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Auditing Theory - Preboard # 1

50 Questions

By Cpama2ster2010

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This is a MOCK BOARD Exam composed of 50 questions. Please assess yourself truthfully.
Take this quiz only once so that you will not be banned from taking again. Provide as your
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Questions and Answers
1. Which of the following best describes high level of assurance?
A It refers to the professional accountant having obtained evidence based on

. procedures agreed upon between the practitioner and the intended users to be
satisfied that findings be reported to the intended users.
B It refers to the professional accountant having obtained sufficient external and internal
. appropriate evidence to be satisfied that the subject matter is plausible in the
circumstances.
C It refers to the professional accountant having obtained sufficient appropriate
. evidence to conclude that the subject matter conforms in all material respects with
identified suitable criteria.
D It refers to the professional accountant having obtained sufficient evidence to
. conclude that he has no knowledge of any required modifications to be made in the
financial statements in order for them to conform of prescribed criteria.
2. Which statement is incorrect regarding an engagement to perform agreed-upon procedures?
A An auditor is engaged to carry out those procedures of an audit nature to which the
. auditor
and the entity and any appropriate third parties have agreed and to report on factual
findings.
B The recipients of the report must form their own conclusions from the report by the
. auditor.
C The report is restricted to those parties that have agreed to the procedures to be
. performed.
D.The report on factual findings is expressed in the form of negative assurance.
3. Which of the following engagements provides third parties the highest level of assurance
about the clients financial statements?
A.
Audit
B.
Review
C.
Agreed-upon procedures
D.
Compilation
4. In which of the following situations can third parties assume responsibility of the auditor
regarding association with financial information?
A. When the auditor attaches a report to that information.
B When the auditor consents to the use of the auditor's name in a professional
. connection.
C.
Either a or b.
D.
Neither a nor b.
5. Which statement is incorrect regarding assurance engagement risk?
A Engagement risk is the risk that the practitioner will express an inappropriate
. conclusion that the subject matter conforms in all material respects with suitable
criteria.

B All components of the engagement risk model will be significant for all assurance
. engagements.
C The extent to which the practitioner considers the relevant components of
. engagement risk will be affected by the engagement circumstances.
D Business risk is not part of engagement risk and does not affect the application of
. Philippine Standard on Assurance Engagements.
6. A concept relating to the accumulation of the audit evidence necessary for the auditor to
conclude that there are no material misstatements in the financial statements taken as a whole.
A.
Reasonable assurance
B.
Positive assurance
C.
Moderate assurance
D.
Negative assurance
7. Which statement is incorrect regarding the external auditors consideration of the work of
internal auditing?
A When the external auditor intends to use specific work of internal auditing, the
. external
auditor need not evaluate and test that work to confirm its adequacy for the external
auditor's purposes.
B The external auditor should consider the activities of internal auditing and their effect,
. if any, on external audit procedures.
C The external auditor should obtain a sufficient understanding of internal audit activities
. to assist in planning the audit and developing an effective audit approach.
D During the course of planning the audit, the external auditor should perform a
. preliminary
assessment of the internal audit function when it appears that internal auditing is
relevant to the external audit of the financial statements in specific audit areas.
8. The independent auditor lends credibility to clients financial statements by
A Maintaining a clear-cut distinction between managements representations and the
. auditors representation.
B. Testifying under oath about clients financial statements.
C Stating in the auditors management letter that the examination was made in
. accordance with generally accepted auditing standards.
D. Attaching an auditors opinion to the clients financial statements.
9. Which of the following is responsible for the fairness of representations made in financial
statements?
A.
The independent auditor.
B.
The internal auditor.
C.
The client's management.
D.
The audit committee.

