AUDITING THEORY (AT-8101) 1. Which of the following statements best describes assurance services? a. Independent professional services that are intended to enhance the credibility of information to meet the needs of an intended user. b. Services designed to express an opinion on the fairness of historical financial statements based on the results of an audit. c.
The preparation of financial statements or the collection, classification, and summarization of other financial information.
d. Services designed for the improvement of operations, resulting in better outcomes. 2. Which of the following engagements is covered by the Framework for Assurance Engagements? a. Consulting engagements. b. Agreed-upon procedures engagement. c.
Preparation of tax returns.
d. Independent financial statements audit. 3. Assurance services differ from consulting services in that they I.
Focus on providing advice
II. Involve monitoring of one party by another. a. I only b. II only c.
Both I and II
d. Neither I nor II 4. How many separate parties are involved in an assurance engagement? a. 2 b. 3 c.
4
d. 5 5. An assurance engagement should have which of the following elements?
Subject Matter
Criteria
a.
Yes
No
b.
No
Yes
c.
Yes
Yes
d.
No
No
6. The subject matter of an assurance engagement may include Financial Information
Internal Controls
Compliance With Regulation
a.
Yes
Yes
Yes
b.
No
No
No
c.
Yes
No
Yes
d.
No
Yes
No
7. Suitable criteria are required for reasonably consistent evaluation or measurement of the subject matter of an assurance engagement. Which of the following statements concerning the characteristics of suitable criteria is correct? a. Reliable criteria contribute to conclusions that are clear, comprehensive, and not subject to significantly different interpretations. b. Relevant criteria allow reasonably consistent evaluation or measurement of the subject matter including, where relevant, presentation and disclosure, when used in similar circumstances by similarly qualified practitioners. c.
Neutral criteria contribute to conclusions that are free from bias.
d. Criteria are sufficiently complete when they contribute to conclusions that are clear, comprehensive, and not subject to different interpretations. 8. Criteria that are embodied in laws or regulations, or issued by authorized or recognized bodies of experts that follow a transparent due process are called a. Suitable criteria b. Established criteria c.
Specifically developed criteria
d. General criteria 9. In an assurance engagement, the outcome of the evaluation or measurement of a subject matter against criteria is called a. Subject matter information b. Subject matter c.
Assurance
d. Conclusion 10. In some assurance engagements, the evaluation or measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form of an assertion by the responsible party that is made available to intended users. These engagements are called a. Direct reporting engagements b. Assertion-based engagements c.
Non-assurance engagements
d. Recurring engagements 11. ___________ is the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated. a. Assurance engagement risk. b. Business risk c.
Client risk
d. Information risk.
12. 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 unmodified opinion of 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 t hat are inappropriate. 13. Which of the following is the objective of a reasonable assurance engagement? a. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a basis for a negative form of expression of the practitioner’s conclusion. b. A reduction in assurance engagement risk to a very low level in the circumstances of the engagement as a basis for a disclaimer of the practitioner’s conclusion. c.
A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a basis for a qualified form of expression of the practitioner’s conclusion.
d. A reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as a basis for a positive form of expression of the practitioner’s conclusion. 14. Which of the following statements is true concerning e vidence in an assurance a. Sufficiency is the measure if the quantity of evidence. b. Appropriateness is the measure of the quality of evidence, that is, its reliability and persuasiveness. c.
The reliability of evidence is influenced not by its nature but by its source.
d. Obtaining more evidence may compensate for its poor quality. 15. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as a result of the following factors except a. The use of selective testing. b. The fact that much of the evidence available to the practitioner is persuasive rather than conclusive. c.
The practitioner may not have the required assurance knowledge and skills to gather and evaluate evidence.
d. The use of judgment in gathering and evaluating evidence and forming conclusions based on that evidence. 16. The Philippine Framework for Assurance Engagements a. Contains basic principles, essential procedures, and related guidance for the performance of assurance engagements. b. Defines and describes the elements and objectives of an assurance engagement, and identifies engagements to which PSAs, PSREs, and PSAEs apply. c.
