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AUDITING THEORY

MIDTERM EXAMINATION

WRITE THE LETTER IN CAPTIAL FORM FOR THE BEST ANSWER FOR EACH QUESTION ON YOUR ANSWER SHEET.

1. Professional judgment

A. should be exercised in planning and performing an audit of financial statements but need not be documented.
B. Can be used as justification for the decision made by the auditor that are not supported by the facts and circumstances of the
engagement.
C. Is necessary in the evaluation of managements judgments and in applying the entities applicable financial reporting framework
D. Is not used in making decisions about materiality and audit risk.
E. None of the above
F. All of the above

2. The primary reason for a financial statement audit by an independent CPA is to

A. Provide increased assurance to users as to the fairness of the financial statements


B. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered
C. Satisfy governmental regulatory requirements
D. Relieve management of responsibility for financial statements
E. None of the above
F. All of the above

3. The auditor shall agree to terms of the audit engagement with management or those charged with governance, as appropriate. The
agreed terms shall be recorded in a/an

A. engagement
B. Letter of audit inquiry
C. Management representation letter
D. Confirmation letter
E. None of the above
F. All of the above

4. Which of the following statements would least likely appear in an auditor‘s engagement letter?

A. Our audit will be made with the objective of our expressing an opinion on the financial statements.
B. We remind you that the responsibility for the preparation of financial statements including adequate disclosure is that of the
management of the entity.
C. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to
complete the engagement.
D. Our fees which will be billed as work progresses are based on the time required by the individuals assigned to the engagement less
out-of-pocket expenses.

5. Which of the following elements does not relate to audit quality?

A. Audit competence
B. Audit fees
C. Independence
D. Due diligence
E. None of the above
F. All of the above

6. In performing an operational audit the auditor primarily relies on which of the following procedures?

A. Physical inspection
B. Analytical procedures
C. Inquiry and Observation
D. Tracing and vouching
E. None of the above
F. All of the above

7. Which of the following statements is an incorrect description of the role of internal auditors

A. Internal auditor should review the means of minimizing risk and assist management processes.
B. Internal auditors should assess risk within the business operations and those from outside of the business.
C. Internal auditors should appraise the economy and efficiency with which resources are employed.
D. Internal auditors should have authority and responsibilities for the activities they audit.
E. None of the above
F. All of the above
AUDITING THEORY
MIDTERM EXAMINATION

8. Which of the following best describes the reason why an independent auditor report on financial statements?

A. A poorly designed internal control system may be in existence.


B. Different interests may exist between the company preparing the statements and the persons using the statements.
C. A misstatement of account balances exists and is generally corrected as the result of the independent auditor’s work for.
D. Management fraud may exist and it is more likely to be detected by independent auditors.
E. None of the above
F. All of the above

9. The purpose of an audit of financial statements is to

A. Relieve management or those charged with the governance of the responsibility for the preparation and presentation of the financial
statements.
B. Obtain an absolute level of assurance that the financial statements as a whole are free from material misstatements.
C. Enhance the degree of confidence of intended users in the financial statements.
D. Assure the future viability of the entity by expressing an opinion on the entity’s financial statements.
E. None of the above
F. All of the above

10. An objective of a performance audit is to determine whether an entity’s

A. Operational information is in accordance with government auditing standards.


B. Specific operating units are functioning economically and efficiently.
C. Financial statements present faity the results of operations.
D. Internal control is adequately operating as designed.
E. None of the above
F. All of the above

11. The term "fraud" refers to an intentional act by one or more individuals among management, those charged with governance,
employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Which statement is correct regarding
fraud?

A. Auditors make legal determinations of whether fraud has actually occurred.

B. Misstatement of the financial statements may not be the objective of some frauds.
C. Fraud involving one or more members of management or those charged with governance is referred to as “employee fraud”.
D. Fraud involving only employees of the entity is referred to as “management fraud”.
E. None of the above
F. All of the above

12. A financial statement audit:

A. Confirms that FS assertions are accurate


B. Guarantees that FS are presented fairly.
C. Assures that fraud had been detected.
D. Lends credibility to the FS.
E. None of the above
F. All of the above

13. which of the following is responsible for an entity's financial statements?

A. The entity’s management


B. The entity’s internal auditors
C. The entity's audit committee'
D. The entity’s board of directors
E. None of the above
F. All of the above

14. As used in auditing, which of the following statements best describes "assertions"?

A. Assertions are the representations of management as to the reliability of the information system
B. Assertions are the auditor’s findings to be communicated in the audit report.
C. Assertions are the representations of management as to the fairness of the financial statements.
D. Assertions are found only in the footnotes to the financial statements.
E. None of the above
F. All of the above

15. The assertions of occurrence means that:

A. All transactions and events that should have been recorded are recorded
B. Amounts and other data relating to recorded transactions and events have been recorded appropriately
C. Transactions and events that have been recorded have occurred, and pertain to the entity
AUDITING THEORY
MIDTERM EXAMINATION

D. Transactions and events have been recorded in the proper accounts


E. None of the above
F. All of the above

16. Physical examination of tangible assets is not a sufficient form of evidence when the auditor wants to determine the:

A. Existence of the Asset


B. Quality and description of the asset
C. Condition or Quality of the Asset
D. Ownership of the asset
E. None of the above
F. All of the above

17. Which of the following illustrates a perceived opportunity to commit fraud?

A. Individuals are living beyond their means.


B. Management is under Pressure, from sources outside or inside the entity, to achieve an expected (and perhaps unrealistic) earnings
target.
C. An individual believes internal control could be circumvented because the individual is in a position of trust or has knowledge of
specific weaknesses in the internal control system.
D. All of the above.
E. None of the above

18. Which of the following is an example of fraudulent financial reporting?

A. Company management changes inventory count tags and overstates ending inventory, while understating cost of good sol.
B. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating
expenses.
C. An employee steals inventory and the 'shrinkage" is recorded ln cost of goods sold.
D. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating
expense.
E. None of the above
F. All of the above

19. Which of the following statements describes why a properly designed and executed audit may not detect a material fraud?

A. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that
is concealed through collusion.
B. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning
material fraud.
C. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of
unintentional errors in the financial statements.
D. The auditor did not consider factors influencing audit risk for account balances that have pervasive effects on the financial statements
taken as a whole
E. None of the above
F. All of the above

20. The principal reason for an independent auditor to gather and evaluate audit evidence is to

A. Form an opinion on the financial statements


B. Evaluate management
C. Detect Fraud.
D. Evaluate Internal Control.
E. None of the above
F. All of the above

BONUS: Write your best accounting related joke.

-GOODLUCK!!-
AUDITING THEORY
MIDTERM EXAMINATION

KEY ANSWERS

1. C
2. A
3. A
4. C
5. B
6. C
7. D
8. B
9. C
10. B
11. B
12. D
13. A
14. C
15. C
16. D
17. C
18. B
19. A
20. A

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