10. The exposure period allowed for each exposure draft of PSA to be considered by the
organizations and persons to whom it is sent for comment is generally
A.
Four months
B.
Three months
C.
Two months
D.
Six months
11. Which statement is incorrect regarding the pronouncements of ASPC?
A The PSAs and Interpretations may also have application, as appropriate, to other
. related activities of auditors.
B PSAs contain basic principles and essential procedures (identified in bold type black
. lettering) together with related guidance in the form of explanatory and other material.
C. PSAs need only be applied to material matters.
D. The Interpretations have the same authority as the PAPSs.
12. The following should be occupied only by a duly registered CPA, except
A Any position in any business or company in the private sector which requires
. supervising the recording of financial transactions.
B Any position in any business or company in the private sector which requires
. preparation of financial statements.
C Any position in any business or company in the private sector which requires
. coordinating with the internal auditors for the audit of financial statements.
D The position of the dean that supervises the BSA program of an educational
. institution.
13. Which of the following is not represented in the Auditing and Assurance Standards Council?
A.
Board of Accountancy
B.
Bangko Sentral ng Pilipinas
C.
Bureau of Internal Revenue
D. Securities and Exchange Commission
14. A study, appraisal, or review by the BOA or its duly authorized representatives, of the quality
of audit of financial statements through a review of the quality control measures instituted by
an Individual CPA, Firm or Partnership of CPAs engaged in the practice of public
accountancy.
A.
Peer review
B.
Quality review
C.
Analytical review
D.
Administrative review
15. Emong, CPA is applying for renewal of his professional license. He is exempted from the
CPE requirements
A.
If he is at least 65 years old.
B If he is working abroad and he has been out of the country for at least two years

. immediately prior to the date of renewal.

C.
Either a or b.
D.
Under no circumstances.
16. The following statements relate to RA 9298. Which statement is true?
A The Professional Regulation Commission has the authority to remove any member of
. the Board of Accountancy for negligence, incompetence, or any other just cause.
B. Insanity is not a ground for proceeding against a CPA.
C A person shall be considered to be in the professional practice of accounting if, as an
. officer in a private enterprise, he makes decisions requiring professional accounting
knowledge.
D After three years, subject to certain conditions, the Board of Accountancy may order
. the reinstatement of a CPA whose certificate of registration has been revoked.
17. There is a need for assurance that all services obtained from a professional accountant are
carried out to the highest standards of performance. This statement relates to
A.
Credibility
B.
Professionalism
C.
Quality of Services
D.
Confidence
18. Indicate the normal pattern of development for a professional accountant. I. A period of work
experience. II. High standard of general education. III. Specific education, training and
examination in professionally relevant subjects
A.
I, II, III
B.
II, III, I
C.
III, II, I
D.
II, I, III
19. A partner or employee of the firm serving as an officer or as a director on the board of an
assurance client will most likely create
A.
Intimidation threat
B.
Self-review threat
C.
Advocacy threat
D.
Familiarity threat
20. Which of the following least likely create a self-review threat?
A A former officer, director or employee of the assurance client serve as a member of
. the assurance team.
B A director, an officer or an employee of the assurance client in a position to exert
. direct and significant influence over the subject matter of the assurance engagement
has been a member of the assurance team or partner of the firm.
C Assisting an audit client in matters such as preparing accounting records or financial
. statements.

D. A firm, or network firm, provides internal audit services to an audit client.

21. This process may include, particularly in the case of large complex audits, requesting
personnel not otherwise involved in the audit to perform certain additional procedures.
A.
Direction
B.
Supervision
C.
Review
D.
All of these
22. Which of the following is least likely a factor that affects the extent of quality control
procedures?
A.
The size of the firm.
B. The type of clients that the firm serves.
C.
The number of practice offices.
D.
The nature of the practice.
23. Which statement is incorrect regarding the auditors responsibility to consider fraud and error
in the audit of financial statements?
A. The auditor is entitled to accept records and documents as genuine.
B. The auditor is may be held responsible for the prevention of fraud and error.
C The auditor should consider the risk of material misstatements in the financial
. statements resulting from fraud or error.
D The risk of not detecting a material misstatement resulting from error is lower than the
. risk of not detecting a material misstatement resulting from fraud.
24. Which statement is incorrect regarding fraud risk factors?
A Using the auditors knowledge of the business, the auditor may identify events or
. conditions that provide an opportunity, a motive or a means to commit fraud, or
indicate that fraud may already have occurred.
B A missing document, an out of balance general ledger, or an analytical procedure that
. does not make sense may be the result of circumstances other than fraud.
C Fraud risk factors indicate the existence of fraud because they often have been
. present in circumstances where frauds have occurred.
D The presence of fraud risk factors may affect the auditors assessment of inherent risk
. or control risk.
25. Cash receipts from sales on account have been misappropriated. Which of the following acts
would conceal this defalcation and least likely to be detected by an auditor?
A.
Understating the sales journal.
B. Overstating the accounts receivable control account.
C. Overstating the accounts receivable subsidiary ledger.
D. Understating the cash receipts journal.
26. Example of the type of information that may come to the auditor's attention that may indicate
that noncompliance with laws or regulations has occurred most likely include

