AUDITING BY SUPERNOVAS

Question 1

1. An auditor compares 2010 revenues and expenses with those of the prior
   year and investigates all changes exceeding 10%. By this procedure the
   auditor would be most likely to learn that
   A. An increase in property tax rates has not been recognized in the
   client’s accrual.
   B. The 2010 provision for uncollectible accounts is inadequate, because
   of worsening economic conditions.
   C. Fourth quarter payroll taxes were not paid.
   D. The client changed its capitalization policy for small tools in 2010

Answer 1

D. The client changed its capitalization policy for small tools in 2010

Question 2

2. 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 2

D. analytical procedures.

Question 3

3. Which of the following events occurring after the issuance of an
   auditor‘s report most likely would cause the auditor to make further
   inquiries about the previously issued financial statements?
   A. A technological development that could affect the entity’s future -
   ability to continue as a going concern.
   B. The discovery of information regarding a contingency that existed before the financial statements were issued.
   C. The entity’s sale of a subsidiary that accounts for 30% of the entity’s
   consolidated sales.
   D. The final resolution of a lawsuit which is adequately explained in a
   separate paragraph of the auditor’s report.

Answer 3

B. The discovery of information regarding a contingency that existed before the financial statements were issued.

Question 4

4. Which of the following statements concerning litigation, claims and
   assessments which were extracted from a letter from a client’s lawyer
   is most likely to cause the auditor to request clarification? A. “I
   believe that the possible liability to the company is nominal in amount.”
   B. “I believe that the action can be settled for less than the damages
   claimed.”
   C. “I believe that the plaintiff’s case against the company is without
   merit.”
   D. “I believe that the company will be able to defend this action
   successfully.”

Answer 4

B. “I believe that the action can be settled for less than the damages
claimed.”

Question 5

5. Road, CPA, believes there is “substantial doubt about the ability of Kennon Company to continue as a going concern for a reasonable period of time. In evaluating Kennon’s plan for dealing with the adverse effects
   of future conditions and events, Rood most likely would consider, as a mitigating factor, Kennon’s plans to:
   A. Make the credit terms for sales on account more lenient.
   B. strengthen internal controls over cash disbursements.
   C. purchase the production facilities currently being leased from a
   related party.
   D. postpone those expenditures for research and development projects.

Answer 5

D. postpone those expenditures for research and development projects.

Question 6

6. The auditor is most likely to discover omitted audit procedures
   during:
   A. preparation of the management letter.
   B. follow-up procedures performed in compliance with generally accepted auditing standards.
   C. a post engagement review performed as part of the firm’s quality
   control inspection program.
   D. the final review of the working papers.

Answer 6

C. a post engagement review performed as part of the firm’s quality

Question 7

7. Internal auditors are most likely to issue a report on which of the
   following?
   A. Annual financial statement reporting
   B. Internal control
   C. Tax compliance
   D. Quarterly financial statement reporting

Answer 7

B. Internal control

Question 8

8. You have been selected to develop an internal auditing department for your company. Your approach would most likely be to hire:
   A. internal auditors each of whom possesses all the skills required to
   handle all audit assignments.
   B. inexperienced personnel and train them the way the company wants them trained.
   C. degreed accountants since most audit work is accounting related.
   D. internal auditors who collectively have the knowledge and skills
   needed to complete all internal audit assignments.

Answer 8

D. internal auditors who collectively have the knowledge and skills
needed to complete all internal audit assignments.

Question 9

9. In performing an operational audit, internal auditors are most likely to focus upon which of the following attributes?
   A. Controls relating to the adequacy of the financial statements.
   B. All controls and not just those relating to financial statements.
   C. Efficiency of operations.
   D. Operations of the business including efficiency, effectiveness,
   internal control and others.

Answer 9

D. Operations of the business including efficiency, effectiveness,
internal control and others.

Question 10

10. An operational auditor is most likely to be concerned with whether
    o transaction was
    A. necessary.
    B. reasonable.
    C. properly approved.
    D. properly supported with documentation.

