AUDITING AND ASSURANCE PRINCIPLE

Question 1

The audit process is
A. A special application of the scientific method of inquiry.
B. Regulated by the AICPA.
C. The only service a CPA is allowed to perform by law.
D. Performed only by CPAs

Answer 1

A. A special application of the scientific method of inquiry.

Question 2

Which one of the following best describes the attest process?
A. Proving the accuracy of the books and records
B. Gathering evidence about specific and known assertions.
C. Assisting management in the successful operations of the company.
D. Assembling and filing tax returns and related supplemental
information.

Answer 2

B. Gathering evidence about specific and known assertions.

Question 3

Which of the following is/are the categories of assertions for audit of financial statements?
I. Assertions about classes of transactions and events for the period under audit
II. Assertions about account balances at period end
III. Assertions about presentation and disclosure
IV. Assertions about financial statements and correspondence to GAAP
A. I and II
B. III and IV
C. I, II, and III
D. I, II, III, and IV

Answer 3

A. I and II

Question 4

Evaluate the following statements.
Statement 1: The audit process is a structured series of steps taken by the auditor to achieve his audit objectives.
Statement 2: Assertions relating to classes of transactions generally relate to line items presented in the statement of financial performance while assertions relating to account balances generally relate to line items presented in the statement of financial position.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 4

C. Both statements are correct

Question 5

Evaluate the following statements.
Statement 1: Management has the responsibility for the preparation and presentation of the face of financial statements which allows the auditor to prepare the related disclosures.
Statement 2: Management has the responsibility to provide the auditor with unrestricted access to any information maintained by them.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 5

D. Both statements are incorrect

Question 6

Assertions about transactions and events include the following, except
A. Presentation
B. Occurrence
C. Accuracy, valuation, and allocation
D. Classification

Answer 6

C. Accuracy, valuation, and allocation

Question 7

Assertions about transactions and events include the following, except
A. Completeness
B. Occurrence
C. Existence
D. Rights and obligations

Answer 7

D. Rights and obligations

Question 8

Assertions about account balances at the period-end include classification, which means that
A. Assets, liabilities, and equity interests exist.
B. Assets, liabilities, and equity interests have been recorded in the proper accounts.
C. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
D. All assets, liabilities, and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included.

Answer 8

B. Assets, liabilities, and equity interests have been recorded in the proper accounts.

Question 9

The assertion of accuracy means that:
A. Transactions and events have been recorded in the proper accounts
B. All transactions and events that should have been recorded are recorded
C. Transactions and events have been recorded in the correct accounting period
D. Amounts and other data relating to recorded transactions and events have been recorded appropriately

Answer 9

D. Amounts and other data relating to recorded transactions and events have been recorded appropriately

Question 10

If a short-term note payable is included in the accounts payable balance on the financial statement, there is a violation of the:
A. Completeness
B. Cutoff
C. Existence
D. Classification

Answer 10

D. Classification

Question 11

Statement 1: The audit process may be subdivided into two sub-phases namely, the investigative phase and reporting phase.
Statement 2: Audit evidence serves as the basis for expressing an opinion required by the audit of financial statements.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 11

C. Both statements are correct

Question 12

Acts to be performed to obtain audit evidence
A. Audit standards
B. Audit program
C. Audit procedures
D. Audit strategy

Answer 12

C. Audit procedures

Question 13

Procedures to be performed in an audit of financial statements are determined by
1. Auditor
II. Management
III. Those charged with governance
A. I only
B. I and II only
C. II and III only
D. I, II, and III

Answer 13

A. I only

Question 14

Which of the following describes further audit procedures?
I. These procedures test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.
II. These procedures are used to detect material misstatements at the assertion level.
III. These procedures include tests of details of classes of transactions, account balances, and disclosures, and analytical procedures.
IV. These are procedures for obtaining an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels.
A. I, II and III
B. I, III and IV
C. II, III and IV
D. I, II, III and IV

Answer 14

A. I, II and III

Question 15

Audit procedures performed to obtain an understanding of the entity and its environment, including its internal control, and to assess the risks of material misstatements at the financial statement and assertion levels.
A. Risk assessment procedures
B. Tests of control
C. Substantive procedures
D. Analytical procedures

Answer 15

A. Risk assessment procedures

Question 16

Audit procedures to test the operating effectiveness of controls in preventing or detecting and correcting material misstatements at the assertion level.
A. Risk assessment procedures
B. Tests of control
C. Substantive procedures
D. Analytical procedures

Answer 16

B. Tests of control

Question 17

An auditor may achieve audit objectives related to particular assertions by:
A. Adhering to a system of quality control.
B. Increasing the level of detection risk.
C. Performing analytical procedures.
D. Preparing audit documentation.

Answer 17

C. Performing analytical procedures.

Question 18

The following are the specific procedures performed in an audit of financial statements, except
A. Inspection
B. Reperformance
C. Recomputation
D. Analytical procedures

Answer 18

C. Recomputation

Question 19

Which of the following statements appropriately describes inquiry?
A. Physical examination of the assets.
B. Consists of looking at a process or procedures being performed by others.
C. Examining records or documents, whether internal or external, in paper form, electronic form, or other media.
D. Consists of seeking information from knowledgeable persons, both financial and non-financial, within the entity or outside the entity.

Answer 19

D. Consists of seeking information from knowledgeable persons, both financial and non-financial, within the entity or outside the entity.

Question 20

Which of the following statements appropriately describes reperformance?
A. The process of obtaining a representation of information or an existing condition directly from a third party. It is a specific type of inquiry.
B. Auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.
C. Evaluation of financial information made by study of plausible relationships among both financial and non-financial data.
D. Consists of checking the mathematical accuracy of documents or records.

Answer 20

B. Auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.

Question 21

Auditing includes both a(an)
A. Documentation process and an evaluation process.
B. Evaluation process and reporting process.
C. Investigative process and a reporting process.
D. Documentation process and reporting process.