Provides a frame of reference for CPAs in public practice when performing audits, reviews, and compilations of historical financial information.
d. Establishes standards and provides procedural requirements for the performance of assurance engagements.
17. After accepting an assurance engagement, a practitioner is not allowed to change the engagement to a non-assurance engagement, or from a reasonable assurance engagement to a limited assurance engagement, except when there is reasonable justification for the change. Which of the following ordinarily will justify a request for a change in the engagement? I.
A change in circumstances that affects the intended users’ requirements.
II.
A misunderstanding concerning the nature of the engagement.
a. I only b. II only c.
Both I and II
d. Neither I nor II 18. Which of the following standards are to be applied, as appropriate, in the audit of historical financial information? a. PSREs b. PSAEs c.
PSRSs
d. PSAs 19. The Philippines Standards on Assurance Engagements (PSAEs) are to be applied in a. Assurance engagements dealing with subject matters other than historical financial information. b. Compilation engagements and agreements to apply agreed-upon procedures to information. c.
The audit or review of historical financial information.
d. Assurance engagements dealing with historical financial information. 20. The Philippine Standards on Quality Control (PSQCs) are to be applied to a. Assurance engagements only. b. Review engagements only. c.
Compilation and review engagements only.
d. All services that fall under AASC’s e ngagement standards. 21. These statements are issued by the AASC to provide interpretive guidance and practical assistance to auditors in the implementation of PSAs and to promote good practice. a. PREPSs b. PAPSs c.
PAEPs
d. PRSPSs 22. Limited assurance is provided for in a. An audit engagement. b. A compilation engagement. c.
A review engagement.
d. An assurance engagement. 23. Absolute assurance is provided for in a. An audit engagement. b. A compilation engagement.
c.
A review engagement.
d. None of the above. 24. Reasonable assurance is provided for in a. An audit engagement. b. A compilation engagement. c.
A review engagement.
d. None of the above. 25. When performing a compilation engagement, the accountant is re quired to a. Assess internal controls. b. Make inquiries of management to assess the reliability and completeness of the information provided. c.
Verify matters and explanations.
d. Obtain a general knowledge of the business and operations of the entity. 26. When an accountant is not independent of a client and is requested to perform a compilations of its financial statements, the accountant a. Is precluded from accepting the engagement. b. May accept the engagement and ne ed not disclose the lack of independence. c.
May accept the engagement and should disclose the lack of independence, but need not indicate the reason for the lack of independence.
d. May accept the engagement and should disclose both the lack of independence and the reason for the lack of independence. 27. What assurance is provided by the auditor in an agree d-upon procedures engagement? a. Reasonable b. Absolute c.
Moderate
d. No assurance 28. Which of the following procedures is not included in a re view engagement of an entity? a. Inquiries of management b. Inquiries regarding significant events subsequent to the balance sheet date c.
Any procedures designed to identify relationships among data that appear to be unusual
d. A study and evaluation of internal control 29. An engagement to perform agreed-upon procedures may involve the auditor in performing certain procedures concerning I.
Individual items of financial data.
II.
A single financial statement.
III.
A complete set of financial statements.
a. I and II only b. II and III only c.
I and III only
d. I, II and III 30. A summary of findings rather than assurance is most likely to be included in a / an a. Agreed-upon procedures report.
b. Compilation report. c.
Examination report.
d. Review report. 31. Independence is not a requirement for which of t he following engagements?
Compilation
Review
Agreed-upon Procedures
a.
No
Yes
No
b.
No
No
No
c.
Yes
No
Yes
d. Yes Yes Yes 32. A practitioner should accept an assurance engagement only if a. The subject matter is in the form of financial information. b. The criteria to be used are not available to the intended users. c.
The practitioner’s conclusion is to be contained in a wr itten report.
d. The subject matter is the responsibility of either the intended users or the practitioner. 33. A practitioner is associated with financial information when I.