Answer 10

A. necessary.

Question 11

11. An auditor who was engaged to perform an examination of the financial statements of a non-public entity has been asked by the client to refrain from performing various audit procedures and changed the nature of the engagement to a review of financial statements. The client made the request because of the significant cost of completing the examination.
    The auditor would most likely
    A. qualify the auditor’s report and refer to the scope limitation
    B. view the request as an indication of possible irregularity
    C. complete the examination in progress
    D. grant the client request

Answer 11

D. grant the client request

Question 12

12. The circumstance most likely to make it impossible for a practitioner to issue a review report is when the
    A. criteria are only available to specified users
    B. subject matter contains a departure from the criteria
    C. company faces a going concern uncertainty
    D. scope of the engagement has been significantly limited

Answer 12

D. scope of the engagement has been significantly limited

Question 13

13. Accepting an engagement to examine an entity’s financial projection most likely would be appropriate if the projection were to be distributed
    to
    A. all employees who work for the entity
    B. potential stockholders who request a prospectus or a registration
    statement
    C. a bank with which the entity is negotiating for a loan
    D. all stockholders of record as of the report date

Answer 13

C. a bank with which the entity is negotiating for a loan

Question 14

14. An auditor will most likely estimate the tolerable failure rate in
    order to:
    A. determine which type of sampling approach to use
    B. calculate the probable control risk
    C. determine the population to be tested
    D. determine the appropriate sample size

Answer 14

D. determine the appropriate sample size

Question 15

15. The product of inherent risk and control risk is assessed as low.
    How would an auditor with this assessment most likely test depreciation expense?
    A. As a ratio of total assets
    B. As a percent of sales
    C. By re-computing all depreciation figures
    D. By fagging and tracing transactions through the system

Answer 15

A. As a ratio of total assets

Question 16

16. What kind of threat to independence most likely occurs when any product or judgment of a previous assurance engagement or non-assurance engagement needs to be re-evaluated in reaching conclusions on the assurance engagement or when a member of that, assurance team was previously a director or officer of the assurance client, or was an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement?
    A. Self-interest threat
    B. Advocacy threat
    C. Self-review threat
    D. Familiarity threat.

Answer 16

C. Self-review threat

Question 17

17. Which of the following is most likely a violation of the Code of
    Ethics?
    A. The professional accountant in public practice bills a client a fee,
    lower than what previously has been charged for similar services
    B. The professional accountant makes a representation that specific professional services in the current or future periods will be performed for a stated fee if it is likely at the time of representation that such fee will be substantially increased
    C. The professional accountant in public practice is the one who
    determines the appropriate billing rates of each professional staff
    engaged in performing services
    D. The professional accountant agrees to the client’s proposal for a
    professional fee that is dependent to the number of service hours
    rendered

Answer 17

B. The professional accountant makes a representation that specific professional services in the current or future periods will be performed for a stated fee if it is likely at the time of representation that such fee will be substantially increased

Question 18

18. Which of the following circumstances would most likely cause an auditor to suspect that material fraud exists in a client’s financial statements?
    A. Property and equipment items are usually sold at a loss before being fully depreciated.
    B. Significantly fewer responses to a positive confirmation requests are
    received than what is expected.
    C. Monthly bank reconciliations usually include several in-transit
    items.
    D. Clerical errors are listed on a CBIS-generated exception report.

Answer 18

B. Significantly fewer responses to a positive confirmation requests are
received than what is expected.

Question 19

19. When the auditor performs tests of control regarding the policy
    counting materials received from the supplies, the auditor most likely
    A. inspect the receiving reports.
    B. verify that cash-vouchers are accompanied by receiving reports
    C. inquire with the receiving clerk of whether count of incoming
    deliveries is being made.
    D. observe several times as the receiving section is receiving the
    incoming deliveries.

Answer 19

D. observe several times as the receiving section is receiving the
incoming deliveries.

Question 20

20. Which of the following accounts would most likely be reviewed by the auditor to gain reasonable assurance that additions to the equipment account are not understated?
    A. Repairs and maintenance expense
    B. Depreciation expense
    C. Gain on disposal of equipment
    D. Accounts payable

Answer 20

A. Repairs and maintenance expense

Question 21

21. An audit of the General Lizard Company, a home appliance manufacturer company, detects material misapplication of the measurement of the lower of cost or market principle. General Lizard’s executive and financial
    management will not change the recorded amounts or disclosures to the auditor’s satisfaction. Such a situation will most likely result in which
    type of report?
    A. Unqualified
    B. Disclaimer
    C. Qualified or adverse
    D. Negative assurance