Answer 21

C. Investigative process and a reporting process.

Question 22

Set the following phases in proper order:
i. Pre-Engagement
ii. Internal Controls
iii. Evidence-Gathering
iv. Planning
v. Post-Audit Responsibilities
vi. Reporting
A. i, ii, iii, iv, v, vi
B. i, iv, ii, iii, vi, v
C. i, iv, iii, ii, v, vi
D. i, iv, ii, iii, v, vi

Answer 22

B. i, iv, ii, iii, vi, v

Question 23

An auditor understands the client’s business primarily to
A. Make suggestions on how to improve internal control
B. Assess the level of control risk
C. Develop a questioning attitude during the audit
D. Identify transactions that may impact the financial statements

Answer 23

D. Identify transactions that may impact the financial statements

Question 24

Statement 1: Preliminary engagement activities help eliminate the likelihood of being associated with a client whose management lacks integrity.
Statement 2: If the results of the study and evaluation of internal control support its operating effectiveness, the auditor proceeds with the completion of the audit and expression of opinion.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 24

D. Both statements are incorrect

Question 25

Which of the following does not relate to further audit procedures?
A. To minimize the likelihood of being associated with a client whose management lacks integrity
B. To assess the different risks associated with the audit to determine the nature, timing, and extent of further audit procedures necessary to be performed
C. To establish a basis for reliance on internal controls, in determining the nature, timing, and extent of audit procedures to be performed
D. To ascertain the degree of correspondence between the financial statements prepared by the client’s management and the financial reporting framework

Answer 25

A. To minimize the likelihood of being associated with a client whose management lacks integrity

Question 26

When an independent auditor is approached to perform an audit for the first time, he or she should make inquiries of the predecessor auditor. Inquiries are necessary because the predecessor may be able to provide the successor with information that will assist the successor in determining whether
A. The company rotates auditors
B. The engagement should be accepted
C. The predecessor’s work should be used
D. In the predecessor’s opinion, control risk is less than high

Answer 26

B. The engagement should be accepted

Question 27

An understanding of a client’s business and industry and knowledge about operations are essential for performing an adequate audit. For a new client, most of this information is obtained:
A. From the predecessor auditor.
B. From the securities and exchange commission.
C. From the permanent file.
D. At the client’s premises.

Answer 27

D. At the client’s premises.

Question 28

If a company’s external auditor expresses an unqualified opinion as a result of the audit of the company’s financial statements, readers of the audit report can assume that
A. The external auditor found no fraud
B. The company is financially sound, and the financial statements are accurate
C. Internal control is effective
D. All material disagreements between the company and the auditor about the application of accounting principles were resolved in the satisfaction of the external auditor.

Answer 28

D. All material disagreements between the company and the auditor about the application of accounting principles were resolved in the satisfaction of the external auditor.

Question 29

Auditing standards require that the audit report must be titled and that the title must:
A. indicate if the auditor is a CPA.
B. include the word “independent”.
C. indicate if the auditor is a proprietorship, partnership, or incorporated.
D. indicate the type of audit opinion issued

Answer 29

B. include the word “independent”.

Question 30

Statement 1: It is necessary to review the conclusion reached in earlier phases of the audit process before forming the overall opinion.
Statement 2: The auditor communicates the conclusion reached in an auditor’s management letter.
Statement 3: Assessing and evaluating the quality of services delivered by the engagement team is commonly performed after the issuance of the audit report.
A. Only one statement is correct
B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

Answer 30

B. Only two statements are correct

Question 31

Preliminary engagement activities include:
A. Setting materiality.
B. Evaluating internal controls.
C. Determining engagement team requirements.
D. Assessing audit risk at the account balance level.

Answer 31

C. Determining engagement team requirements.

Question 32

In deciding whether to accept or reject an engagement, the auditor’s firm should consider the following,
I. Its competence and independence
II. Its ability to serve the client properly
III. The integrity of the prospective client’s management
A. I and II
B. II and III
C. I and III
D. I, II and III

Answer 32

D. I, II and III

Question 33

Ultimately, the decision about whether or not an auditor is independent must be made by
A. Auditor
B. Public
C. Client’s management
D. Audit committee

Answer 33

A. Auditor

Question 34

On an audit engagement performed by a CPA firm with one office, at the minimum, knowledge of the relevant professional accounting and auditing standards should be held by:
A. The auditor with final responsibility for the audit.
B. All professionals working on the audit.
C. All professionals working on the audit and the partner in charge of the CPA firm.
D. All professionals working in the office.

Answer 34

A. The auditor with final responsibility for the audit.

Question 35

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should
A. Engage financial experts familiar with the nature of the business entity.
B. Obtain 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 cannot be issued.

Answer 35

B. Obtain knowledge of matters that relate to the nature of the entity’s business.

Question 36

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to
A. Enable the CPA firm to attest to the integrity of the client management.
B. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
C. Minimize the likelihood of association with clients whose management lacks integrity.
D. Anticipate before performing any field work whether an unmodified opinion can be expressed.

Answer 36

C. Minimize the likelihood of association with clients whose management lacks integrity.

Question 37

Auditors must not only decide whether to accept new clients; they also should periodically review their list of current clients and remove those clients the firm no longer wants to be associated with. Reasons for discontinuing clients might include the following, except:
A. Difficulty in working with client personnel.
B. Inability to negotiate an acceptable increase in the audit fee.
C. Evidence indicating a client’s management has integrity.
D. Client needs specialized services the current firm is unable or unwilling to provide.

Answer 37

C. Evidence indicating a client’s management has integrity.

Question 38

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
A. The prospective client has already completed its physical inventory count.
B. The CPA lacks an understanding of the prospective client’s operations and industry.
C. The CPA is unable to review the predecessor auditor’s audit
documentation.
D. The prospective client is unwilling to make all financial records available to the CPA.

Answer 38

D. The prospective client is unwilling to make all financial records available to the CPA.

Question 39

An auditor may most likely decide not to accept a new audit engagement when
A. The prospective client’s system is highly automated and the auditor lacks understanding of the system.
B. The prospective client’s CEO is also the chairman of the governing board.
C. The CPA has knowledge of the prospective client’s disregard for its responsibilities concerning internal controls.
D. The CPA has knowledge that the prospective client has too many related-party transactions.

Answer 39

C. The CPA has knowledge of the prospective client’s disregard for its responsibilities concerning internal controls.

Question 40

Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s financial statements?
A. The complexity of the accounting system.
B. The adequacy of the accounting records.
C. The existence of related-party transactions.
D. The operating effectiveness of control procedures.

Answer 40

B. The adequacy of the accounting records.

Question 41

When one auditor succeeds another, the proposed auditor should request the
A. Client to instruct its attorney to send a letter of audit inquiry concerning the status of the prior year’s litigation, claims, and assessments.
B. Previous auditor to submit a list of internal control weaknesses that have not been corrected.
C. Client to authorize the previous auditor to respond to inquiries.
D. Previous auditor to update the prior year’s report to the date of the change of auditors.