A Payments for specified services or loans to consultants, related parties, employees or

. government employees.
B Payments for goods or services made to the country from which the goods or
. services originated.
C. Purchasing at prices significantly above or below market price.
D Sales commissions or agent's fees that appear reasonable in relation to those
. ordinarily paid by the entity or in its industry or to the services actually received.
27. When the auditor knows that an illegal act has occurred, the auditor must
A.
Issue an adverse opinion.
B.
Withdraw from the engagement.
C. Report it to the proper government authorities.
D
Consider the effects on the financial statements, including the adequacy of disclosure.
.
28. Which statement is correct regarding the auditors communications of audit matters with
those charged with governance?
A The auditors communications of matters include all audit matters of governance
. interest.
B An audit of financial statements is designed to identify all matters that may be relevant
. to those charged with governance.
C The auditors communications with those charged with governance may be made
. orally or in writing.
D.
None of the above.
29. It is in the interest of both client and auditor that the auditor sends an engagement letter,
preferably before
A. The performance of substantive testing.
B. The commencement of the engagement.
C.
The completion of audit.
D. Before the issuance of audit report.
30. When a change in the type of engagement from higher to lower level of assurance is
reasonably justified, the report based on the revised engagement (choose the incorrect one)
A.Should not contain a separate paragraph that refers to the original engagement.
B Should not refer to any procedures that may have been performed in the original
. engagement.
C. Should qualify the opinion due to scope limitation.
D. Omits reference to the original engagement.
31. A basic tool used by the auditor to control the audit work and review the progress of the
audit.
A.
Audit program
B.
Progress flowchart

C.
D.

Engagement letter.
Time and Expense Summary
32. Which of the following is not normally a planning procedure?
A Assess the conclusions reached and the evaluation of the overall financial statement
. presentation through the use analytical procedures.
B. Consider the risk of the existence of related-party transactions.
C. Consider the nature of the audit reports expected to be rendered.
D. Identify items likely to require adjustments.
33. An understanding of the clients business and industry and knowledge about the companys
operations are essential for doing an adequate audit. For a new client, most of this
information is obtained
A.
From the predecessor auditor.
B.
From the SEC.
C.
At the clients premises.
D.
From the permanent file.
34. The managements assessment of the entitys ability to continue as a going concern covers a
period of:
A. Not longer than 12 months from balance date.
B. At least 12 months from the balance sheet date.
C. Not longer than 12 months from the date of audit report.
D. At least 12 months from the date of audit report.
35. Which of the following would an auditor most likely use in determining the auditors
preliminary judgment about materiality?
A. The results of the internal control questionnaire.
B. The contents of the management representation letter
C. The entitys annualized interim financial statements.
D. The anticipated sample size of the planned substantive tests.
36. How can the audit program best be described at the beginning of the audit process?
A.
Tentative.
B.
Comprehensive.
C.
Conclusive.
D.
Optional.
37. Which of the following is appropriate about risk assessment?
A Detection risk is eliminated if an auditor were to examine 100 percent of the account
. balance or class of transactions
B There is an inverse relationship between detection risk and the combined level of
. inherent and control risk.
C The assessed level of inherent and control risk can be sufficiently low, thus resulting
. to eliminating the need for substantive tests.

D Audit risk may be more appropriately determined by assessing inherent and control
. risk separately.
38. Which of the following most directly illustrates inherent risk?
A. Inadequate segregation of duties
B.Confirmation of receivables by an auditor fails to detect a material misstatement.
C ABC Company, a client company, lacks sufficient working capital to continue
. operations.
D A client fails to discover employee fraud on a timely basis because bank accounts are
. not reconciled monthly.
39. Which of the following is a valid statement about the assessment of control risk?
A There is a positive relationship between detection risk and the combined level of
. inherent and control risk.
B The auditor should consider the assessed levels of inherent and control risks in
. determining the nature, timing, and extent of substantive procedures required to
eliminate audit risk.
C Misstatements discovered by conducting substantive procedures may cause the
. auditor to modify the previous assessment of control risk.
D The assessed level of inherent and control risks can be sufficiently low in order to
. eliminate the auditors need to perform substantive tests on some assertions.The
assessed level of inherent and control risks can be sufficiently low in order to
eliminate the auditors need to perform substantive tests on some assertions.
40. The auditor should perform which of the following as risk assessment procedure?
A.
Analytical procedures
B.
Confirmation
C.
Recalculation
D.
Reperformance
41. Which of the following is least likely a potential benefit of effectiveness and efficiency for an
entitys internal control that IT provides?
A. Enhance the timeliness, availability, and accuracy of information.
B Enhance the ability to monitor the performance of the entitys activities and its policies
. and procedures.
C. Eliminate the risk that controls will be circumvented.
D Consistently apply predefined business rules and perform complex calculations in
. processing large volumes of transactions or data.
42.
Control environment
A Consists of the policies and procedures that help ensure that management directives
. are carried out.
B Includes the governance and management functions and the attitudes, awareness,