Answer 21

C. Qualified or adverse

Question 22

22. The auditors of White Stained Sheets, Inc. are unable to obtain
    evidence regarding accounts receivable which is a material balance. Instead, the auditors are able .to satisfy themselves with other alternative procedures relating to the White Stained Sheets audit. Which report will the auditors most likely issue in this situation?
    A. Qualified
    B. Unqualified
    C. Adverse
    D. Disclaimer

Answer 22

B. Unqualified

Question 23

23. Which one of the following subsequent events will most likely result to an adjustment to the financial statements?
    A. Material change in the amount of settlement, of a lawsuit which had
    been estimated at year end
    B. Entry into a significant-new line of products and business
    C. Proceeds received-from a ‘related party note payable
    D. Signing of a letter-of-intent by the’ client to acquire 55% of another entity for stock

Answer 23

A. Material change in the amount of settlement, of a lawsuit which had
been estimated at year end

Question 24

24. Which one of the following is a key condition indicating doubt
    regarding an entity’s ability to continue as a going-concern?
    A. Improvement in key financial ratios
    B. Litigation in the normal course of business
    C. The company‘s auditors were voted out in the most previous
    shareholder’s meeting
    D. Inability to make principal and interest payments as they become due

Answer 24

D. Inability to make principal and interest payments as they become due

Question 25

25. A successor auditor would most likely make specific inquiries of the
    predecessor auditor regarding
    a. Specialized accounting principles of the client’s industry.
    b. The competency of the client’s internal audit staff
    c. The uncertainty inherent in applying sampling procedures.
    d. Disagreements With management as to auditing procedures.

Answer 25

d. Disagreements With management as to auditing procedures.

Question 26

26. Which of the following factors most likely would cause an auditor
    not to accept a new audit engagement?
    a. An inadequate understanding of the entity’s internal control
    structure.
    b. The close proximity to the end of the entity’s fiscal year.
    c. Concluding that the entity’s management probably lacks integrity.
    d. An inability to perform preliminary, analytical assessing control risk.

Answer 26

c. Concluding that the entity’s management probably lacks integrity.

Question 27

27. Which of the following procedures would an auditor most likelyperform in planning a financial statement audit?
    a. Inquiring of the client’s legal counsel concerning pending,
    litigation.
    b. Comparing the financial statements to anticipated-results
    c. Examining computer generated exception reports to verify the
    effectiveness of internal controls.
    d. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities

Answer 27

b. Comparing the financial statements to anticipated-results

Question 28

28. Inquiries directed towards those charged with governance may most
    likely
    a. Relate to their activities concerning the design and effectiveness
    of the entity’s internal control and whether management has
    satisfactorily responded to any findings from these activities
    b. Help the auditor understand the environment in which the financial
    statements are prepared.
    c. Relate to changes in the entity’s marketing strategies, sales trends
    or contractual arrangements with its customers.
    d. Help the auditor in evaluating the appropriateness of the selection
    and application of certain accounting policies

Answer 28

b. Help the auditor understand the environment in which the financial
statements are prepared.

Question 29

29. In auditing accounts payable, an auditor’s procedures most likely
    will focus primarily on management’s assertion of
    a. Existence or occurrence
    b. Completeness
    c. Presentation and disclosure
    d. Valuation or allocation

Answer 29

b. Completeness

Question 30

30. An auditor is most likely to inspect loan’ agreements under which an entity’s inventories are pledged to support management‘s financial statement assertion of
    a. Existence or occurrence
    b. Presentation and disclosure
    c. Completeness
    d. Valuation or allocation

Answer 30

b. Presentation and disclosure

Question 31

31. An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence concerning
    a. Rights and obligations
    b. Existence or occurrence
    c. Completeness
    d. Valuation

Answer 31

c. Completeness

Question 32

32. Confirmation is most likely to be a relevant form of evidence with
    regard to assertions about accounts receivable when the auditor has
    concern about the receivables
    a. Valuation
    b. Classification
    c. Existence
    d. Completeness

Answer 32

c. Existence

Question 33

33. The auditor most likely performs extensive tests for possible understatement of
    a. Revenues
    b. Assets.
    c. Capital
    d. Liabilities

Answer 33

d. Liabilities

Question 34

34. Which of the following procedures would on auditor most likely perform in planning a financial statement audit?
    a. Inquiring of the client’s legal counsel concerning pending litigation.
    b. Examining computer generated exception reports to verify the
    effectiveness of internal control
    c. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities
    d. Comparing the financial statements to anticipated results.