Answer 41

C. Client to authorize the previous auditor to respond to inquiries.

Question 42

Communication with a predecessor auditor is initiated by:
A. Management
B. The audit committee of the board of directors
C. The successor auditor
D. The chair of the board of directors

Answer 42

C. The successor auditor

Question 43

What is the responsibility of a successor auditor to communicate with the predecessor auditor in connection with a prospective new client?
A. The successor auditor has no responsibility to contact the predecessor auditor.
B. The successor auditor should obtain permission from the prospective client to contact the predecessor auditor.
C. The successor auditor should contact the predecessor auditor if the client authorizes contact.
D. The successor auditor need not contact the predecessor if the successor is aware of all available relevant facts.

Answer 43

B. The successor auditor should obtain permission from the prospective client to contact the predecessor auditor.

Question 44

If permission from the client to discuss its affairs with the proposed auditor is denied by the client, the predecessor auditor should:
A. Keep silent about the denial
B. Disclose the fact that the permission to disclosure is denied by the client
C. Disclose adequately to the proposed auditor all non-compliance made by the client
D. Seek legal advice before responding to the proposed auditor

Answer 44

B. Disclose the fact that the permission to disclosure is denied by the client

Question 45

A proposed auditor makes specific inquiries of the previous auditor, prior to engagement acceptance, to
A. Have knowledge of whether PFRS has been consistently applied
B. Inquire or significant subsequent events with respect to the prior period
C. Gain an understanding of the reasons for the change of auditor
D. Compare audit fees

Answer 45

C. Gain an understanding of the reasons for the change of auditor

Question 46

Which of the following should an auditor obtain from the previous auditor prior to accepting an audit engagement?
A. Analysis of balance sheet accounts.
B. Analysis of income statement accounts.
C. All matters of continuing accounting significance.
D. Facts that might bear on the integrity of management.

Answer 46

D. Facts that might bear on the integrity of management.

Question 47

A firm has obtained information that would have caused it to decline an engagement had the information been available earlier. Actions available to the auditor would include the following, except:
A. Reporting the information and its implications to the person/s who appointed the CPA
B. Withdraw from the engagement
C. Withdraw from the client relationship
D. Issue a disclaimer of opinion

Answer 47

D. Issue a disclaimer of opinion

Question 48

Prior to acceptance of the engagement, a CPA firm is not likely to
A. Make inquiries of the previous auditor
B. Make inquiries of the proposed client’s legal counsel
C. Review financial statements of proposed client
D. Review the personnel practices of the proposed client

Answer 48

D. Review the personnel practices of the proposed client

Question 49

Statement 1: The successor auditor has no responsibility to contact the predecessor auditor.
Statement 2: The successor auditor should obtain permission from the prospective client to contact the predecessor auditor.
Statement 3: An auditor may accept an engagement that is beyond his capacity and capability provided that relevant training and expertise will be obtained during the performance of the audit.
A. Only one statement is correct
B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

Answer 49

B. Only two statements are correct

Question 50

It is the use by management of an acceptable financial reporting framework (e.g. PFRS) in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted.
A. Engagement letter
B. Written representation
C. Preconditions for an audit
D. Fair presentation

Answer 50

C. Preconditions for an audit

Question 51

According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms would need to be recorded in a(n)
A. Client representation letter
B. Memo placed in the permanent section of the working papers
C. Engagement letter
D. Comfort letter

Answer 51

C. Engagement letter

Question 52

The primary purpose of the engagement letter is to:
A. Satisfy the requirements of the CPA’s liability insurance policy
B. Remind management that the primary responsibility for the financial statements rests with management
C. Provide a written record of the agreement with the client as to the services to be provided
D. Provide a starting point for the auditor’s preparation of the preliminary audit program

Answer 52

C. Provide a written record of the agreement with the client as to the services to be provided

Question 53

An engagement letter is best described as
A. A letter from the company to the auditors specifying management’s expectations for completion of the audit on a timely basis and the fees.
B. A letter from the auditors to company management specifying that management is responsible for the financial statements, and the auditors will issue an opinion on the financial statements.
C. A letter from the auditors to company management that specifies the responsibilities of both the company and the auditors in completing the audit and the timing for its completion.
D. A letter from the Board of Directors’ audit committee to the auditor that indicates the auditor has been engaged to perform the audit and the fees to be paid.

Answer 53

C. A letter from the auditors to company management that specifies the responsibilities of both the company and the auditors in completing the audit and the timing for its completion.

Question 54

Engagement letters are widely used in practice for:
A. Audits only
B. Related services only
C. Assurance engagements only
D. Professional engagements of all types

Answer 54

D. Professional engagements of all types

Question 55

The form and content of audit engagement letters may vary for each client, but they would generally include reference to:
I. The objective and scope of the audit of the financial statements
II. The responsibilities of the auditor and management
III. Identification of the applicable financial reporting framework for the preparation of the financial statements
A. I and II
B. II and III
C. I and II
D. I, II and III

Answer 55

D. I, II and III

Question 56

The auditor may also wish to include in the engagement letter the following, except
A. Basis in which fees are computed and any billing arrangements
B. Expectation of receiving representation letter
C. Acknowledgment of management of terms of agreement
D. Description of specific procedures to be performed during the audit

Answer 56

D. Description of specific procedures to be performed during the audit

Question 57

Which of the following statements would be least likely to appear in an auditor’s engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses.
B. Management is responsible for making all financial records and related information available to us.
C. Our engagement is subject to the risk that material errors or fraud, if they exist, will not be detected.
D. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagements.

Answer 57

D. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagements.

Question 58

Which of these circumstances would normally lead to a change in engagement?
A. Restrictions imposed by management
B. Auditor’s inability to gather evidence
C. Financial statements departing from GAAP
D. Misunderstanding as to the nature of the engagement

Answer 58

D. Misunderstanding as to the nature of the engagement

Question 59

Which of the following statements is/are correct?
Statement 1: On recurring audits, the auditor should consider whether circumstances require the terms of the engagement to be revised and whether there is a need to remind the client of the existing terms of engagement.
Statement 2: The auditor should send a new engagement letter each year to an established client.
A. Only Statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 59

A. Only Statement 1 is correct

Question 60

If a change in the type of engagement from higher to lower of assurance is not justified, the auditor should:
A. Qualify the report on the original engagement.
B. Continue with the revised engagement, but make an explicit reference
to the original engagement.
C. Refuse to agree to management’s request on the change of engagement and continue with the original engagement.
D. Withdraw from the engagement.

Answer 60

C. Refuse to agree to management’s request on the change of engagement and continue with the original engagement.

Question 61

Which of the following is not a financial statement assertion relating to account balances?
A. Completeness
B. Existence
C. Rights and obligations
D. Valuation and competence

Answer 61

D. Valuation and competence

Question 62

Assertions about account balances at the period-end include completeness, which means that
A. Assets, liabilities, and equity interests have been recorded in the proper accounts.
B. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
C. All assets, liabilities, and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included.
D. Assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described.

