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AUDITING THEORY MCQs 1.

2.

The Accountancy Law provided that a CPA certificate may be suspended or revoked on grounds except a. Immoral or dishonorable conduct. b. Gross negligence or incompetence in the practice of profession. c. Refusal to accept an audit engagement with a government corporation. d. Conduct discreditable to the accounting profession Statement 1: Independence standards are required for audits of public companies, but not for audits of private companies.

c. d. 7.

Assurance services may improve all of the following except: a. Relevance. c. Periodicity. b. Timeliness. d. Reliability.

8.

Which of the following would best be described as an assurance service? a. Preparing a report representing a client's position during a BIR audit. b. Working with a client to develop a more efficient method of processing financial transactions. c. Offering an opinion concerning the accuracy of statements made on a client's web site relating to the client's online privacy policies. d. Assisting a client in identifying potential sources of capital for potential acquisitions.

9.

Which of the following statements is not true with respect to assurance, attest (assertion-based assurance engagement as opposed to direct reporting assurance engagement), and audit services? a. These services are applied only to financial statements and financial statement accounts. b. These services all involve obtaining and evaluating evidence. c. These services all involve determining the correspondence of some information to a set of criteria. d. These services all involve issuing a report.

Statement 2: Due care requires a critical review of the work done and the judgment exercised by those assisting in an audit at every level of supervision. a. True, true c. False, true, b. True, false d. False, false 3.

4.

The auditor must be independent of the audit client unless: a. The lack of independence does not influence his or her professional judgment. b. Both parties agree that the independence issue is not a problem. c. The lack of independence is insignificant. d. None of the above. Statement 1: The Code of Professional Ethics does not allow an auditor to disclose confidential client information without the client's consent. Statement 2: If an auditor is not independent of the client, it is unlikely that a user of financial statements will place much reliance on the CPA's work. a. True, true c. False, true, b. True, false d. False, false

5.

6.

Which of the following is a “self review” threat to engagement team member’s compliance with fundamental principles? a. An engagement team member has a spouse that serves as CFO of the attest client. b. A second partner review is required on all attest engagements. c. An engagement team member prepares invoices for the attest client. d. An engagement team member has a direct financial interest in the attest client. According to the standards of the profession, which of the following circumstances will prevent a CPA performing audit engagements from being independent? a. Obtaining a collateralized automobile loan from a financial institution client. b. Litigation with a client relating to billing for consulting services for which the amount is immaterial.

Employment of the CPA’s spouse as a client’ s director of internal audit. Acting as an honorary trustee for a not-for-profit organization client.

10. Statement 1: Assurance services are independent professional services that improve the quality of information specifically for internal decision makers. Statement 2: Management and the external auditor are responsible for the effectiveness of the entity's internal control. a. True, true c. False, true, b. True, false d. False, false 11. In performing an attestation engagement, a CPA typically a. Supplies litigation support services b. Assesses control risk at a low level c. Expresses a conclusion about an assertion d. Provides management consulting advice 12. Which of the following procedures ordinarily performed during an audit are also performed in review? a. Assessment of accounting and internal control systems b. Test of controls c. Tests of records and of responses to inquiries d. Inquiry and analytical procedures

13. According to Philippine Standard on Auditing, the procedures employed in doing compilation are: a. Designed to enable the accountant to express a limited assurance. b. Designed to enable the accountant to express a negative assurance. c. Not designed to enable the accountant to express any form of assurance. d. Less extensive than review procedures but more extensive than agreed-upon procedures. 14. One of a certified audit firm’s basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this basic objective is provided through: a. A system of quality control. b. A system of peer review. c. Continuing professional education. d. Compliance with International Financial Reporting Standards. 15. Which of the following is not true about International and Philippine Auditing Standards? a. International and Philippine Auditing Standards do not require an audit of internal control. b. International and Philippine Auditing Standards do not allow reference to division of responsibilities in the audit report. c. International and Philippine Auditing Standards require obtaining an attorney's letter. d. International and Philippine Auditing Standards are based on a risk assessment approach. 16. A CPA is most likely to refer to its quality control policies and procedures in determining a. The nature of the CPA's report qualification b. The scope of the CPA's auditing procedures c. Requirements for the review of the entity and its environment d. Whether the CPA should undertake an audit engagement 17. Which of the following is not an element of quality control as defined by Philippine Standards on Quality Control 1? a. b. c. d.