Answer 34

d. Comparing the financial statements to anticipated results.

Question 35

35. Which of the following characteristics would most likely heighten an auditors concern about the risk of material misstatements in an entity‘s financial statements?
    a. the entity industry is experiencing declining customer demand
    b. employees who handle cash receipts are not bonded
    c. bank reconciliations usually include in- transit deposits.
    d. equipment is often sold at a loss before being fully depreciated

Answer 35

a. the entity industry is experiencing declining customer demand

Question 36

36. Management philosophy and operating style most likely would have a significant influence on an entity‘s control environment when:
    a. the internal auditor reports directly to management
    b. management is dominated by one individual
    c. accurate management job descriptions delineate specific duties.
    d. the audit committee actively oversees the financial reporting process

Answer 36

b. management is dominated by one individual

Question 37

37. Assessing control risk at below he maximum level most likely would involve:
    a. performing more extensive substantive test with large sample sizes that originally planned
    b. reducing inherent risk for most of the assertions relevant to
    significant account balances
    c. changing the timing of substantive test by omitting interim-date testing and performing the test year-end
    d. identifying specific internal controls relevant to specific
    assertions

Answer 37

d. identifying specific internal controls relevant to specific
assertions

Question 38

38. Which of the following controls most likely could prevent EDP
    personnel from modifying programs to bypass programmed controls?
    a. Periodic management review of computer utilization reports and systems documentation
    b. Segregation of duties within EDP for computer programming and computer operations
    c. Participation of user department personnel in designing and approving new systems
    d. Physical security of EDP equipment

Answer 38

b. Segregation of duties within EDP for computer programming and computer operations

Question 39

39. Which of the following would most likely be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?
    A. An estimate of the standard deviation of the population’s recorded amounts is not required.
    B. The auditor rarely needs the assistance of a computer program to design an efficient sample.
    C. inclusion of zero and negative balances generally does not require
    special design considerations.
    D. Any amount that is individually significant is automatically
    identified and selected.

Answer 39

C. inclusion of zero and negative balances generally does not require
special design considerations.

Question 40

40. A third party sues a public accounting firm for negligence under common law on the basis of materially false financial statements. Which of the following is the firm’s defense?
    A. Lack of privity
    B. Lack of reliance
    C. Lack of intent
    D. Contributory negligence

Answer 40

A. Lack of privity

Question 41

41. Mainframe computer systems include several advanced processing procedures. Two of the most common processing procedures are multiprocessing and multiprogramming. Which one of the following statements about these processing procedures is false?
    A. Multiprogramming allows multiple programs to be executed at exactly the same time.
    B. Multiprogramming switches back and forth between programs during
    processing.
    C. Multiprocessing allows the sharing of a central memory during
    processing.
    D. Multiprocessing allows multiple programs to be executed at exactly
    the same time.

Answer 41

A. Multiprogramming allows multiple programs to be executed at exactly the same time.

Question 42

42. Which is not true of the intended user?
    A. The intended user is the person or class of persons for whom the
    professional accountant prepares the report for a specific use or
    purpose.
    B. The intended user(s) is (are) always limited to the addressee of the professional accountant‘s report.
    C. The responsible party may also be the one of the intended users.
    D. The intended user(s) may not be the addressee of the professional
    accountant‘s report.

Answer 42

B. The intended user(s) is (are) always limited to the addressee of the professional accountant‘s report.

Question 43

43. Which of the following statements is true concerning a compliance audit?
    A. Compliance audits are only performed by government auditors.
    B. Risks such as inherent risk, control risk, and detection risk are not appropriate in planning and performance of a compliance audit.
    C. Materiality is difficult to measure in a compliance audit.
    D. A report on compliance can only include negative assurance.