The practitioner attaches a report t o that financial information.
II.
The practitioner consents to the use of his/her name in a professional connection.
a. I only b. II only c.
Either I or II
d. Neither I or II 34. The auditor is required to comply with all PSAs relevant to the audit of an entity’s financial statements. A PSA is relevant to the audit when I.
The PSA is in effect.
II.
The circumstances addressed by the PSA e xist.
a. I only b. II only c.
Either I or II
d. Neither I or II
(AT-8103) 1. It involves establishing the overall audit strategy for the engagement and developing an audit plan in order to reduce audit risk to an acceptably low level. a. Reporting
b. Planning c.
Field work
d. Organizing 2. Adequate planning of the audit work helps to ensure that A
B
C
D
areas of the audit
Yes
No
Yes
No
Potential problems are identified
Yes
Yes
Yes
No
The work is completed expeditiously
No
Yes
Yes
No
Appropriate attention is devoted to important
3. The auditor should plan the audit work so that the audit will be performed in an effective manner. The extent of planning will vary according to the A
B
C
D
Size of the entity
Yes
Yes
No
No
Complexity of the audit
Yes
No
Yes
No
Auditor’s experience with the entity and knowledge
Yes
Yes
Yes
No
of the business 4. Obtaining knowledge of the entity’s business is an important part of planning the audit work. The auditor’s knowledge of the entity’s business assists in the identification of events, transactions and practices which may have a material effect on the financial statements a. Both statements are true. b. Both statements are false. c.
True; false
d. False; True 5. According to PSA 300, the auditor may discuss elements of planning with those charged with governance and the entity’s management. The audit plan sets the scope, timing and direction of the audit guides the development of the more detailed overall audit strategy. The overall audit strategy is more detailed than the audit plan and includes the nature, timing and extent of audit procedures to be performed by engagement team members to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level. a. False; False; True b. True; True; False c.
True; False; False
d. False; True; False 6. Which of the following matters should be considered by the auditor in developing the overall audit strategy? a. Important characteristics of the entity, its business, its financial performance and its reporting requirements including changes since the date of the prior audit.
b. Conditions requiring special attention, such as the existence of related parties. c.
The setting of materiality levels for audit purposes.
d. All of the above. 7. A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified opinion has been issued is the a. Inherent risk b. Acceptable audit risk c.
Control risk
d. Detection risk 8. Which of the following audit risk components may be assessed in quantitative terms? Inherent Risk
Control Risk
Detection Risk
a.
Yes
No
Yes
b.
Yes
Yes
Yes
c.
No
No
No
d.
No
No
Yes
9. A measure of the auditor’s assessment of the likelihood that there are material misstatements in an account before considering the effect iveness of the client’s internal control is called a. Audit risk b. Detection risk c.
Inherent risk
d. Control risk 10. When inherent risk is high, there will need to be
A lower assessment of audit risk
More evidence accumulated by the auditor
a.
Yes
Yes
b.
No
No
c.
Yes
No
d.
No
Yes
11. It is the process designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of the entity’s objectives. a. Internal auditing b. Internal control c.
Business strategy
d. Accounting process
12. 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 r isk. 13. Which of the following are considered control environment elements? Commitment to Competence
Detection Risk
Organizational Structure
a.
No
Yes
No
b.
Yes
Yes
Yes
c.
Yes
No
Yes
d.
No
No
Yes
14. Which of the following statements concerning the relevance of various types of controls to a financial statement audit is correct? a. All controls are ordinarily relevant to a financial statement audit. b. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of financial reporting may also be relevant. c.
Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial statement audit, but other controls may also be relevant.
d. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken. 15. Under PSA 315, monitoring of controls is an internal control component that involves a process of assessing the quality of internal control performance over time. It involves assessing the design and operation of controls on a timely basis and taking necessary corrective actions. Monitoring of controls is accomplished through ongoing monitoring activities, separate evaluations, or a combination of the two. An entity’s ongoing monitoring activities often include a. Periodic reporting by the entity’s internal auditors about the functioning of internal control. b. Reviewing the purchasing function. c.
