8 November 2024

Long Quiz#01
Auditing Theory
Instruction: Please encircle the letter that corresponds to your answer.
Time allotted is 2min/ question.

1. The decision as to whether the criteria are suitable involves considering whether the subject
against or measurement using such
matter is capable of reasonably consistent evaluation
are suitable include the following,
criteria. The characteristics for determining whether criteria
except?
a. Relevance c. Reliability
b. Sufficiency
d. Understandability

sufficient appropriate evídence to conclude

2. When the professional accountant has obtained
respects with identified suitable criteria, he or
that the subject matter conforms in all material
she can provide what level of assurance?
a. None c. Moderate
d. Absolute
b. High
3. The following are assurance engagements, except
a. Reasonable assurance engagement
b. Other assurance engagements
c. Review engagement
d. Tax servicesS
includes an
4. An 'integrated audit' as required by Sarbanes Oxley Act for US public companies,
D audit of:
a. Company's financial statements
b. Company's internal controls
c. Company's compliance with its rules and polices
d. Company's financial statements and internal controls
5. The objective of an operational audit is to
B a. Evaluate fairness of presentation of financial statements
b. Evaluate the effectiveness and efficiency with which resources are employed and identifying
areas for improvement.
c. Evaluate whether laws have been broken by management.
d. Evaluate compliances with company rules and regulations.
6. Which of the following statements about theoretical framework of auditing is/are incorrect?
I. The data to be audited are verifiable
B Ell. Long term conflicts may exists between managers who prepares the data and auditors who
examines the data
FIL. Auditors act on behalf of management
fIV. An audit benefits the public.
a. Il & | c. Il only
b. II, I||&IV d. Ill only

7. Which of the following is not a distinguishing feature of risk-based auditing?

a. ldentifying areas posing the highest risk of financial statement errors.
b. Analysis of internal controls.
c. Collecting and evaluating evidence
d. Concentrating audit resources in those areas presenting the highest risk of financial
statement errors.
 8. Statement 1. The auditor has no responsibility to plan and perform the audit to obtain
T reasonable assurance that misstatement, whether due to fraud or errors that are not material to
A the financial statements are detected.

Statement 2. Professional judgment is said to be the hallmark of auditing, while professional

skepticism is believed to be the best method of uncovering fraud and error in the financial
statements.
a. True, True c. False, True
b. True, False d. False, False
9. Assertions are representations of management that are embodied infinancial statement
components. They can be either explicit or implicit. Which of these assertions is not about
valuation and allocation?
a. Property is recorded at historical cost.
b. Trade accounts receivable in the balance sheet are stated at net realizable value.
c. Notes payable in the balance sheet include all such obligations of the entity.
d. Property cost is systematically allocated to appropriate accounting period.
10. Which of the following audit procedures are used extensively throughout the audit and often
are complementary to performing other audit procedures, yet the least reliable?
a. Inspection c. Inquiry
b. Observation d. Confirmation

B 11. Which of the following is the most persuasive type of evidence?

a. Check register c. Observation of assets
b. Bank statement d. Inquiry with the in-house attorney

12. Which of the following statements about working papers is correct?

x a. Working papers are not permitted to be used as a reference source by the client.
/ b. The auditor should document the understanding of the client's internal control obtained to
plan the audit.
X c. Working papers may be regarded as substitute for the client's accounting records.
x d. The independent auditor may discard working papers after two years.
13. Which of the following would an auditor least likely perform as part of the auditor's
D preliminary engagement activities or pre-planning or pre-engagement phase?
a. Perform procedures regarding the continuance of the client relationship and specific
engagement.
b. Evaluate compliance with ethical requirements, including independence.
c. Establish an understanding of the terms of the engagement.
d. Obtain understandingof the legal and regulatory framework applicable to the entity.
14. Which of the folowing will an auditor most likely discuss with the former auditor of a
D potential client prior to acceptance?
a. Integrity of the management.
b. Reasons for changing audit firms.
c. Disagreements with management regarding accounting principles.
d. All of the above must be discussed.