Answer 43

C. Materiality is difficult to measure in a compliance audit.

Question 44

44. Which of the following is true of the conceptual framework approach?
    A. It is impossible to define every situation that creates specific
    threats and and specify the appropriate mitigating action.
    B. A professional accountant should take qualitative but not quantitative
    factors into account when considering the significance of a threat.
    C. A professional accountant should take quantitative but not qualitative
    factors into account when considering the significance of a threat.
    D. All inadvertent violations of the code of Ethics, irrespective of
    their nature and significance, always compromise compliance with the fundamental principles

Answer 44

A. It is impossible to define every situation that creates specific
threats and and specify the appropriate mitigating action.

Question 45

45. The following statements relate to RA 9298. Which statement is true?
    A. The Professional Regulation Commission has the authority to remove any member of the Board of Accountancy for negligence, incompetence, or any other just cause.
    B. Insanity is not a ground for proceeding against a CPA.
    C. A person shall be considered to be in the professional practice of
    accounting if, as an officer in a private enterprise, he makes decisions requiring professional accounting knowledge.
    D. After three years, subject to certain conditions, the Board of
    Accountancy may order the reinstatement of a CPA whose certificate of registration has been revoked.

Answer 45

C. A person shall be considered to be in the professional practice of
accounting if, as an officer in a private enterprise, he makes decisions requiring professional accounting knowledge.

Question 46

46. Which of the following statements is true?
    A. It is usually easier for the auditor to uncover irregularities than
    errors.
    B. It is usually easier for the auditor to uncover errors than
    irregularities.
    C. It is usually equally difficult for the auditor to uncover errors or
    irregularities.
    D. It is usually, none of the given statements is true.

Answer 46

B. It is usually easier for the auditor to uncover errors than
irregularities.

Question 47

47. Which of the following statements is true when the CPA has been
    engaged to do an attestation engagement?
    A. The CPA firm is engaged and paid by the client; therefore, the firm
    has primary responsibility to be an advocate for the client.
    B. The CPA firm is engaged and paid by the client, but the primary
    beneficiaries of the audit are the statement users.
    C. Should a situation arise where there is no convincing authoritative
    standard available, and there is a choice of actions, which could impact client’s financial statements either positively or negatively, the CPA is free to endorse the choice which is best in the client’s interest.
    D. As long as CPA firms are competent, it is not required that they remain unbiased.

Answer 47

B. The CPA firm is engaged and paid by the client, but the primary
beneficiaries of the audit are the statement users.

Question 48

48. Which of the following statement(s) is (are) true?
    A. Gross negligence may constitute constructive fraud.
    B. Constructive fraud is also termed recklessness.
    C. Fraud requires the intent to deceive.
    D. All the responses are true.

Answer 48

D. All the responses are true.

Question 49

49. Which of the following is ordinarily true of a modification of the audit report by adding an emphasis of matter paragraph?
    A. The modification by adding an emphasis of matter paragraph is an
    “except for” qualification of opinion
    B. The emphasis of matter paragraph is a “subject to qualification of opinion
    C. The emphasis of matter paragraph would ordinarily refer to the fact that the auditor’s opinion is not qualified
    D. The emphasis of matter paragraph is presented before the opinion paragraph

Answer 49

C. The emphasis of matter paragraph would ordinarily refer to the fact that the auditor’s opinion is not qualified

Question 50

50. Which of the following-statements is not true?
    A. A one-paragraph report is generally used when the auditor is not independent
    B. A modification of the audit report that involves modified wordings
    may contain an unqualified opinion
    C. An addition of another paragraph to an otherwise standard audit report always requires a modification of an unqualified opinion
    D. An unqualified opinion may be issued though the audit report requires an additional explanatory paragraph

Answer 50

C. An addition of another paragraph to an otherwise standard audit report always requires a modification of an unqualified opinion

Question 51

51. Which of the following-statements is not true?
    A. A one-paragraph report is generally used when the auditor is not independent
    B. A modification of the audit report that involves modified wordings
    may contain an unqualified opinion
    C. An addition of another paragraph to an otherwise standard audit report always requires a modification of an unqualified opinion
    D. An unqualified opinion may be issued though the audit report requires an additional explanatory paragraph

Answer 51

C. An addition of another paragraph to an otherwise standard audit report always requires a modification of an unqualified opinion

Question 52

52. Which of the following is not a true statement? “In the opinion
    paragraph of the standard unqualified report, required to state
    A. an opinion about the financial statements taken as whole
    B. a conclusion about whether the company follows Philippine financial reporting standards.
    C. whether the management has or has not made adequate disclosure.
    D. That the financial statements are presented fairly.

