting II. II. Misstatements resulting from misappropriation of assets a. I and II b. I only c. II only d. Neither I nor II 36. Fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users. Fraudulent financial reporting least likely involve a. Deception such as manipulation, falsification, or alteration of accounting records or supporting documents from which the financial statements are

prepared. b. Misrepresentation in or intentional omission from, the financial statements of events, transactions or other significant information. c. Intentional misapplication of accounting principles relating to measurement, recognition, classification, presentation, or disclosure. d. Embezzling receipts, stealing physical or intangible assets, or causing an entity to pay for goods and services not received. 37. Which of the following illustrates a perceived opportunity to commit fraud? a. Individuals are living beyond their means. b. Management is under pressure, from sources outside or inside the entity, to achieve an expected (and perhaps unrealistic) earnings target. c. An individual believes internal control could be circumvented because the individual is in a position of trust or has knowledge of specific weaknesses in the internal control system. d. All of the above. 38. Which statement is incorrect regarding the auditor’s responsibility to consider fraud and error in an audit of financial statements? a. The auditor is not and cannot be held responsible for the prevention of fraud and error. b. In planning the audit, the auditor should discuss with other members of the audit team the susceptibility of the entity to material misstatements in the financial statements resulting from fraud or error. c. The auditor should design test of controls to reduce to an acceptably low level the risk that misstatements resulting from fraud and error that are material to the financial statements taken as a whole will not be detected. d. When the auditor encounters circumstances that may indicate that there is a material misstatement in the financial statements resulting from fraud or error, the auditor should perform procedures to determine whether the financial statements are materially misstated. 39. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement resulting from error because a. The effect of fraudulent act is likely omitted in the accounting records. b. Fraud is ordinarily accompanied by acts specifically designed to conceal its existence. c. Fraud is always a result of connivance between or among employees. d. The auditor is responsible to detect errors but not fraud. 40. Which of the following statements describes why a properly designed and executed audit may not detect a material fraud? 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 fraud. 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 pervasive effects on the financial statements taken as a whole. 41. The auditor’s ability to detect a fraud depends on factors such as I. The skillfulness of the perpetrator. II. The frequency and extent of manipulation. III. The degree of collusion involved. IV. The relative size of individual amounts manipulated. V. The seniority of those involved. a. All of the above b. I, III and V only c. I, II, III and V only d. III and V only 42. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is a. Greater for employee fraud because of the higher crime rate among blue collar workers. b. Greater for management fraud because of management’s ability to override existing internal controls. c. Greater for employee fraud because of the larger number of employees in the organization. d. Greater for management fraud because managers are inherently smarter than employees. 43. The subsequent discovery of a material misstatement of the financial statements resulting from fraud or error, in and of itself, indicates: a b c d • a failure to obtain reasonable assurance

Yes

Yes

Yes

No

• inadequate planning, performance or judgment

Yes

No

No

No

• the absence of professional competence and due care • a failure to comply with PSAs

Yes Yes

Yes No

No No

No No

44. Whether the auditor has performed an audit in accordance with PSAs is determined by a. The adequacy of the audit procedures performed in the circumstances and the suitability of the auditor’s report based on the result of these procedures. b. The absence of material misstatements. c. The absence of material errors. d. The Securities and Exchange Commission. 45. When planning the audit, which of the following is least likely a purpose of the auditor’s inquiries of management? a. To obtain an understanding of management’s assessment of the risk that the financial statements may be materially misstated as a result of fraud. b. To obtain knowledge of management’s understanding regarding the accounting and internal control systems in place to prevent and detect error. c. To determine whether management has discovered any material errors. d. To determine extent of authentication of documentation. 46. Which of the following best describes what is meant by the term “fraud risk factor”? a. Factors whose presence indicates that the risk of fraud is high. b. Factors whose presence often has been observed in circumstances where frauds have occurred. c. Factors whose presence requires modifications of planned audit procedures. d. Reportable conditions identified during an audit. 47. Which of the following is least likely a category of fraud risk factors that relate to misstatements resulting from fraudulent financial reporting? a. Management’s characteristics and influence over the control environment. b. Industry conditions. c. Operating characteristics and financial stability. d. Susceptibility of assets to misappropriation. 48. Fraud risk factors relating to management’s characteristics and influence over the control environment a. Pertain to management’s abilities, pressures, style, and attitude relating to internal control and the financial reporting process. b. Involve the economic and regulatory environment in which the entity operates. c. Pertain to the nature and complexity of the entity and its transactions, the entity’s financial condition, and its profitability. d. Involve the lack of controls designed to prevent or detect misappropriation of assets. 49. Which of the following is least likely an example of fraud risk factors relating to management’s characteristics and influence over the control environment? a. There is motivation for management to engage in fraudulent financial

reporting. b. There is a failure by management to display and communicate an appropriate attitude regarding internal control and the financial reporting process. c. Non-financial management participates excessively in, or is preoccupied with, the selection of accounting principles or the determination of significant estimates. d. New accounting, statutory or regulatory requirements that could impair the financial stability or profitability of the entity. 50. The following are examples of fraud risk factors relating to industry conditions, except a. There is a high turnover of management, counsel or board members. b. A high degree of competition or market saturation, accompanied by declining margins. c. A declining industry with increasing business failures and significant declines in customer demand. d. Rapid changes in the industry, such as high vulnerability to rapidly changing technology or rapid product obsolescence. 51. Which of the following is most likely an example of fraud risk factor relating to management’s characteristics and influence over the control environment a. There is a strained relationship between management and the current or predecessor auditor. b. Inability to generate cash flows from operations while reporting earnings and earnings growth. c. Significant related party transactions which are not in the ordinary course of business. d. Significant, unusual or highly complex transactions (especially those close to year-end) that pose difficult questions concerning substance over form. 52. Examples of fraud risk factors relating to susceptibility of assets to misappropriation include the following, except a. Large amounts of cash on hand or processed. b. Inventory characteristics, such as small size combined with high value and high demand. c. Easily convertible assets, such as bearer bonds, diamonds or computer chips. d. Lack of appropriate manag...