15. Retainer's fee basis is when

C a. Billing is done on the basis of actual time spent at the agreed rates/hour.
b. The client is charged on a per diem basis with a cap or ceiling amount.
C. The client is biled a fixed fee periodically for the services rendered during a designated
period of time.
d. The client is billed at a single amount for the entire engagement.
 16. Which of the following actions may be appropriate if the auditor is unable to agree to a
change in engagement and is not permitted to continue the original engagement?
a. Auditor should withdraw from the engagement.
shareholders the
b. Consider whether there is any obligation to report to the BOD or
circumstances necessitating withdrawal.
c. Continue with the new engagement and document client's disagreement.
d. a & b

17. The primary purpose of the engagement letter is to

B a. Remind management that the primary responsibility for the FSs rests with management.
provided.
b. Provide awritten recordof the agreement with the client as to services to be
c. Satisfy the requirements of the CPA's liability for insurance policy.
d. Provide astarting point for the auditor's preparation of the preliminary audit program.
18. An audit engagement letter least Iikely includes
B a. A reference to the inherent limitation of an audit that some material misstatements may
remain undiscovered.
b. ldentification of specific audit procedures that the auditor needs to undertake.
c. Description of any letters or reports that the auditor expects to submit to the client.
staff.
Jd. Arrangements concerning the involvement of internal auditors and other client's
19.Which of the following procedures is not performed as part of planning an audit
engagement.
a. Reviewing the working papers of the prior year.
b. Performing analytical procedures
c. Confirmation of all major accounts.
d. Designing an audit program.
20. Tolerable misstatement is
a. Materiality allocated to an assertion.
b. Materiality for the balance sheet as a whole.
C. Materiality for the income statement as a whole.
d. Materiality allocated toa specific account.
21. The preliminary judgment about materiality and the amount of audit evidence to be
accumulated are related.
a. Directly c. Not
b. Indirectly d. Inversely

22. What type of analytical procedure would an auditor most likely use in developing
relationships among balance sheet accounts when reviewing financial statements of a nonpublic
entity?
a. Trend analysis c. Ratio analysis
b. Regression analysis d. Risk analysis

23. During financial statement audits, the auditors' consideration of their client's internal control
B is integral to both assess the risk of material misstatement and to:
a. Assess inherent risk
b. Design further audit procedures
C. Assess compliance with PSAs
d. Provide reasonable basis for an opinion on compliance with applicable laws.
 24. When obtaining an understanding of the entity's internal control the auditor shouldobtain
A knowledge about internal control's.
Design Implementation Operating effectiveness
Yes Yes Yes
b Yes Yes No
Yes No No
d. No No Yes

25. Which of the following would be considered a dual purpose test' in an audit?
a. Sending negative confirmations of receivables to customers with small recorded balances
and positive confirmations to accounts with large balances.
b. Vouching sales invoices for authorization and tracing the amount of each invoice to the sales
journal.
c. Comparing the amount determined according to the amortization method used bythe client to
the amount reported in the financial statements.
d. Reviewìng the client's inventory taking instructions and observing whether the instructions are
followed.

26. Assume that inherent risk is 0.80 and the likelihood that the auditor gives an audit
C inappropriate opinion when the financial statements are materially misstated is 0.05. If the risk
of material misstatement or the likelihood that the financial statements are materially misstated
prior to the audit is 0.56, what is the risk that audit procedures performed by the auditor will not
detect a material misstatement that exists?
a. 0.11 C. 0.09
b. 0.07 d. 0.50

D 27.Which of the following is an example of a common type of financial reporting fraud?

xa. Capitalizing major overhauls to operating equipment.
x b. Deferring service revenue until it is delivered to customers.
x C. Recording sales for inventory sold with the right to return.
/d. Excluding a contingent liability that has been settled.
28. In planning examination, the auditor would consider all of the following, except
D a. Anticipated reliance on internal controls.
b. Preliminary judgment about materiality levels for audit purposes.
c. Determination of extent of involvement of client's internal auditors and experts.
d. ldentification complex accounting areas including those involving accounting estimates.
29. The element of the audit planning process most likely to be agreed upon with the client
A before inplementation of the audit strategy is the determination of the:
a. Timing of inventory observation procedures.
b. Evidence to be gathered to provide a sufficient and appropriate basis for the auditor's opinion.
c. Procedures to be undertaken in performing the audit.
d. Materiality and specific items to be tested.
30. In considering materiality in planning purposes, an auditor believes that misstatements
aggregating P 50,000 would have a material effect on an entity's Income Statement but would
have to aggregate P 80,000 to materially affect the Balance sheet. It would be appropriate to
design auditing procedures that would be expected to detect misstatements that aggregate?
a. P 50,000 c. P 40,000
b. P 80,000 d. P 100,000
31. Which of the following nonfinancial information would an auditor most likely consider in
performing analytical procedures during the planning phase of the audit?
a. Turnover of personnel in the accounting department.
b. Objectivity of audit committee members.
 c. Square footage of selling space.
d. Management's plans to repurchase stock.

32. Analytical procedures used in planning an audit should focus on?

a. Reducing the scope of tests of controls and substantive tests/
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditor's understanding of the clent's business required to identify areas of
heightened risk.
d. Assessing the adequacy of the available evidence.