Answer 62

C. All assets, liabilities, and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included.

Question 63

Statement 1: Risk assessment procedures are performed to obtain an understanding of the entity to identify and assess risks of material misstatements at the financial statement and assertion levels.
Statement 2: Substantive procedures are designed to detect material misstatements at the financial statement level.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 63

A. Only Statement 1 is correct

Question 64

Statement 1: Observation consists of looking at a process or procedure being performed by others.
Statement 2: Confirmation is a specific type of inquiry to obtain a representation of information or an existing condition from management.
Statement 3: Recalculation pertains to the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.
A. Only one statement is correct
B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

Answer 64

B. Only two statements are correct

Question 65

The four major steps in conducting an audit are:
1. Testing internal controls
II. Audit report
III. Planning
IV. Testing transactions and balances
The proper sequence of applying the above steps is:
A. I, IV, III, II
B. II, III, IV, I
C. III, I, IV, II
D. III, IV, I, II

Answer 65

C. III, I, IV, II

Question 66

Statement 1: The auditor will not ordinarily initiate discussion with the audit committee concerning the details of the procedures the auditor intends to apply.
Statement 2: Auditing standards require that the audit report must be titled and that the title must include the word “independent.”
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 66

C. Both statements are correct

Question 67

Which is not considered in deciding whether to accept an engagement?
A. Competence of the audit team
B. Ethical considerations
C. Potential client’s reputation
D. Type of opinion to be issued

Answer 67

D. Type of opinion to be issued

Question 68

A CPA who has never audited a commercial bank
A. May not accept such an engagement.
B. May accept the engagement only if the accounting firm specializes in the audit of commercial banks.
C. May accept the engagement after attaining a suitable level of understanding of the transactions and accounting practices unique to commercial banking.
D. May accept the engagement because training as a CPA transcends unique industry characteristics

Answer 68

C. May accept the engagement after attaining a suitable level of understanding of the transactions and accounting practices unique to commercial banking.

Question 69

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
A. The details of most recorded transactions are not available after a specified period of time.
B. Internal control activities requiring the segregation of duties are subject to management override.
C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
D. Management has a reputation for consulting with several accounting firms about significant accounting issues.

Answer 69

C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.

Question 70

Before accepting an engagement to audit a new client, a CPA is required to obtain
A. An understanding of the prospective client’s industry and business.
B. The prospective client’s signature on the engagement letter.
C. A preliminary understanding of the prospective client’s control environment.
D. The prospective client’s consent to make inquiries of the previous auditor, if any

Answer 70

D. The prospective client’s consent to make inquiries of the previous auditor, if any

Question 71

Which of the following best describes the purpose of the engagement letter?
A. The engagement letter relieves the auditor of some responsibility for the exercise of due care.
B. By clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve misunderstandings between the CPA and client regarding the precise nature of the work to be performed and the type of report to be issued.
C. The engagement letter conveys to management the detailed steps to be applied in the audit process.
D. The engagement letter should be signed by both the client and the CPA and should be used only for independent audits.

Answer 71

B. By clearly defining the nature of the engagement, the engagement letter helps to avoid and resolve misunderstandings between the CPA and client regarding the precise nature of the work to be performed and the type of report to be issued.

Question 72

An engagement letter should ordinarily include information on the objectives of the engagement and
I. CPA’s responsibilities
II. Client’s responsibilities
III. Limitations of engagement
A. I and II
B. II and III
C. I and III
D. I, II, and III

Answer 72

D. I, II, and III

Question 73

Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a new engagement letter to the client?
A. A recent change in partner and/or staff involved in the audit engagement.
B. A change in the terms of engagement.
C. A recent change in client management.
D. A significant change in the nature or size of the client’s business.

Answer 73

A. A recent change in partner and/or staff involved in the audit engagement.

Question 74

An auditor’s engagement letter most likely would include a statement regarding:
A. Management’s responsibility to provide certain written representations to the auditor.
B. Conditions under which the auditor may modify the preliminary judgment about materiality.
C. Internal control activities that would reduce the auditor’s assessment of risk.
D. Materiality matters that could modify the auditor’s preliminary assessment of fraud risk.

Answer 74

A. Management’s responsibility to provide certain written representations to the auditor.

Question 75

Which of the following normally signs the engagement letter for an audit of a public company?
A. Corporate treasurer
B. Chief financial officer
C. Chairman of the board of directors
D. Audit committee

Answer 75

D. Audit committee

Question 76

Early appointment of the auditor enables preliminary work to be performed by the auditor, which benefits the client in that it permits the examination to be performed in
A. a more efficient manner.
B. a more thorough manner.
C. accordance with quality control standards.
D. accordance with generally accepted auditing standards

Answer 76

D. accordance with generally accepted auditing standards

Question 77

Which of the following helps prevent misunderstandings in the early phases of the audit process?
A. Auditor involvement in the preparation of the client’s financial records.
B. Client involvement in determining specific audit planning issues.
C. A preliminary meeting conference with the client to discuss fees, timing, client assistance, and related issues.
D. Involvement of the client’s internal auditors in setting materiality levels and determining the scope of audit tests.

Answer 77

C. A preliminary meeting conference with the client to discuss fees, timing, client assistance, and related issues.

Question 78

One of the first things that the auditor will do after accepting a new client is:
A. Communicate with the predecessor auditor.
B. Contact the client’s attorney to discover legal obligations.
C. Study the client’s internal control structure.
D. Tour the client’s facilities.

Answer 78

D. Tour the client’s facilities.

Question 79

While performing procedures for the audit engagement, the auditor was asked to change the engagement to review. Assuming the change is not justifiable, which of these statements does not concur?
A. The auditor continues to perform audit procedures.
B. The auditor withdraws from the audit engagement.
C. The auditor communicates the matter to an appropriate level of management.
D. The auditor provides negative assurance on the new report.