. and actions of those charged with governance and management concerning the
entitys internal control and its importance in the entity.
C Is the entitys process for identifying business risks relevant to financial reporting
. objectives and deciding about actions to address those risks, and the results thereof.
D Consists of the procedures and records established to initiate, record, process, and
. report entity transactions (as well as events and conditions) and to maintain
accountability for the related assets, liabilities, and equity.
43. Which of the following situations will normally result to increase in the extent of audit
procedures?
A. Decrease in the risk of material misstatement.
B. Decrease in the degree of assurance the auditor plans to obtain.
C.
Decrease in materiality level.
D.
None of the above.
44. The auditor should determine overall responses to address the risks of material misstatement
at the financial statement level. Such responses most likely include
A. Assigning less experienced staff.
B Emphasizing to the audit team the need to maintain professional skepticism in
. gathering and evaluating audit evidence.
C. Performing predictable further audit procedures.
D.Performing substantive procedures at an interim date instead of at period end.
45. Which statement is incorrect regarding the nature, timing and extent of tests of controls?
A Those controls subject to testing by performing inquiry combined with inspection or
. reperformance ordinarily provide more assurance than those controls for which the
audit evidence consists solely of inquiry and observation.
B If the auditor plans to rely on controls that have not changed since they were last
. tested, the auditor should test the operating effectiveness of such controls at least
once in every third audit.
C The length of time period between retesting controls is a matter of professional
. judgment, but cannot exceed three years.
D The more the auditor relies on the operating effectiveness of controls in the
. assessment of risk, the greater is the extent of the auditors tests of controls.
46. Which of the following statements is correct regarding the auditors primary objective in
performing procedures to obtain an understanding of the internal control structure?
A The primary objective is to provide the auditor with an evaluation of the consistency of
. application of managements policies.
B The primary objective is to provide the auditor with knowledge necessary for audit
. planning.
C The primary objective is to provide the auditor with evidential matter to use in
. assessing inherent risk.

D The primary objective is to provide the auditor with a basis for modifying tests of
. controls.
47. Which of the following would most likely indicate internal control deficiency for the revenue
cycle (including cash receipts)?
A. Credit is granted by a credit department.
B Cash receipts received in the mail are received by a secretary with no recordkeeping
. responsibility.
C.
Cash is deposited weekly.
D.Cash disbursements over P100,000 does not require two signatures on the check.
48. The following statements relate directly to test of controls except
A.May involve comparisons of financial information with nonfinancial information.
B Setting the planned assessed level of control risk at the maximum will eliminate these
. tests.
C.Often performed concurrently with obtaining an understanding of internal control.
D Inquire of the accounts receivable clerk regarding the effectiveness of the computer
. program in updating accounts receivable balances.
49. After obtaining an understanding of an entitys internal controls, an auditor may assess
control risk at the maximum for some assertions because the auditor:
A. Believes internal control activities are unlikely to be effective.
B. Determines that internal control is not well-documented.
C. Performs tests of controls to restrict detection of risk to an acceptable level.
D. Identifies control activities that are likely to prevent material misstatements.
50. The report of the service organization auditor on the suitability of design (Type A) will not
ordinarily include an opinion by the service organization auditor that:
A The description of the service organization's accounting and internal control systems,
. ordinarily prepared by the management of the service organization is accurate.
B. The systems' controls have been placed in operation.
C The accounting and internal control systems are operating effectively based on the
. results from the tests of control.
D The accounting and internal control systems are suitably designed to achieve their
. stated objectives.
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