Answer 52

C. whether the management has or has not made adequate disclosure.

Question 53

53. Which of the following statements is true?
    A. The auditor is required to issue a disclaimer of opinion in the event
    of a material uncertainty.
    B. The auditor is required to issue a disclaimer of opinion in the event
    of a going concern problem.
    C. The auditor is required to issue a disclaimer of opinion for a material
    uncertainty and for a going concern problem.
    D. The auditor has the option, but is not required, to issue a disclaimer
    of opinion for a material uncertainty or for a going concern problem.

Answer 53

D. The auditor has the option, but is not required, to issue a disclaimer
of opinion for a material uncertainty or for a going concern problem.

Question 54

54. Which of the following statement is true with regard to the
    relationship among audit risk, audit evidence, and materiality?
    a. The lower the inherent risk and control risk, the lower the aggregated materiality threshold
    b. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining external evidence and should reduce
    reliance on internal evidence
    c. Where inherent risk is high and control risk is low, the auditor may
    safely ignore inherent risk
    d. Aggregated materiality thresholds should not change under conditions of changing risk levels

Answer 54

b. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining external evidence and should reduce
reliance on internal evidence

Question 55

55. Which of the following is true?
    a. Auditors are responsible for detecting all fraudulent financial
    reporting
    b. Auditors must specifically consider fraud risk from overstating
    liabilities
    c. Auditor must specifically consider fraud risk from management override of controls
    d. All of them are true

Answer 55

c. Auditor must specifically consider fraud risk from management override of controls

Question 56

56. With respect to the auditors planning of a year-end examination, which of the following statements is always true?
    a. An engagement proposed after the fiscal year ends should not accepted.
    b. An inventory count must be observed at the balance sheet date
    c. The client’s audit committee should not be told of the specific audit procedures that will be performed.
    d. It is an acceptable practice to-carry out substantial parts of the
    examination at interim dates

Answer 56

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

Question 57

57. Which of the following is not true regarding planning in an
    electronic environment?
    a. The definition of auditing is not changed
    b. The purposes of auditing is not changed
    c. The procedures used are not changed
    d. Auditing standards are not changed

Answer 57

c. The procedures used are not changed

Question 58

58. Which of the following statements is true?
    a. Tests of controls are necessary if the auditor plans to use the
    primarily substantive approach
    b. Tests of controls are necessary if the auditor plans to assess the
    level of control risk at maximum
    c. The auditor can simultaneously obtain an understanding of internal
    control and perform tests of controls.
    d. After performing tests of controls, the auditor will always assess control risk at maximum.

Answer 58

c. The auditor can simultaneously obtain an understanding of internal
control and perform tests of controls.

Question 59

59. Which of the following statements is true? If control risk is
    assessed of the maximum, the
    a. nature of related substantive tests should be changed from more to less effective
    b. nature of related substantive tests should be changed from less to more effective.
    c. timing of related substantive tests should be changed from year-end to an interim date.

Answer 59

b. nature of related substantive tests should be changed from less to more effective.

Question 60

60. When testing a computerized accounting system, which of the following is not true of the test data approach?
    A. The test data need consist pf only those valid and invalid conditions in which the auditor is interested
    B. Only one transaction of each type need be tested
    C. Test data are processed by the client‘s computer programs under the auditor‘s control
    D. The test data must consist of all possible valid and invalid
    conditions

Answer 60

D. The test data must consist of all possible valid and invalid
conditions

Question 61

61. When an auditor tests a computerized accounting system, which of the following is true of the test data approach?
    A. Test date must consist of all possible valid and invalid conditions
    B. The program tested is different from the program used throughout the year by the client
    C. Several transactions of each type must be tested
    D. Test data are process by the client‘s computer programs under the auditor‘s control

Answer 61

D. Test data are process by the client‘s computer programs under the auditor‘s control

Question 62

62. Which of the following statements is not true regarding the competence of audit evidence?
    A. Relevance is enhanced by an effective information system.
    B. To be competent, evidence must be both valid and relevant.
    C. Validity is related to the quality of the client‘s information system.
    D. Relevance must always relate to audit objectives.

