AUD 1

Question 1

Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?
A. Selecting a sample of vendors’ invoices for comparison to receiving reports.
B. Coordinating the assistance of entity personnel in data preparation.
C. Discussing matters that may affect the audit with firm personnel responsible for non-audit
services to the entity.
D. Reading the current year interim financial statements.

Answer 1

A. Selecting a sample of vendors’ invoices for comparison to receiving reports.

Question 2

The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of
the
A. Factors that raise doubts about the auditability of the financial statements.
B. Operating effectiveness of internal controls.
C. Risk that material misstatements exist in the financial statements.
D. Possibility that the nature and extent of substantive tests may be reduced.

Answer 2

C. Risk that material misstatements exist in the financial statements.

Question 3

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, financial performance, and 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 may not be objective
with respect to its own financial statements.
D. It is a customary courtesy that all shareholders of a company receive an independent
report on management’s stewardship of the affairs of the business.

Answer 3

C. The opinion of an independent party is needed because a company may not be objective
with respect to its own financial statements.

Question 4

Sandy requested permission to communicate with the predecessor auditor and review certain
portions of the predecessor’s working papers. The prospective client’s refusal to permit this
will bear directly on Sandy’s 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.

Answer 4

D. Integrity of management.

Question 5

Early in an audit, the auditor discovered several fraud risk factors. Which of the following is
the least likely response of the auditor?
A. Substantive test procedures are moved away from the end of the client’s accounting
period so that differences can be more easily resolved.
B. The auditor should attempt to incorporate in the audit more elements of unpredictability.
C. The auditor should attempt to gather more audit evidence through physical inspection.
D. Analytical procedure should still be applied but at a more disaggregated level.

Answer 5

A. Substantive test procedures are moved away from the end of the client’s accounting
period so that differences can be more easily resolved.

Question 6

When an auditor has a question concerning a client’s ability to continue as a going concern,
the auditor considers management’s plans for dealing with the situation. That consideration
is most likely to include consideration of management’s plans to
A. decrease ownership equity.
B. dispose of assets.
C. increase expenditures on key products.
D. invest in derivative securities.

Answer 6

B. dispose of assets

Question 7

An abnormal fluctuation in gross profit that might suggest the need for extended audit
procedures for sales and inventories would most likely be identified in the planning phase of
the audit by the use of
A. tests of transactions and balances.
B. a preliminary review of internal control.
C. specialized audit programs.
D. analytical procedures.

Answer 7

D. analytical procedures.

Question 8

SAXOPHONE COMPANY acquires a new manufacturing equipment on January 1, 2023, on
installment basis. The deferred payment contract provides for a down payment of P300,000
and an 8-year note for P3,104,160. The note is to be paid in 8 equal annual installment
payments of P388,020, including 10% interest. The payments are to be made on December
31 of each year, beginning December 31, 2023. The equipment has a cash price equivalent
of P2,370,000. Saxophone’s financial year-end is December 31.
What is the acquisition cost of the equipment?
A. P3,404,160
B. P2,804,160
C. P3,104,160
D. P2,370,000

Answer 8

D. P2,370,000

Question 9

Which of the following statements correctly defines the term reasonable assurance?
A. A substantial level of assurance to allow an auditor to detect a material misstatement.
B. A significant level of assurance to allow an auditor to detect a material misstatement.
C. An absolute level of assurance to allow an auditor to detect a material misstatement.
D. A high, but not absolute, level of assurance to allow an auditor to detect a material
misstatement.

Answer 9

D. A high, but not absolute, level of assurance to allow an auditor to detect a material
misstatement.

Question 10

A client is presenting comparative (two-year) financial statements. Which of the following is
correct concerning reporting responsibilities of a continuing auditor?
A. The auditor should issue one audit report that is on both presented years.
B. The auditor should issue two audit reports, one on each year.
C. The auditor should issue one audit report, but only on the most recent year.
D. The auditor may issue either one audit report on both presented years, or two audit
reports, one on each year

Answer 10

A. The auditor should issue one audit report that is on both presented years.

Question 11

An audit team has concluded that inventory is highly susceptible to misappropriation and that
a potential misstatement would be material to the financial statements. How should the audit
team address the audit procedures to the increased risk?
A. Review the client’s control procedures over the safeguarding of inventory, and perform a
physical inventory count on the last day of the current year.
B. Review the client’s control procedures over the safeguarding of inventory, incorporate the
use of substantive analytical procedures, and develop an expectation.
C. Review the client’s control procedures over the safeguarding of inventory, but do not
modify substantive procedures over inventory.
D. Review the client’s control procedures over the safeguarding of inventory, and perform
physical inventory counts throughout the current year.

Answer 11

A. Review the client’s control procedures over the safeguarding of inventory, and perform a
physical inventory count on the last day of the current year.

Question 12

Which of the following procedures regarding notes payable would an accountant most likely
perform during a review engagement?
A. Confirming the year-end outstanding note payable balance with the lender.
B. Examining records indicating proper authorization of the notes payable.
C. Making inquiries of management regarding maturities, interest rate, and collateral.
D. Documenting control procedures for payment calculations of the notes’ principal and
interest.

Answer 12

C. Making inquiries of management regarding maturities, interest rate, and collateral.

Question 13

Which of the following statements is correct concerning statistical sampling in tests of
controls?
A. As the population size increases, the sample size should increase proportionately.
B. Deviations from specific internal control procedures at a given rate ordinarily result in
misstatements at a lower rate.
C. There is an inverse relationship between the expected population deviation rate and the
sample size.
D. In determining tolerable rate, an auditor considers detection risk and the sample size.