Periodic audits by the audit committee.
d. The audit of the annual financial statements. 16. An auditor should consider two key issues when obtaining an understanding of a client’s internal controls. These issues are a. The effectiveness and efficiency of the controls. b. The frequency and effectiveness of the controls. c.
The design and implementation of the controls.
d. The implementation and efficiency of controls.
17. 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 em ployee to open cash receipts and record t hose receipts.
d. Employees who authorize transactions should have recording responsibility for these transactions. 18. Authorizations can be either general or specific. Which of the following is not an example of a general authorization? a. Automatic reorder points for raw mate rials inventory. b. A sales manager’s authorization for a sales r eturn. c.
Credit limits for various classes of transactions.
d. A sales price list for merchandise. 19. When obtaining knowledge about an entity’s internal control, it is important for the auditor to consider the competence of its employees, because their competence bears directly and importantly upon the a. Cost-benefit relationship of internal control. b. Comparison of recorded accountability with assets. c.
Achievement of the objectives of internal control.
d. Timing of substantive tests to be performed. 20. Control activities are the policies and procedures that help ensure that management directives are carried out. These include activities relating to authorization, performance reviews, information processing, physical controls, and segregation of duties. There is proper segregation of duties when an individual who a. Records a transaction do not compare the accounting record of the asset with the asset itself. b. Authorizes a transaction records it. c.
Authorizes a transaction maintains custody of the asset that r esulted from the transaction.
d. Maintains custody of an asset has access to t he accounting records for the asset. 21. An auditor should obtain sufficient knowledge of an entity’s information system, including the related business processes relevant to financial reporting, to understand the a. Policies used to detect the concealment of fraud. b. Process used to prepare significant accounting e stimates. c.
Safeguards used to limit access to c omputer facilities.
d. Procedures used to assure proper authorization of transactions. 22. The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with a. Knowledge necessary to plan the audit.
b. A basis for modifying tests of controls. c.
Information necessary to prepare flowcharts.
d. Evidence to use in reducing detection risk. 23. In obtaining an understanding of internal control relevant to the audit, an auditor is required to obtain knowledge about the a. Effectiveness of controls that have been implemented. b. Consistency which controls is currently being applied. c.
Design of the controls pertaining to internal contr ol components.
d. Controls related to each class of t ransactions and account balance. 24. After considering a client’s internal controls, an auditor has concluded that it is well designed and is functioning as intended. Under these circumstances the auditor would most likely a. Perform tests of controls to the extent outlined in the audit program. b. Determine the control procedures that should prevent or detect errors and fraud. c.
Not increase the extent of predetermined substantive tests.
d. Determine whether transactions are recorded to permit preparation of financial statements in accordance with PFRS. 25. Audit evidence concerning proper segregation of duties normally is best o btained by a. Direct personal observation of the employee who applies control procedures. b. Making inquiries of co-workers about the employee who applies control procedures. c.
Preparation of a flowchart of duties performed and available personnel.
d. Inspection of third-party documents containing the initials of who applied control procedures. 26. In conducting an audit in accordance with PS As, the auditor is required to identify and assess the risks of material misstatement at the financial statement level, and at the assertion level for classes of transactions, account balances, and disclosures. Some of these risks, in the auditor’s judgment, require special audit consideration, such as those that involve fraud or complex transactions. Such risks are called a. Business risks b. Audit risks c.
Significant risks
d. Material risks 27. As a result of obtaining an understanding of an entity’s internal control system, the auditor may become aware of material weaknesses in the design or implementation of internal control. The auditor is required to communicate this matter to a. Those charged with governance or management b. Chief executive officer c.