Answer 79

D. The auditor provides negative assurance on the new report.

Question 80

An auditor who, before the completion of the engagement, is requested to change the engagement to one which provides a lower level of assurance, should
A. withdraw and consider whether there is any obligation to report to other parties the circumstances necessitating the withdrawal.
B. Issue a report that includes reference to the original engagement and any procedures that may have been performed in the original engagement.
C. Not agree to a change of engagement where there is reasonable justification for doing so.
D. Consider the change reasonable if it relates to information that is incorrect, incomplete, or otherwise unsatisfactory

Answer 80

C. Not agree to a change of engagement where there is reasonable justification for doing so.

Question 81

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. Fieldwork
D. Organizing

Answer 81

B. Planning

Question 82

Which of the following statements is/are correct?
Statement 1: The client should plan the audit work so that the audit will be performed in an effective manner.
Statement 2: The auditor should conduct the audit with an attitude of professional skepticism.
Statement 3: The auditor should develop and document an overall audit plan describing the scope and conduct of the audit.
A. I and II
B. II and III
C. I and III
D. I, II, and III

Answer 82

B. II and III

Question 83

The auditor’s plan should
I. Precede action
II. Be flexible
III. Be cost-beneficial
A. I and II
B. II and III
C. I and III
D. I, II and III

Answer 83

D. I, II and III

Question 84

Adequate planning benefits the audit of financial statements in several ways, including the following, except
A. Helping the auditor to devote appropriate attention to less important areas of the audit
B. Helping the auditor identify and resolve potential problems on a timely basis
C. Helping the auditor properly organize and manage the audit engagement so that it is performed in an effective and efficient manner
D. Assisting in the selection of engagement team members with appropriate levels of capabilities and competence to respond to anticipated risks, and the proper assignment of work to them

Answer 84

A. Helping the auditor to devote appropriate attention to less important areas of the audit

Question 85

Which of the following statements is incorrect?
A. The auditor should plan the audit so that the engagement will be performed in an effective manner.
B. Planning an audit involves establishing the overall audit strategy for the engagement and developing the audit plan, in order to reduce audit risk to an acceptably low level.
C. Planning involves the engagement partner and other key members of the engagement team to benefit from their experience and insight and to enhance the effectiveness and efficiency of the planning process.
D. Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the finalization of the audit program.

Answer 85

D. Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the finalization of the audit program.

Question 86

Evaluate the following statements.
Statement 1: According to PSA 300, the auditor may discuss elements of planning with those charged with governance and the entity’s management.
Statement 2: The audit plan sets the scope, timing, and direction of the audit and guides the development of a more detailed overall audit strategy.
Statement 3: 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. Only one statement is correct
B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

Answer 86

A. Only one statement is correct

Question 87

An initial (first-time) audit requires more audit time to complete than a recurring audit. One of the reasons for this is that
A. New auditors are usually assigned to an initial audit.
B. Predecessor auditors need to be consulted.
C. The client’s business, industry, and internal control are unfamiliar to the auditor and need to be carefully studied.
D. A larger proportion of customer accounts receivable needs to be confirmed on an initial audit.

Answer 87

C. The client’s business, industry, and internal control are unfamiliar to the auditor and need to be carefully studied.

Question 88

An auditor should design the audit plan so that
A. All material transactions will be selected for substantive testing.
B. Substantive tests prior to the balance sheet date will be minimized.
C. The audit procedures selected will achieve specific audit objectives.
D. Each account balance will be tested under either the test of controls or the test of transactions.

Answer 88

C. The audit procedures selected will achieve specific audit objectives.

Question 89

In developing an overall audit strategy, an auditor should consider:
A. Whether the allowance for sampling risk exceeds the achieved upper precision limit.
B. Findings from substantive tests performed at interim dates.
C. Whether the inquiry of the client’s attorney identifies any litigation, claims, or assessments not disclosed in the financial statements.
D. Preliminary evaluations of materiality, audit risk, and internal control.

Answer 89

D. Preliminary evaluations of materiality, audit risk, and internal control.

Question 90

The extent of audit planning will vary according to the
1. Size of the entity
II. Complexity of the audit
III. Auditor’s experience with the entity and knowledge of the business
A. I and II
B. II and III
C. I and III
D. I, II and III

Answer 90

D. I, II and III

Question 91

Statement 1: Risk assessment procedures enable the auditor to understand the entity and its environment and identify and assess risks of material misstatement.
Statement 2: Risk assessment procedures help in specifically identifying the applicable further audit procedures to respond to identified risks.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 91

C. Both statements are correct

Question 92

Risk assessment procedures include the following procedures, except
A. Inspection
B. Reperformance
C. Observation
D. Analytical procedures

Answer 92

B. Reperformance

Question 93

Much of the information obtained by the auditor’s inquiries is obtained from management and those responsible for financial reporting. However, the auditor may also obtain information through inquiries of others within the entity and other employees with different levels of authority. This includes:
I. Those charged with governance
II. Internal audit personnel
III. External legal counsel
IV. Accounting department personnel
A. I, II, and III
B. I, II, and IV
C. II, III and IV
D. I, III and IV

Answer 93

B. I, II, and IV

Question 94

Statement 1: Physical verification of the entity’s premises and plant facilities is considered an inspection procedure.
Statement 2: Analytical procedures are seldom used for planning an audit engagement because they are substantive procedures.
A. Only Statement 1 is correct
C. Both statements are correct
B. Only Statement 2 is correct
D. Both statements are incorrect

Answer 94

A. Only Statement 1 is correct

Question 95

Statement 1: Analytical procedures enable the auditor to conclude if the fluctuations and relationships in the entity’s financial information make sense.
Statement 2: Industry benchmarks or averages may be used to develop expectations regarding financial statements.
Statement 3: Only planning and concluding analytical review are required to be performed in an audit.
A. Only one statement is correct
B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

Answer 95

A. Only one statement is correct

Question 96

Which of the following statements is not correct with respect to analytical procedures?
A. Auditing standards emphasize the need for auditors to develop and use expectations.
B. Analytical procedures must be performed throughout the audit.
C. Analytical procedures may be performed at any time during the audit.
D. Analytical procedures use comparisons and relationships to assess whether account balances appear reasonable.

Answer 96

B. Analytical procedures must be performed throughout the audit.

Question 97

Analytical procedures are performed in the planning stage because
A. These procedures replace tests of balances and transactions that exceed scoping materiality.
B. The study of financial ratios is an acceptable alternative to investigate unusual fluctuations that lead to audit efficiency
C. Statistical tests of financial information may lead to the discovery of material errors in the financial statements
D. Plausible relationships among information are expected and continue in the absence of opposing conditions

Answer 97

D. Plausible relationships among information are expected and continue in the absence of opposing conditions

Question 98

Which of the following is correct concerning the use of analytical procedures?
A. Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption.
B. Analytical procedures must be used throughout the audit.
C. Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor’s attention so that the auditor’s understanding of the business is improved.
D. Analytical procedures are performed by studying plausible relationships between financial and non-financial data.

Answer 98

D. Analytical procedures are performed by studying plausible relationships between financial and non-financial data.

Question 99

The major concern when using nonfinancial data in analytical procedures is the:
A. accuracy of nonfinancial data.
B. source of nonfinancial data.
C. type of non-financial data.
D. presence of multiple sources of non-financial data.