Monitoring Independence Human resources Relevant ethical requirements

18. The quality control standards are concerned primarily with a. Actions of individual auditors b. A firm's monitoring of its practice c. Disciplinary actions against individual auditors d. Preventing legal action 19. An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should a. Engage financial experts familiar with the nature of the business entity. b. Obtain a knowledge of matters that relate to the nature of the entity's business.

c. d.

Refer a substantial portion of the audit to another CPA, who will act as the principal auditor. First inform management that an unqualified opinion can not be issued.

20. Before accepting an engagement to audit a new client, an auditor is required to a. Make inquiries of the predecessor auditor. b. Tell the client whether or not the auditor is willing to issue a "clean" opinion. c. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. d. Become a member of the client's board of directors. 21. A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether the individuals who were assigned increased degrees of responsibility met a predetermined criteria. This is evidence of the CPA firm's adherence to prescribed standards of a. Quality control b. Due professional care c. Supervision and review d. Fieldwork 22. Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures? a. Using the audit risk model b. Using statistical sampling techniques c. Assigning personnel to engagements d. Considering audit risk and materiality 23. In order to achieve effective quality control, a firm of independent auditors should establish policies and procedures for a. Determining the minimum procedures necessary for unaudited financial statements b. Setting the scope of audit work c. Deciding whether to accept or continue a client d. Setting the scope of internal control study and evaluation 24. Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm to provide personnel within the firm with a. Technical training that ensures proficiency as an auditor b. Opportunities for career advancement outside the accounting firm c. Knowledge required to fulfill assigned responsibilities d. Knowledge required to perform a peer review 25. Which of the following actions should a CPA firm take to comply with the Philippine Standards on Quality Control? a. Establish procedures that comply with the standards of the RA 9298.

b. c. d.

Use attributes sampling techniques in testing internal controls. Consider inherent risk and control risk before determining detection risk. Establish policies to ensure that the audit work meets applicable professional standards.

26. Among the possible reasons why an auditor will discontinue servicing an audit client is a. Too many errors have to be adjusted to make the financial statements conform with PFRSs b. The auditor has to use a specialist in verifying inventory valuation c. The auditor is also rendering at the same time, a management advisory engagement for the same client d. A change in the client management and the auditor is worried about the reputation of the new management 27. Which of the following best describes the concept of audit risk? a. The risk of the auditor being sued because of association with an audit client. b. The risk that the auditor will provide an unqualified opinion on financial statements that are, in fact, materially misstated. c. The overall risk that a material misstatement exists in the financial statements. d. The risk that auditors use audit procedures that are inappropriate. 28. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? a. It is difficult to prepare financial statements that fairly present a company's financial position and changes in cash flows without the expertise of an independent auditor. b. It is management's responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. c. The opinion of an independent party is needed because a company is not likely to be considered objective with respect to its own financial statements. d. It is a customary courtesy that all stockholders of a company receive an independent report on management's stewardship in managing the affairs of the business. 29. Which of the following best describes the fundamental, underlying reason for why there is demand for an independent auditor to report on financial statements? a. A management fraud may exist and it is more likely to be detected by auditors if they are independent. b. Different interests may exist between the company preparing the statements and the parties using the statements. c. A misstatement of account balances may exist and it is the independent auditor's responsibility

d.

to ensure that financial statements are not misstated. A poorly designed internal control system may be in place.