Securities and Exchange Commission
d. Board of Accountancy
28. Which of the following controls most likely would provide reasonable assurance that all credit sales transactions of an entity are recorded? a. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by c ustomers. b. The accounting department supervisor independently reconciles, on a monthly basis, the accounts receivable subsidiary ledger to the accounts r eceivable control account. c.
The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
d. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances. 29. A sound internal control procedure should require that defective merchandise returned by customers be presented initially to the a. Receiving clerk b. Accounts receivable supervisor c.
Billing clerk
d. Shipping department supervisor 30. Macho Dancer Company uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the invoicing function allows goods to be shipped but not invoiced. The inadequate controls could cause what type of misstatement in each of the following accounts?
Revenues
Receivables
Inventories
a.
Understatement
Understatement
Understatement
b.
Overstatement
Overstatement
Understatement
c.
Understatement
Understatement
Overstatement
d.
Overstatement
Overstatement
Overstatement
31. Which of the following control activities in an entity’s revenue/receipt cycle would provide reasonable assurance that all billed sales are correctly posted to the accounts receivable ledger? a. Each shipment of goods on credit is supported by a prenumbered sales invoice. b. The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable control account in the general ledger. c.
Daily sales summaries are compared to daily postings to the accounts receivable ledger.
d. Each sales invoice is supported by a prenumbered shipping document. 32. The auditor’s primary objective in obtaining an understanding of the client’s controls over the purchasing function is to a. Investigate the recording of unusual transaction regarding raw materials.
b. Determine the reliability of financial reporting by the purchasing function. c.
Observe the annual physical count.
d. Ascertain that raw materials paid for are on hand. 33. Effective controls relevant to purchasing of raw materials should usually include all of the following, except a. Determining the need for the raw materials prior to preparing the purchase order. b. Systematic reporting of product changes t hat will affect raw materials. c.
Obtaining financial approval prior to making a commitment.
d. Obtaining third-party written quality and quantity reports prior to payment for the raw materials. 34. Which of the following controls is not usually performed in the accounts payable department? a. Indicating on the voucher the affected asset and expense account to be debited. b. Approving vouchers for payment by having an authorized employee sign the vouchers. c.
Accounting for unused prenumbered purchase orders and rec eiving reports.
d. Matching the vendor’s invoice with the related purchase requisition, purchase order, and receiving report. 35. The following are appropriate questions on an internal control questionnaire concerning purchase transactions, except a. Are all goods received in a centralized receiving department and counted, inspected, and compared with purchase orders on receipt? b. Are intact cash receipts deposited daily in the bank? c.
Are prenumbered purchase orders and r eceiving reports used and accounted for?
d. Are on approved purchase requisition and a signed purchase order required for each purchase? 36. Which of the following is of least concern to an auditor in assessing the risks of material misstatement? a. Signed checks are distributed by the controller to approved payees. b. Checks are signed by one person. c.
Cash receipts are not deposited intact daily.
d. Treasurer does not verify the names and addresses of check payees. 37. Which of the following is an essential control procedure to ensure the accuracy of the recorded inventory quantities? a. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with inventory policy. b. Testing inventory extensions. c.
Performing a gross profit test.
d. Establishing a cutoff for goods received and shipped. 38. Effective internal controls over inventories are designed and implemented for the following reasons, except a. Inventories typically represent a large component of an e ntity’s current assets. b. Inventories are the most liquid asset. c.
Inventories directly affect the financial performance of an entity.
d. Inventories typically represent a large portion of an entity’s total assets. 39. A client, a merchandising concern, has annual sales of P30,000,000 and a 40% gross profit rate. Tests reveal that 2% of the peso amount of purchases do not get into inventory because of breakage and inventory pilferage by employees. The company estimates that these losses could be reduced to 0.5% of purchases by designing and implementing certain controls costing approximately P350,000. Should all the controls be designed and implemented? a. Yes, regardless of cost-benefit considerations, because the situation involved employee theft. b. Yes, because the ideal system of internal control is the most extensive one. c.