Answer 99

A. accuracy of nonfinancial data.

Question 100

In using the information on the statement of cash flows while obtaining an understanding of a profitable, growing company, which of the following would ordinarily be least surprising to an auditor?
A. Decreases in accounts payable.
B. Decreases in accounts receivable.
C. Negative cash flows from investing.
D. Negative operating cash flows.

Answer 100

C. Negative cash flows from investing.

Question 101

If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is:
A. Material.
B. Insignificant.
C. Significant.
D. Relevant.

Answer 101

A. Material.

Question 102

The preliminary judgment about materiality is the ____ amount by which the auditor believes the statements could be misstated and still not affect the decisions of reasonable users.
A. Minimum
B. Maximum
C. Mean average
D. Median average

Answer 102

B. Maximum

Question 103

Auditors are responsible for determining whether financial statements are materially misstated, so upon discovering a material misstatement they must bring it to the attention of:
A. no one in particular.
B. regulators.
C. the audit firm’s managing partner.
D. the client’s management.

Answer 103

D. the client’s management.

Question 104

The definition of materiality emphasizes what class of financial statement users?
A. Regulators.
B. Informed investors.
C. Reasonable people.
D. Potential investors.

Answer 104

C. Reasonable people.

Question 105

When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to as:
A. the materiality ranges.
B. the error ranges.
C. tolerable materiality.
D. tolerable misstatement

Answer 105

D. tolerable misstatement

Question 106

The preliminary judgment about materiality and the amount of audit evidence accumulated are
A. directly related.
B. inversely related.
C. unrelated
D. inversely related

Answer 106

D. inversely related

Question 107

Which of the following statements concerning materiality is incorrect?
A. Aggregate materiality thresholds are a function of the auditor’s preliminary judgments concerning audit risk.
B. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality threshold.
C. The smallest aggregate level of errors or fraud that could be considered material to any one of the financial statements is referred to as a “materiality threshold.”
D. Materiality thresholds may change between the planning and review stages of the audit. These changes may be due to quantitative and/or qualitative factors.

Answer 107

B. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality threshold.

Question 108

In considering materiality for planning purposes, Jamil, the auditor, believes that misstatements aggregating P100,000 would have a material effect on an entity’s Statement of Income and Expenses, but that misstatements would have to aggregate P80,000 to materially affect the Statement of Financial Position. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:
A. P80,000
B. P90,000
C. P100,000
D. P180,000

Answer 108

C. P100,000

Question 109

It is a threshold calculated as a certain percentage of overall materiality in order to capture any uncorrected misstatements, the total amount of which may exceed overall materiality.
A. Overall materiality
B. Scoping materiality
C. Performance materiality
D. Tolerable misstatement

Answer 109

C. Performance materiality

Question 110

tatement 1: The benchmark to be used in determining materiality could either be an element or component of the financial statements
Statement 2: In practice, the benchmark commonly used for profit-oriented companies is profit from continuing operations before tax (PBT).
Statement 3: Specific materiality is the amount set by the auditor for particular elements or components, well though higher than overall materiality could influence decision-making.
A. Only one statement is correct
B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

Answer 110

B. Only two statements are correct

Question 111

An audit approach that allocates proportionately more audit resources to areas of high audit risk is referred to as a
A. Controls-based approach
B. Substantive approach audit.
C. Data-driven approach
D. Risk-based approach

Answer 111

D. Risk-based approach

Question 112

These are audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels.
A. Risk assessment procedures controls
B. Further audit procedures
C. Test of the effectiveness of
D. Preliminary analytical procedures

Answer 112

A. Risk assessment procedures controls

Question 113

Some account balances, such as those for retirement benefits and finance leases, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is referred to as
A. Audit risk
B. Detection risk
C. Control risk
D. Inherent risk

Answer 113

D. Inherent risk

Question 114

Which of the following is least likely to be considered when assessing inherent risk?
A. Estimation transactions
B. Nonroutine transactions
C. Expected effectiveness of controls
D. Susceptibility to theft

Answer 114

C. Expected effectiveness of controls

Question 115

Inherent risk factors pertain to characteristics of events or conditions that affect susceptibility to misstatement, whether due to fraud or error, of an assertion about a class of transactions, account balance, or disclosure, before consideration of controls. Such factors may be qualitative or
quantitative, and include the following (choose the exception):
A. Complexity
B. Change
C. Objectivity
D. Uncertainty

Answer 115

C. Objectivity

Question 116

It is easier and more common to implement increased evidence accumulation for inherent risk than for acceptable audit risk because:
A. inherent risk can usually be isolated to specific accounts.
B. inherent risk applies to the entire audit.
C. acceptable audit risk and sample sizes are set statistically.
D. acceptable audit risk does not impact the amount of evidence that must be accumulated.

Answer 116

A. inherent risk can usually be isolated to specific accounts.

Question 117

In an audit area that has a lower inherent risk, it would be prudent to:
A. increase the amount of audit evidence gathered.
B. assign more experienced staff to that area.
C. increase the tolerable misstatement for the area.
D. expand planning procedures.

Answer 117

C. increase the tolerable misstatement for the area.

Question 118

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are:
A. Elements of audit risk while detection risk is not.
B. Changes at the auditor’s discretion while detection risk is not.
C. Considered at the individual account balance level while detection risk is not.
D. Functions of the client and its environment while detection risk is not.

Answer 118

D. Functions of the client and its environment while detection risk is not.

Question 119

While assessing the risks of material misstatement auditors identify risks, relate risks to what could go wrong, consider the magnitude of risks, and
A. Assess the risk of misstatements due to illegal acts.
B. Consider the complexity of the transactions involved.
C. Consider the likelihood that the risks could result in material misstatements.
D. Determine materiality levels.

Answer 119

C. Consider the likelihood that the risks could result in material misstatements.

Question 120

Statement 1: Risks of material misstatement are assessed at the assertion level in order to determine the nature, timing, and extent of further audit procedures necessary to obtain sufficient appropriate audit evidence.
Statement 2: For the identified risks of material misstatement at the assertion level, a separate assessment of inherent risk and control risk is not required but highly encouraged.
Statement 3: The auditor’s process of risk identification and assessment is iterative and dynamic.
A. Only one statement is correct
B. Only two statements are correct
C. All statements are correct
D. All statements are incorrect

Answer 120

B. Only two statements are correct

Question 121

The risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated is:
A. Analytical procedures risk
B. Audit risk
C. Control risk
D. Inherent risk

Answer 121

B. Audit risk

Question 122

Audit risk has three components: inherent risk, control risk, and detection risk. Which of the following statements is correct?
A. Detection risk is a function of the efficiency of an audit procedure.
B. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
C. The risk that material misstatement will not be prevented or detected on a timely basis by internal control can be reduced to zero by effective controls.
D. The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor.