Answer 13

B. Deviations from specific internal control procedures at a given rate ordinarily result in
misstatements at a lower rate.

Question 14

An examination of a financial forecast is a professional service that involves
A. compiling or assembling a financial forecast that is based on management’s assumptions.
B. limiting the distribution of the accountant’s report to management and the board of
directors.
C. assuming responsibility to update management on key events for one year after the
report’s date.
D. evaluating the preparation of a financial forecast and the support underlying
management’s assumptions.

Answer 14

D. evaluating the preparation of a financial forecast and the support underlying
management’s assumptions.

Question 15

Which of the following factors would most likely influence the form and extent of the auditor’s
documentation of an entity’s internal control environment?
A. Complexity and size of the entity.
B. Amount of audit work performed at an interim date.
C. Amount of audit work performed by the internal auditor.
D. Results of verifying material account balances.

Answer 15

A. Complexity and size of the entity.

Question 16

Which of the following statements is correct regarding an accountant’s working papers?
A. The accountant owns the working papers and generally may disclose them as the
accountant sees fit.
B. The client owns the working papers but the accountant has custody of them until the
accountant’s bill is paid in full.
C. The accountant owns the working papers but generally may not disclose them without
the client’s consent or a court order.
D. The client owns the working papers but, in the absence of the accountant’s consent, may
not disclose them without a court order.

Answer 16

C. The accountant owns the working papers but generally may not disclose them without
the client’s consent or a court order.

Question 17

If an audit firm discovers threats to independence with respect to an audit engagement, the
Code of Ethics indicates that the firm should
A. immediately resign from the engagement.
B. notify the appropriate regulatory body.
C. document the issue.
D. evaluate the significance of the threats and apply appropriate safeguards to reduce them
to an acceptable level.

Answer 17

D. evaluate the significance of the threats and apply appropriate safeguards to reduce them
to an acceptable level.

Question 18

Assessing control risk at a low level most likely would involve
A. performing more extensive substantive tests with larger sample sizes than originally
planned.
B. reducing inherent risk for most of the assertions relevant to significant account balances.
C. changing the timing of substantive tests by omitting interim-date testing and performing
the tests at year-end.
D. identifying specific controls relevant to specific assertions.

Answer 18

D. identifying specific controls relevant to specific assertions.

Question 19

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses
control risk higher than appropriate. The most likely explanation for this situation is that:
A. The deviation rate in the auditor’s sample is less than the tolerable rate, but the deviation
rate in the population exceeds the tolerable rate.
B. The deviation rates of both the auditor’s sample and the population exceed the tolerable
rate.
C. The deviation rates of both the auditor’s sample and the population are less than the
tolerable rate.
D. The deviation rate in the auditor’s sample exceeds the tolerable rate, but the deviation
rate in the population is less than the tolerable rate.

Answer 19

D. The deviation rate in the auditor’s sample exceeds the tolerable rate, but the deviation
rate in the population is less than the tolerable rate.

Question 20

A requirement that working papers be reviewed by the supervisor, and any deficiencies be
discussed with the preparer is an example of a quality control procedure in the area of
A. acceptance and continuance of client relationships and specific engagements.
B. engagement performance.
C. human resources.
D. relevant ethical requirements

Answer 20

B. engagement performance.

Question 21

Using laptop computers in conducting financial statement audits may affect the methods used
to review the work of staff assistants because
A. Supervisory personnel may not have an understanding of the capabilities and limitations
of computers.
B. Working paper documentation may not contain readily observable details of calculations.
C. The overall audit objectives may differ.
D. Documenting the supervisory review may require assistance of management services
personnel.

Answer 21

B. Working paper documentation may not contain readily observable details of calculations.

Question 22

In which circumstance will the auditor not consider the need to modify the report?
A. The client’s legal counsel is requested to advise whether a material act is legal or illegal
but refuses to do so.
B. The auditor concludes that the effect of an illegal act creates substantial doubt about the
entity’s ability to continue as a going concern.
C. The auditor concludes that the effect of an illegal act, taken alone or with similar acts, is
material in amount and has not been properly accounted for or disclosed in the financial
statements.
D. All of the circumstances require modification of the auditor’s report.

Answer 22

D. All of the circumstances require modification of the auditor’s report.

Question 23

Which of the following procedures would be appropriate to test the existence assertion during
an audit of accounts receivable?
A. Trace transactions from the subsidiary ledger to the general ledger.
B. Send confirmations to customers.
C. Trace a sample of invoices to recording in the general ledger.
D. Determine that all shipments before year end are recorded as sales.

Answer 23

B. Send confirmations to customers.

Question 24

During an audit of an entity’s financial statements, an auditor should perform tests of controls
to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant
controls if
A. the auditor does not presume that client management has committed fraud.
B. more financial documentation is available through tests of controls.
C. substantive procedures alone cannot provide sufficient appropriate audit evidence.
D. the auditor does not intend to rely on the operating effectiveness of controls.

Answer 24

C. substantive procedures alone cannot provide sufficient appropriate audit evidence.

Question 25

Which of the following statements ordinarily is not included among the written client
representations made by the chief executive officer and the chief financial officer?
A. “Sufficient evidential matter has been made available to the auditor to permit the issuance
of an unmodified opinion.”
B. “There are no unasserted claims or assessments that our lawyer has advised us are
probable of assertion and must be disclosed.”
C. “We have no plans or intentions that may materially affect the carrying value or
classification of assets and liabilities.”
D. “No events have occurred subsequent to the balance sheet date that would require
adjustment to, or disclosure in, the financial statements.”

Answer 25

A. “Sufficient evidential matter has been made available to the auditor to permit the issuance
of an unmodified opinion.”