30. The primary responsibility for the adequacy of disclosures in the financial statements of a publicly held company rests with the a. Partner assigned to the audit engagement b. Management of the company c. Auditor in charge of the fieldwork d. Securities and Exchange Commission 31. Which is not an attribute of an external auditor? a. Independence b. Client advocacy c. Objectivity d. Concern for the public interest 32. Which of the following is true concerning internal and external auditors? a. Internal and external auditors require the same professional designation. b. Internal and external auditors must be independent, but they define independence differently. c. Internal and external auditors both report to the shareholders of the company. d. Internal and external auditors both increase the internal control of a company. 33. An attitude of “professional skepticism” is necessary if a CPA is to perform an audit engagement with due care. Which of the following best describes how a CPA may display an attitude of “professional skepticism” when performing an audit engagement? a. By insisting that all management assertions are documented in writing b. By obtaining appropriate evidence in support of all material management assertions c. By assessing inherent risk as high for all material financial statement assertions d. By requiring both the client’s CEO and CFO to sign the letter of representation to the auditor 34. Which of the following activities is typically associated with operational auditing? a. Determining whether the financial statements are an accurate representation of the entity's operations. b. Evaluating the feasibility of attaining the entity's operational objectives. c. Making recommendations for improving performance. d. Reporting on the entity's relative success in meeting profitability goals. 35. The single feature that most clearly distinguishes auditing, attestation, and assurance is a. Type of service. b. Training required to perform the service c. Scope of services. d. CPA’s approach to the service.

36. Which of the following best describes the operational audit? a. It requires the constant review by internal auditors of the administrative controls as they relate to operations of the company. b. It concentrates on implementing financial and accounting control in a newly organized company. c. It attempts and is designed to verify the fair presentation of a company's results of operations. d. It concentrates on seeking out aspects of operations in which waste would be reduced by the introduction of controls. 37. Statement 1: Testing all transactions that occurred during the period is cost prohibitive. Statement 2: Audit procedures are designed to test management assertions. c. True, true c. False, true, d. True, false d. False, false 38. Evidence is reliable if it a. Signals the true state of a management assertion. b. Applies to the period being audited. c. Relates to the audit assertion being tested. d. Is consistent with management's assertions. 39. Statement 1: Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements. Statement 2: The classification assertion refers to transactions and events being recorded in the correct accounting period. Statement 3: The relevance of audit evidence or specific audit procedures depends on the assertion being tested. a. True, true, true c. False, true, true b. True, false, true d. False, false, true 40. A confirmation is used to: a. Verify the inventory count is correct. b. Verify that a control is being observed. c. Verify a representation from a third party. d. Verify that a specific trend is correct. 41. Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must a. Be well documented and cross-referenced in the audit documents b. Be based on sources that are considered reliable c. Bear a direct relationship to the audit assertion d. Be persuasive enough to enable the auditor to form an opinion 42. Tracing is used primarily to test which of the following assertions about classes of transactions? a. Occurrence b. Completeness c. Cutoff d. Classification

43. Which of the following presumptions does not relate to the appropriateness of audit evidence? a. The more effective the internal control system, the more assurance it provides about the accounting data and financial statements b. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost c. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity d. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly 44. Of the following, which is the least persuasive type of audit evidence? a. Documents mailed by outsiders to the auditor b. Correspondence between the auditor and third party vendors c. Copies of client sales invoices inspected by the auditor d. Computations made by the auditor 45. All of the following are typically in the current file except a. Adjusting journal entries b. Copies of the audit report c. Chart of accounts d. Lead schedules 46. You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying? a. Existence or occurrence b. Completeness c. Rights and obligations d. Valuation or allocation 47. Which of the following best describes the primary purpose of audit procedures? a. To detect all errors or fraudulent activities b. To comply with generally accepted accounting principles c. To gather corroborative evidence about management's assertions d. To verify the accuracy of the balance sheet account balances 48. Which statement concerning audit evidence is not valid? a. The auditor is seldom convinced beyond all doubt with respect to all aspects of the financial statements being audited b. The auditor performs tests to collect convincing evidence that the financial statements are not misstated c. The auditor weighs the cost of obtaining evidence with its usefulness d. The auditor considers the amount of risk present in deciding the nature and extent of evidence to be collected

49. Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for the a. Difficulty and expense involved in testing a particular item b. Assessment of control risk at a low level c. Low inherent risk involved d. Relationship between the cost of obtaining evidence and its usefulness 50. Which of the following presumptions is correct about the reliability of audit evidence? a. Information obtained indirectly from outside sources is the most reliable audit evidence b. To be reliable, audit evidence should be convincing rather than persuasive c. Reliability of audit evidence refers to the amount of corroborative evidence obtained d. An effective internal control system provides more reliable audit evidence 51. Which of the following is the least persuasive documentation in support of an auditor's opinion? a. Schedules of details of physical inventory counts conducted by the client b. Notation of auditor's inferences drawn from ratios and trends c. Notation of appraisers' conclusions documented in the auditor's working papers d. Lists of negative confirmation requests for which no response was received by the auditor 52. Audit documents record the results of the auditor's evidence-gathering procedures. When preparing audit documents, the auditor should remember that a. Audit documents should be kept on the client's premises so that the client can have access to them for reference purposes b. Audit documents should be the primary support for the financial statements being examined c. Audit documents should be considered as a substitute for the client's accounting records d. Audit documents should be designed to facilitate the review and supervision of work done by auditors assigned to the engagement 53. Based on conversations with the owner-manager of an audit client, the auditor ascertained that the company's primary motivation is to avoid paying income taxes. Based on this motivation, which account balance assertion for ending inventory will the auditor be most concerned about verifying? a. Existence or occurrence b. Completeness c. Rights and obligations d. Observation 54. Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for transactions within the purchasing process are you most concerned with? a. Existence or occurrence b. Completeness c. Rights and obligations

d.

Presentation and disclosure

55. Which of the following is not a typical analytical procedure? a. Study of relationships of the financial information with relevant nonfinancial information b. Comparison of the financial information with similar information regarding the industry in which the entity operates c. Comparison of recorded amounts of major disbursements with appropriate invoices d. Comparison of the financial information with budgeted amounts 56. A primary objective of analytical procedures used in the final review stage of an audit is to a. Identify account balances that represent specific risks relevant to the audit. b. Gather evidence from tests of details to corroborate financial statement assertions. c. Detect fraud that may cause the financial statements to be misstated. d. Assist the auditor in evaluating the overall financial statement presentation. 57. What is the best method an auditor may use to detect fraud in the financial statements of clients? a. Use professional skepticism. b. Understand and properly apply Generally Accepted Accounting Standards. c. Brainstorm with the client to find the types of fraud occurring. d. Actively search for all errors in the financial statements. 58. According to professional audit standards, how might an understanding of the nature of fraud that may occur in the client organization best be identified by the audit firm? a. Fraud training courses from actual corporate fraud ex-criminals. b. Conducting a brainstorming meeting with the members of the audit team. c. Circulating a survey to the client company employees for completion. d. Discussions with other CPA firms. 59. Misappropriation of assets is normally perpetrated by: a. members of the board of directors. b. employees at lower levels of the organization. c. management of the company. d. the internal auditors. 60. If an auditor believes a client may have committed illegal acts, which of the following actions should the auditor take? a. Consult with the client’s counsel and the auditor’s counsel to determine how the suspected illegal acts will be communicated to stockholders. b. Extend auditing procedures to determine whether the suspected illegal acts have a material effect on the financial statements. c. Make inquiries of the client’s management and obtain an understanding of the circumstances

d.

underlying the acts and of other evidence to determine the effects of the acts on the financial statements. Notify each member of the audit committee of the board of directors about the nature of the acts and request that they advise an approach to be taken by the auditor.

61. Which of the following is least likely to uncover fraud? a. External auditors c. Internal controls b. Internal auditors d. Management 62. Which of the following would most likely be deemed a direct-effect illegal act? a. Violation of employment laws. b. Violation of environmental regulations. c. Violation of income tax laws. d. Violation of civil rights laws. 63. If the auditor suspects that members of senior management, including members of the board of directors, are involved in noncompliance to laws as regulations, and he believes his report may not be acted upon, he would: a. Do nothing. b. Issue a disclaimer of opinion. c. Consider seeking legal advice. d. Make special investigation in order to fully determine the extent of client’s noncompliance. 64. An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if a. The payments violated the client's policies regarding the prevention of illegal acts b. The client receives financial assistance from a federal government agency c. Documentation that is necessary to prove that the bribes were paid does not exist d. Management fails to take the appropriate remedial action 65. If material fraud perpetrated by management is discovered by the auditor, the nature of the fraud should always be reported directly to: a. the BOA b. the SEC c. the NBI d. the audit committee of the company 66. Management of Premium Discovery Company is compensated through large salaries, stock options and bonuses tied to the company's working capital growth. The CEO is constantly holding meetings to ensure that management is on target for increased operating income each month. Based upon the above information only, what type of probable motivation is there to commit fraud at the Premium Discovery Company? a. Pressure. b. Opportunity. c. Rationalization. d. Expectation.

