AUDITING IN A CIS ENVIRONMENT

Bachelor of Science in Accountancy 3

Quiz No. 1

Name:
Date:

INSTRUCTIONS: Encircle the best answer. Cheating is strictly prohibited. Anyone who caught cheating will
automatically get a zero rating for the quiz.

1. Financial statement assertions are established for account balances,

Classes of transactions Disclosures
a. Yes Yes
b. Yes No
c. No Yes
d. No No

2. As the acceptable level of detection risk decreases, an auditor may

a. Reduce substantive testing by relying on the assessments of inherent risk and control risk.
b. Postpone the timing of substantive tests from interim dates to the year-end.
c. Eliminate the assessed level of inherent risk from consideration as a planning factor.
d. Lower the assessed level of control risk from the maximum level to below the maximum.

3. The risk than an auditor will conclude, based on substantive tests, that a material misstatement does not
exist in an account balance when, in fact, such misstatement does exist is referred to as
a. Sampling risk
b. Detection risk
c. Non-sampling risk
d. Inherent risk

4. As the acceptable level of detection risk decreases, the assurance directly provided from
a. Substantive tests should increase.
b. Substantive tests should decrease.
c. Tests of control should increase.
d. Tests of control should decrease.

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

6. 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 lel, the auditor would
a. Decrease substantive testing.
b. Decrease detection risk.
c. Increase inherent risk.
d. Increase materiality levels.
7. 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 have been observed in circumstances where frauds have occurred.
c. Factors whose presence requires modification of planned audit procedures.
d. Material weaknesses identified during an audit.

8. When performing a financial audit, auditors are required to explicitly assess the risk of material misstatement
due to
a. Errors
b. Fraud
c. Illegal acts
d. Business risk

9. Audits of financial statements are designed to obtain assurance of detecting misstatement due to
Errors Fraudulent Financial Reporting Misappropriation of Assets
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes No

10. An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected for all of
the following except,
a. Employee collusion
b. Falsified documentation
c. Need to apply professional judgement in evaluating fraud risk factors
d. Professional skepticism

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

12. Which of the following is most likely to be considered a risk factor relating to fraudulent financial
reporting?
a. Domination of management by top executives.
b. Large amounts of cash processed.
c. Negative cash flows from operations.
d. Small high-dollar inventory items.

13. Which of the following is most likely to be presumed to represent fraud risk on an audit?
a. Capitalization of repairs and maintenance into the property, plant, and equipment asset account.
b. Improper revenue recognition.
c. Improper interest expense accrual.
d. Introduction of significant new products.
14. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding
a. Disagreements the predecessor 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’s assessments of inherent risk and judgments about materiality.

15. 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’s audit report was issued.
b. Understanding as to the reasons for the change of auditors.
c. Awareness of the consistency in the application of GAAP between periods.
d. Evaluation of all matters of continuing accounting significance.

16. Which of the following matters is generally included in an auditor’s engagement letter?
a. Management’s responsibility for the entity’s compliance with laws and regulations.
b. The factors to be considered in setting preliminary judgments about materiality.
c. Management’s vicarious liability for illegal acts committed by its employees.
d. The auditor’s responsibility to search for significant internal control deficiencies.

17. During the initial planning phase of an audit, a CPA most likely would
a. Identify specific internal control activities that are likely to prevent fraud.
b. Evaluate the reasonableness of the client’s accounting estimates.
c. Discuss the timing of the audit procedures with the client’s management.
d. Inquire of the client’s attorney as to whether any unrecorded claims are probable of assertion.

18. Which of the following documentation is not required for an audit in accordance with generally accepted
auditing standards?
a. A written audit plan setting forth the procedures necessary to accomplish the audit’s objectives.
b. An indication that the accounting records agree or reconcile with the financial statements.
c. A client engagement letter that summarizes the timing and details of the auditor’s planned fieldwork.
d. The assessment of the risks of material misstatement.

19. The auditor should document the understanding established with a client through a(n)
a. Oral communication with the client.
b. Written communication with the client.
c. Written or oral communication with the client.
D. Completely detailed audit plan.

20. With respect to planning an audit, which of the following statements is always true?
a. It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.
b. An engagement should not be accepted after the client’s year-end.
c. An inventory count must be observed at year-end.
d. Final staffing decisions must be made prior to completion of the planning stage.

21. In designing written audit plans, an auditor should establish specific audit objectives that relate
primarily to the
a. Timing of audit procedures.
b. Cost-benefit of gathering evidence.
c. Selected audit techniques.
d. Financial statement assertions
 22. A successor auditor should request the new client to authorize the predecessor auditor to allow a
review of the predecessor’s
Engagement Letter Working papers
a. Yes Yes
b. Yes No
c. No Yes
d. No No

22. Which of the following is not a component of an entity’s internal control?

a. Control risk
b. Control activities
c. Monitoring
d. Control environment

23. When considering internal control, an auditor should be aware of the concept of reasonable assurance,
which recognizes that
a. Internal control may be ineffective due to mistakes in judgment and personal carelessness.
b. Adequate safeguards over access to assets and records should permit an entity to maintain proper
accountability.
c. Establishing and maintaining internal control is an important responsibility of management.
d. The cost of an entity’s internal control should not exceed the benefits expected to be derived.

24. Which of the following factors are included in an entity’s control environment?
Audit Committee Integrity and Ethical Values Organizational
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes

25. Proper segregation of functional responsibilities calls for separation of the functions of
a. Authorization, execution, and payment.
b. Authorization, recording, and custody.
c. Custody, execution, and reporting.
d. Authorization, payment, and recording.

26-30. Give at least five Control Environment Factors.

30-35. Explain the relationship of the Audit Risk components.

(Inherent Risk, Control Risk, Detection Risk)