No, because the cost of designing and implementing the added controls exceeds the projected savings.
d. Yes, because the expected benefits to be derived exceed the cost of the added controls. 40. Which of the following controls most likely would be implemented to achieve the production cycle control objective of maintaining accurate inventory records? a. Periodic inventory counts are used to adjust t he perpetual inventory records. b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum. c.
Perpetual inventory records are periodically compared with the net realizable value of individual inventory items.
d. Purchase requisitions, receiving reports, purchase orders, and vendor invoices are independently matched before payment is approved. 41. Which of the following is the most likely procedure an auditor would perform in obtaining an understanding of a manufacturing entity’s internal control for an inventory balances? a. Perform test counts if inventory when observing the entity’s physical count. b. Perform analytical procedures designed to identify significant cost variances. c.
Analyze the liquidity and turnover ratio of the inventory.
d. Review the entity’s description of inventory policies and procedures. 42. The following controls are appropriate for property, plant, and e quipment (PPE), except a. Written policies for capitalization and expenditure and review of application of depreciation methods. b. Disposal of fully depreciated PPE items. c.
Proper authority for acquisition and retirement of PPE items.
d. Detailed PPE records and physical controls over PPE items. 43. An internal control objective concerning a property, plant, and equipment (PPE) acquisitions is that they be recorded at the correct amounts and in the proper period, and properly classified. In which of the following conditions would an auditor most likely assess a high level risk of material misstatement? a. All material acquisitions of PPE are required to be approved by the board of directors. b. Most additions are self-constructed by the entity. c.
Recently acquired loans include covenants that preclude further plant acquisitions for 5 years.
d. Gross PPE increased 30% during the current period.
44. Which of the following controls would an entity most likely use in safeguarding against the loss of trading securities? a. The independent auditor traces all purchases and sales of trading securities through the subsidiary ledgers to the general ledger. b. Most additions are self-constructed by the entity. c.
Recently acquired loans include covenants that preclude further plant acquisitions for 5 years.
d. A designated member of the board of directors controls the securities in bank safe-deposit box. 45. The following controls are designed to protect investment se curities, except a. Investment securities should be properly controlled physically in order to prevent unauthorized usage. b. Custody over investment securities should be limited to personnel having record-keeping responsibility over the securities. c.
Securities should be registered in the entity’s name.
d. Access to securities should be vested in two individuals. 46. Effective controls over the payroll function may include a. Custody of rate authorization records by the supervisor of t he payroll department. b. Preparation of payroll transaction journal entries by an employee who reports to the supervisor of the personnel department. c.
Verification of agreement of job time tickets with the employee clock card hours by a payroll department employee.
d. Reconciliation of totals on job time tickets with job reports by employees responsible for those specific jobs. 47. Organizational independence in the processing of payroll can be achieved by segregating the functions of authorization, record-keeping, and custody of assets. Which one of the following functional separations is not required for internal control purposes? a. Separation of payroll preparation and paycheck distribution. b. Separation of personnel functions from payroll preparation. c.
Separation of timekeeping from payroll preparation.
d. Separation of payroll preparation and maintenance of year-to-date recor ds. 48. Which of the following situations represents an internal control weakness in the payroll department? a. The timekeeping function is independent of the payroll department. b. Payroll records are periodically reconciled with tax reports. c.
Paychecks are distributed by the employees’ immediate supervisor.
d. Payroll department personnel are rotated in their duties. 49. Which of the following personnel department procedures reduces the risk of payroll fraud and represents an appropriate responsibility for the department? a. Authorizing the addition or deletion of employees from the payroll. b. Authorizing overtime hours. c.
Collection and retention of unclaimed paychecks.
d. Distributing paychecks. 50. Employees of a manufacturing entity are often required to use time cards and job time tickets. Which of the following statements concerning the use o f these documents is incorrect? a. Time reported on job time ticke ts should be reconciled to time cards. b. Payroll should be calculated based on job time tickets. c.
Each employee should have only one time card.
d. An employee may have one or many job time tickets in a day.