67. The fraud triangle consists of three components (pressure, opportunity, and rationalization). Which of the three components are present in most every fraud? a. All three factors are usually present when fraud occurs. b. Pressure and opportunity c. Opportunity and rationalization d. Rationalization and pressure 68. Which of the following statements best describes the auditor's responsibility regarding the detection of material fraud? a. Because of the inherent limitations of an audit, the auditor is not responsible for the failure to detect material fraud. b. The auditor is responsible for the failure to detect material fraud when such failure results from nonperformance of audit procedures specifically described in the engagement letter. c. The auditor should design audit programs that will provide reasonable assurance that material errors and fraud will be detected in the ordinary course of the examination. d. The auditor is responsible for the failure to detect material fraud when the auditor's evaluation of internal control procedures indicates that they are ineffective. 69. Which of the following issues is normally part of the “brainstorming” session required by PSAs? How assets How and where the entity’s could be financial statements are misappropriated susceptible to material misstatements due to fraud a. Yes Yes b. No No c. Yes No d. No Yes 70. Research has found that the most fraudulent financial reporting, such as misleading reporting was perpetrated by which of the following. a. lower-level employees. b. external auditors. c. internal auditors. d. senior management. 71. Which of the following matters is generally included in 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 liability for illegal acts committed by its employees. d. The auditor's responsibility to search for significant internal control deficiencies. 72. For which engagements are engagement letters required? a. All engagements b. Audit engagements only c. Assurance engagements only

d.

All engagements except the preparation of income tax returns

73. Which of the following factors most likely would influence an auditor’s determination of the auditability of the entity’s financial statements a. The complexity of the accounting system. b. The existence of related party transactions. c. The adequacy of the accounting records d. The operating effectiveness of control procedures. 74. If the auditor believes that an understanding with the client has not been established, he or she should ordinarily a. Perform the audit with increased professional skepticism b. Assess the control risk at the maximum level and perform a primarily substantive audit c. Decline to accept or perform the audit d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud 75. An auditor who accepts an audit engagement and does not possess expertise with respect to the business entity's industry, should a. Engage financial experts familiar with the nature of the business entity. b. Obtain a knowledge of matters that relate to the nature of the entity's business. c. Refer a substantial portion of the audit to another CPA, who will act as the principal auditor. d. First inform management that an unqualified opinion can not be issued. 76. Before accepting an engagement to audit a new client, an auditor is required to a. Make inquiries of the predecessor auditor. b. Tell the client whether or not the auditor is willing to issue a "clean" opinion. c. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. d. Become a member of the client's board of directors.

77. Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the a. Adequacy of the preplanned audit program b. Ability to establish consistency in application of accounting principles between years c. Apparent scope limitation d. Integrity of management 78. Engagement letters include all of the following except a. A list of additional services that will be provided b. A list of adjusting journal entries c. Information about the audit fee d. Arrangements involving the use of specialists 79. Which of the following factors most likely would cause a CPA not to accept a new audit engagement? a. The prospective client's unwillingness to permit inquiry of its legal counsel b. The inability to review the predecessor auditor's documentation c. The CPA's lack of understanding of the prospective client's operations and industry d. Indications that management has not investigated employees in key positions before hiring them 80. An auditor is required to establish an understanding with a client regarding the responsibilities for each engagement. This understanding generally includes a. Management's responsibility to guarantee that there are no material misstatements due to fraud b. The auditor's responsibility to plan and perform the audit to provide reasonable, but not absolute, assurance of detecting material errors or fraud c. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud d. The auditor's responsibility for the fairness of the financial statements

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