Answer 62

A. Relevance is enhanced by an effective information system.

Question 63

63. Which of the following statement relating to the competence of evidential matter is always true?
    A. Evidential matter gathered by an auditor from outside an enterprise
    is reliable.
    B. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory conditions.
    C. Oral representations made by managements are not valid
    D. Evidence gathered by auditors must be both valid and relevant to be considered competent.

Answer 63

D. Evidence gathered by auditors must be both valid and relevant to be considered competent.

Question 64

64. Which of the following statements is not true? “The evidence gathering technique of observation
    A. Is useful in most parts of the audit.”
    B. Is rarely sufficient by itself.”
    C. Is limited to what the auditor sees.”
    D. Requires the gathering of corroborative evidence.”

Answer 64

C. Is limited to what the auditor sees.”

Question 65

65. Which of the following statements is true?
    A. The auditor‘s objectives follow and are closely related to management assertions
    B. Management‘s assertions follow and are closely related to the
    auditor‘s objectives
    C. The auditor‘s primary responsibility is to find and disclose
    fraudulent management assertions
    D. Assertions about presentation and disclosure deal with whether the accounts have been included in the financial statements at appropriate amounts

Answer 65

A. The auditor‘s objectives follow and are closely related to management assertions

Question 66

66. After the general objectives are understood, specific objectives for
    each account balance on the financial statements can be developed. Which of the following statements is true?
    A. There should be at least one specific objective for each relevant
    general objective
    B. There will be only one specific objective for each relevant general
    objective
    C. There will be many specific objectives developed for each relevant objective
    D. There must be one specific objective for each general objective

Answer 66

A. There should be at least one specific objective for each relevant
general objective

Question 67

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

Answer 67

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

Question 68

68. Which one of the following statements is true?
    A. Evidence must pertain to the objective that the auditor is testing
    before it can be persuasive
    B. Relevance can be considered only in terms of specific audit objectives
    C. Evidence may be relevant to one objective but not to other objective
    D. All the responses are true

Answer 68

D. All the responses are true

Question 69

69. Which of the following statements is not true?
    A. A large sample of highly competent evidence is not persuasive unless it is relevant to the objective being tested
    B. A large sample of evidence that is neither competent nor timely is
    not persuasive
    C. A small sample of only one or two pieces of relevant competent, and timely evidence lacks persuasiveness
    D. The persuasiveness of evidence can be evaluated after considering its competence and its sufficiency

Answer 69

D. The persuasiveness of evidence can be evaluated after considering its competence and its sufficiency

Question 70

70. Observation, though considered a reliable audit procedure, has
    limited usefulness. However, it is used in a number of different audit
    situations. Which of the following statements is true regarding
    observation as an audit technique
    A. It is the most effective audit methodology to use in filling out
    internal control questionnaires
    B. It is the most persuasive technique to learn how transactions are really processed during the period under audit
    C. It is rarely sufficient to satisfy any audit assertion other than
    existence
    D. It is the most persuasive audit technique for determining if fraud
    has really occurred

Answer 70

C. It is rarely sufficient to satisfy any audit assertion other than
existence

Question 71

71. Which of the following statements is not true? “The evidence gathering technique of inquiry
    A. Cannot be regarded as conclusive.”
    B. Requires the gathering of corroborative evidence.”
    C. Is the auditor‘s principal method of evaluating the client‘s internal
    control structure.”
    D. Does not provide evidence from an independent source.”