Answer 122

A. Detection risk is a function of the efficiency of an audit procedure.

Question 123

Which of the following is least likely to be considered a financial statement audit risk factor?
A. Management operating and financing decisions are dominated by top management.
B. A new client with no prior audit history.
C. The rate of change in the entity’s industry is rapid.
D. The profitability of the entity relative to its industry is inconsistent.

Answer 123

B. A new client with no prior audit history.

Question 124

Which of the following is not a potential effect of an auditor’s decision that a lower acceptable audit risk is appropriate?
A. More evidence is accumulated.
B. Less evidence is accumulated.
C. Special care is required in assigning experienced staff.
D. Review of audit documentation is performed by personnel not assigned to the engagement.

Answer 124

B. Less evidence is accumulated.

Question 125

Which component of the audit risk model may be expressed in qualitative terms?
I. Inherent Risk
II. Control Risk
III. Detection Risk
A. I and II
B. II and III
C. I and III
D. I, II and III

Answer 125

D. I, II and III

Question 126

The risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as:
A. Account risk.
B. Control risk.
C. Detection risk.
D. Inherent risk.

Answer 126

C. Detection risk.

Question 127

Which of the following is not an example of a likely adjustment in the auditors’ overall audit approach when significant risk is found to exist?
A. Apply increased professional skepticism about material transactions.
B. Increase the assessed level of detection risk.
C. Assign personnel with particular skills to areas of high risk.
D. Obtain increased evidence about the appropriateness of management’s selection of accounting principles.

Answer 127

B. Increase the assessed level of detection risk.

Question 128

When the combined assessed level of inherent and control risks is high, detection risk is set
A. Low
B. High
C. At zero
D. At the same level

Answer 128

A. Low

Question 129

Which of the following conditions supports an increase in detection risk?
A. Internal control over cash receipts is excellent.
B. Internal control over shipping, billing, and recording of sales revenue is weak.
C. Application of analytical procedures reveals a significant increase in sales revenue in December, the last month of the fiscal year.
D. Study of the business reveals that the client recently acquired a new company in an unrelated industry.

Answer 129

A. Internal control over cash receipts is excellent.

Question 130

In a financial statement audit, audit risk represents the probability that
A. Internal control fails and the failure is not detected by the auditor’s procedures.
B. The auditor unknowingly fails to modify an opinion on materially misstated financial statements.
C. Inherent and control risks cause errors that could be material to the financial statements.
D. The auditor is not retained to conduct a financial statement audit in the succeeding year.

Answer 130

B. The auditor unknowingly fails to modify an opinion on materially misstated financial statements.

Question 131

Audit programs are designed to
A. Ensure that all audit work may be completed as of the interim date.
B. Gather sufficient and appropriate evidence to support the opinion.
C. Inherent risk may be assessed at a low level.
D. Identify constructive and value-adding suggestions to the client.

Answer 131

B. Gather sufficient and appropriate evidence to support the opinion.

Question 132

An audit program is ordinarily prepared for an audit engagement because:
A. It documents the auditor’s understanding of the client’s internal control.
B. It aids in instructing assistants in the work to be done.
C. It is required by generally accepted auditing standards.
D. It explains any weaknesses noted in the evaluation of the client’s existing internal control.

Answer 132

B. It aids in instructing assistants in the work to be done.

Question 133

The audit program should set out the
I. Nature of procedures
II. Timing of planned procedures
III. Extent of planned procedures
A. I and II
B. II and III
C. I and III
D. I, II, and III

Answer 133

D. I, II, and III

Question 134

How can the audit program best be described at the beginning of the audit process?
A. Comprehensive
B. Conclusive
C. Tentative
D. Cohesive

Answer 134

C. Tentative

Question 135

The audit program usually cannot be finalized until the
A. Consideration of the entity’s internal control has been completed.
B. Engagement letter has been communicated to the audit committee.
C. Reportable conditions have been communicated to the audit committee.
D. Search for unrecorded liabilities has been performed and documented.

Answer 135

A. Consideration of the entity’s internal control has been completed.

Question 136

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the
A. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
B. Timing of inventory observation procedures to be performed.
C. Procedures to be undertaken to discover litigation, claims, and assessments.
D. Pending legal matters to be included in the inquiry of the client’s attorney.

Answer 136

B. Timing of inventory observation procedures to be performed.

Question 137

The auditor should plan the nature, timing, and extent of direction and supervision of engagement team members and review their work. Which of the following statements is incorrect regarding direction, supervision, and review?
A. The auditor plans the nature, timing, and extent of direction and supervision of engagement team members based on the assessed risk of material misstatement.
B. As the assessed risk of material misstatement increases, for the area of audit risk, the auditor ordinarily increases the extent and timeliness of direction and supervision of engagement team members.
C. As the assessed risk of material misstatement decreases, for the area of audit risk, the auditor performs a more detailed review of their work.
D. The auditor plans the nature, timing, and extent of the review of the team’s work based on the capabilities and competence of the individual team members performing the audit work.

Answer 137

C. As the assessed risk of material misstatement decreases, for the area of audit risk, the auditor performs a more detailed review of their work.

Question 138

With respect to the auditor’s planning of a year-end audit, which of the following statements is always true?
A. An engagement should not be accepted after the fiscal year-end.
B. An inventory count must be observed at the balance sheet date.
C. The client’s audit committee should not be told of any specific audit procedures which will be performed.
D. It is an acceptable practice to carry out parts of the examination at interim dates.

Answer 138

D. It is an acceptable practice to carry out parts of the examination at interim dates.

Question 139

A person or firm possessing special skill, knowledge, and experience in a particular field other than accounting and auditing is called a/an
A. Professional
B. Consultant
C. Auditor
D. Expert

Answer 139

D. Expert

Question 140

During an audit, the auditor may need the assistance of an expert in obtaining sufficient appropriate evidence. A common example is
A. Evaluating the potential financial statement effect of employee fraud.
B. Determination of the amounts using actuarial computations.
C. Evaluating the integrity of management.
D. Determining the sufficiency and appropriateness of evidential matter obtained.

Answer 140

B. Determination of the amounts using actuarial computations.

Question 141

Evaluate the following statements related to the audit planning.
Statement 1: Audit planning helps the auditor properly organize and manage the audit engagement.
Statement 2: Audit effectiveness is the primary objective of the auditor in engagement planning which results in the utilization of the least number of resources.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 141

A. Only Statement 1 is correct

Question 142

Which of the following is not one of the main reasons why the auditor should properly plan engagements?
A. To enable proper on-the-job training of employees.
B. To enable the auditor to obtain sufficient appropriate evidence.
C. To avoid misunderstandings with the client.
D. To help keep audit costs reasonable.