33. Which of the following is least likely to be comparable between similar corporations in the
same industry line of business?
a. Accounts receivable turnover c. Gross profit percentage
b. Earnings per share d. ROA before interest and taxes

D 34. The auditor's review of the client's internal control is documented in order tosubstantiate?
a. Conformity of the accounting records with the PFRS.
b. Representation as to adherence to requirements of management.
c. Representation as to compliance with PSA.
d. The fairness of the financial statement's presentation.

35.When obtaining an understanding of an entity's internal control, the auditor should

B concentrate on the substance of controls rather than on their form because
a. The controls may be operating effectively but may not be documented.
b. Management may establish appropriate controls but not act on them.
c.The controls may be so inappropriate that the auditor contemplates no reliance.
d. Management may implement controls with costs inexcess of benefits.
36.The following are examples of fraud risk factors relating to misstatements arising from
A misappropriation of assets, except
a. Recurring negative cash flows from operating activities while reporting earnings and earnings
growth.
b. Inadequate physical safeguards over cash, investments, inventory or fixed assets.
c. Inadequate segregation of duties or independent checks.
d. Adverse relationship between the entity and employees with access to cash or other assets
susceptitble to theft created by recent changes made to employee compensation or benefit
plans.

37.Which of the following is not an attestation standard?

B a. Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is
expressed in the report
b. The report shall identify the subject matter on the assertion being reported on and state the
character of the engagement
c.The work shall be adequately planned and assistants, if any, shall be properly supervised
d. A sufficient understanding of internal control shall be obtained to plan the engagement

38. The existence of audit risk is recognized by the statement in the auditor's standard report
A that the auditor
a. Obtains reasonable assurance about whetherthe financial statements are free of material
misstatement.
b. Assesses the accounting principles used and also evaluates the overall financial statement
presentation.
c. Realizes some matters either individually or in the aggregate, are important while other
matters are not important.
 d. Is responsible for expressing an opinion on the financial statements, which arc the
responsibility of management.

C 39. Which of the following services would be most likely to be structured as an attest
engagement?
a.Advocating a client's position in tax matter.
b. Aconsulting engagement to develop a new database system for the revenue cycle.
c. An engagement to issue a report addressing an entity's compliance with requirements of
specified laws.
d. The compilation of aclient's forecast information.

D 40. When a CPA is approached to perform an audit for the first time, the CPA should make
inquiries of the predecessor auditor. This is a necessary procedure because the predecessor
may be able to provide the successor with information that will assist the successor in
determining whether:
a. The predecessor's work should be utilized
b. The company follows the policy of rotating its auditors
c. In the predecessor's opinion, internal control of the company is satisfactory
d. The engagement should be accepted

D 41.Which of the following combination of engagement risk, audit risk and materiality would lead
the auditor to most audit work?
Engagement risk Audit risk Materiality
a. Low High High
b. Moderate Low Low
C. Low Moderate Low
d.
High High High
42. For all audits of financial statements conducted in accordance with PSAs, the use of
B analytical procedures is required to some extent
A B C D
As risk assessment procedure
In the planning phase Yes Yes No No

As a substantive test procedure Yes Nó Nó Yes

In the over-all review of the

Financial statements Yes Yés No Yes

43. An auditor's responsibility to detect illegal acts that have a direct and material effect on the
D financial statements is the same as that for errors and irregularities.

According to PSA 250 (Consideration of Laws and Regulations in an Audit of Financial

T Statenments), in the absence of evidence to the contrary, the auditor is not entitled to assume the
entity is in compliance wit applicable laws and regulations affecting the client.
One reason why the auditor's examination cannot reasonably be expected to bring an illegal act
by the client to the auditor's attention is that illegal acts by clients often relate to operating
aspects rather than accounting aspects.
 a. False,True, True
b. True, False, True
C. True, False, False
d. F¡lse, False, False
44. Awritten engagement letter formalizing the level of service to be rendered is a required
documentation in an audit in accordance with GAAS.

A flowchart depicting the segregation of duties and authorization of transactions is a required

documentation in an audit in accordance with GAAS.
a. True, False
b. Both statements are false
C. False, True
d. Both statements are true

45. In the process of obtaining an understandingof an entity's internal control in the financial
D statement audit, the auditor is not obligated to determine whether the control procedures have
been placed in operation.

In the process of obtaining an understanding of an entity's internal control in the financial

statement audit, the auditor is not obligated to perform procedures to understand the design of
the internal control policies.
In the process of obtaining an understanding of an entity's internal control in the financial
T statement audit, the auditor is not obligated to search for significant deficiencies in the operation
of internal control.

a. Second and third statements are not correct, the first statement is correct
b. First and third statement are not correct, the second statement is correct
C. Allabove statements are not correct
d. First and second statements are not correct, the third statement is correçt