Answer 142

A. To enable proper on-the-job training of employees.

Question 143

Which of the following is most likely to occur at the beginning of an initial audit engagement?
A. Prepare a rough draft of the financial statements and the auditor’s report.
B. Study and evaluate the system of internal administrative control.
C. Determine the client’s reason for an audit.
D. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.

Answer 143

C. Determine the client’s reason for an audit.

Question 144

Which of the following procedures is not performed as a part of planning an audit engagement?
A. Reviewing the working papers of the prior year.
B. Performing analytical procedures.
C. Confirmation of all major accounts.
D. Designing an audit program.

Answer 144

C. Confirmation of all major accounts.

Question 145

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. Specialized audit programs.
B. Analytical procedures.
C. Tests of transactions and balances.
D. An assessment of internal control.

Answer 145

B. Analytical procedures.

Question 146

Which of the following statements is not correct?
A. Analytical procedures used in the planning phase of the audit are primarily directed at understanding the client’s business and directing the auditor’s attention to areas that may contain possible misstatements.
B. Analytical procedures used in the completion phase are primarily aimed at assessing going concern and secondarily aimed at directing the auditor’s attention to areas that may contain possible misstatements.
C. Analytical procedures must be used in the planning and completion phases of the audit and are optional in the testing phase.
D. Analytical procedures used in the completion phase are primarily aimed at directing the auditor’s attention to areas that may contain possible misstatements and secondarily aimed at assessing going concern.

Answer 146

B. Analytical procedures used in the completion phase are primarily aimed at assessing going concern and secondarily aimed at directing the auditor’s attention to areas that may contain possible misstatements.

Question 147

When are auditors likely to encounter judgment problems in the use of analytical procedures?
A. Whenever the auditor places reliance on management’s explanations for unusual fluctuations in account balances without first developing independent expectations.
B. Whenever the auditor allows unaudited balances to unduly influence his/her expectations of current balances.
C. Whenever the auditor fails to consider the pattern reflected by several unusual fluctuations when trying to explain what caused them.
D. The auditor is likely to encounter judgment problems in each of the above instances.

Answer 147

D. The auditor is likely to encounter judgment problems in each of the above instances.

Question 148

After the preliminary judgment about materiality has been established, auditors may:
A. not adjust it.
B. adjust it downward only.
C. adjust it upward only.
D. adjust it either downward or upward.

Answer 148

D. adjust it either downward or upward.

Question 149

The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is:
A. The auditors’ preliminary estimate of the largest number of misstatements that would be material to any one of the client’s
B. The auditors’ preliminary estimate of the smallest amount of misstatement that would be material to any one of the client’s financial statements.
C. The auditors’ preliminary estimate of the amount of misstatement that would be material to the client’s balance sheet.
D. An amount that cannot be quantitatively stated since it depends on the nature of the item.

Answer 149

B. The auditors’ preliminary estimate of the smallest amount of misstatement that would be material to any one of the client’s financial statements.

Question 150

Amounts involving fraud are usually considered unintentional errors of equal peso amounts. important than
A. Less
B. No less
C. Equally
D. More

Answer 150

D. More

Question 151

The risk of material misstatement is related to detection risk in what manner?
A. Direct
B. Inverse
C. Proportional
D. Indeterminable

Answer 151

B. Inverse

Question 152

The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as:
A. Account risk.
B. Control risk.
C. Detection risk.
D. Inherent risk.

Answer 152

D. Inherent risk.

Question 153

When the inherent risk is high, there will need to be:
1. A lower assessment of audit risk
II. More evidence accumulated by the auditor
A. I only
B. II only
C. Both I and II
D. Neither I nor II

Answer 153

B. II only

Question 154

Which of the following situations would most likely require special audit planning by the auditors?
A. Some items of factory and office equipment do not bear identification numbers.
B. Depreciation methods used on the client’s tax return differ from those
C. Assets costing less than $500 are expensed even though the expected life exceeds one year.
D. Inventory is comprised of precious stones.

Answer 154

D. Inventory is comprised of precious stones.

Question 155

Statement 1: The identification and assessment of risks of material misstatements are both done at the financial statement and assertion levels.
Statement 2: Detection risk is determined and controlled by the auditor.
A. Only Statement 1 is correct
B. Only Statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer 155

C. Both statements are correct

Question 156

After evaluating the risks of material misstatements, the auditor determines the detection risk
A. As the complement of overall audit risk.
B. By performing substantive audit tests.
C. At a level that equates the joint probability of inherent risk, control risk, and detection risk with overall audit risk.
D. As a product of further study of the business and industry and application of analytical procedures as part of performing risk assessment procedures to properly plan the audit in an effective manner

Answer 156

C. At a level that equates the joint probability of inherent risk, control risk, and detection risk with overall audit risk.

Question 157

A retail entity uses the Internet to execute and record its purchase transactions. The entity’s auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would:
A. Compare a sample of paid vendors’ invoices to the receiving records at year-end.
B. Plan for a large measure of tolerable misstatement in substantive tests.
C. Perform tests several times during the year, rather than only at year- end.
D. Increase the sample of transactions to be selected for cutoff tests.

Answer 157

C. Perform tests several times during the year, rather than only at year- end.

Question 158

The auditor faces a risk that the audit will not detect material misstatements in the financial statements. Concerning minimizing this risk, the auditor primarily relies on:
A. Substantive procedures.
B. Tests of controls.
C. Internal control.
D. Statistical analysis.

Answer 158

A. Substantive procedures.

Question 159

In connection with the planning phase of an audit engagement, which of the following statements is always correct?
A. Observation of inventory count should be performed at year-end.
B. An engagement should not be accepted after the client’s financial year- end.
C. Final staffing decisions must be made prior to the completion of the planning stage.
D. A portion of the audit of a continuing audit client can be performed at interim dates.

Answer 159

C. Final staffing decisions must be made prior to the completion of the planning stage.

Question 160

When planning an audit, an auditor should:
A. Consider whether the extent of substantive procedures may be reduced based on the results of the internal control questionnaire.
B. Conclude whether changes in compliance with prescribed control procedures justify reliance on them.
C. Make preliminary judgments about materiality levels for audit purposes.
D. Prepare a preliminary draft of the management representation letter.

Answer 160

B. Conclude whether changes in compliance with prescribed control procedures justify reliance on them.