Answer 71

C. Is the auditor‘s principal method of evaluating the client‘s internal
control structure.”

Question 72

72. Which of the following statements concerning the sample size is true?
    A. An increase in the tolerable occurrence rate, other factors remaining unchanged, increases the sample size.
    B. The higher the expected occurrence rate, other factors remaining unchanged, the larger will be the sample size.
    C. The more critical the attribute being tested, the higher will be the
    tolerable occurrence rate set by the auditor, and the larger will be the
    sample size.
    D. The lower the acceptable risk of underassessment of control risk, the smaller will be the sample size be

Answer 72

B. The higher the expected occurrence rate, other factors remaining unchanged, the larger will be the sample size.

Question 73

73. Which of the following statements regarding statistical sampling in auditing is true?
    A. In as much as audits are test-based, generally accepted auditing
    standards require the use of statistical sampling methods whenever the auditor decided to examine only a part of the population.
    B. Although statistical sampling may be applied to test controls, it is
    required for substantive testing purposes.
    C. Sampling methods are used by auditors in both testing of controls and substantive testing.
    D. Statistical sampling methods are more appropriate for testing of
    controls when the auditor elects to reprocess transactions, than when
    controls are tested by means of document examination.

Answer 73

C. Sampling methods are used by auditors in both testing of controls and substantive testing.

Question 74

74. Which of the following statement is true?
    A. The audit procedures will vary as a result of using either statistical
    or non-statistical sampling.
    B. The audit procedures will be the same for either statistical or nonstatistical sampling, but they must be performed differently for each.
    C. Statistical sampling requires quantitative audit procedures whereas non-statistical sampling requires judgmental audit procedures.
    D. The same audit procedures are performed in the same manner for either statistical or non-statistical sampling.

Answer 74

D. The same audit procedures are performed in the same manner for either statistical or non-statistical sampling.

Question 75

75. Which of the following statements is true about non-statistical sampling, in tests of controls?
    A. Non-statistical sampling plans provide a quantitative measure of
    sampling risk.
    B. The auditor’s judgment in non-statistical sampling is guided by
    classical statistical sampling concepts.
    C. The calculated non-statistical sample should never be altered by the auditor.
    D. The auditor considers the same parameters when determining a non-statistical sample size as when determining a statistical sample size

Answer 75

D. The auditor considers the same parameters when determining a non-statistical sample size as when determining a statistical sample size

Question 76

76. An auditor is testing credit authorization procedures by examining sales invoices for credit approval by the credit department. The procedures will be considered to be working adequately if 96% of all sales invoices either indicate approval or are cash sales. The auditor selects a random sample of 100 invoices. In this situation, which of the following outcomes illustrates underassessment?
    A. The auditor finds five deviations and concludes that procedures work inadequately. The actual population deviation rate is 2%.
    B. The auditor finds no deviations and concludes that, procedures work adequately. The true population deviation rate is 5%.
    C. The auditor finds no deviations and concludes that the procedures
    work adequately. The true population deviation rate is 2%.
    D. The auditor finds five deviations and concludes that procedures work inadequately. The true population deviation rate is 6%.

Answer 76

B. The auditor finds no deviations and concludes that, procedures work adequately. The true population deviation rate is 5%.

Question 77

77. At times a sample may indicate that the auditor’s assessed level of
    control risk for a given control is reasonable when, in fact, the true
    compliance rate does not justify the assessed level. This situation
    illustrates the risk of
    A. assessing control risk too low
    B. incorrect precision
    C. assessing control risk too high
    D. incorrect rejection

Answer 77

A. assessing control risk too low

Question 78

78. As a result of tests of controls, an auditor under assessed control
    risk and decreased substantive testing. This underassessment occurred because the true occurrence rate in the population was
    A. Less than the risk of underassessment in the auditor’s sample.
    B. Less than the occurrence rate in the auditor’s sample.
    C. More than the risk of underassessment in the auditor’s sample.
    D. More than the occurrence rate in the auditor‘s sample.

Answer 78

D. More than the occurrence rate in the auditor‘s sample.

Question 79

79. For variables sampling purposes, changes in certain parameters affect sample size positively while changes in others have a negative effect.
    In this regard, which of the following statements is true?
    A. An increase in beta risk reduces sample size.
    B. Population size affects sample size inversely, i.e., as population
    size increases, sample size decreases.
    C. An increase in alpha risk, increases sample size.
    D. As materiality (M) increases, sample size increases.

Answer 79

A. An increase in beta risk reduces sample size.

Question 80

80. Although most substantive testing is performed during the final audit, some substantive tests may be done during the interim period. Which of the following statements concerning the timing of substantive tests is true?
    A. When internal control is weak, extensive substantive testing should be performed during the interim audit.
    B. Substantive testing should be performed during the interim audit only under conditions of excellent internal control.
    C. As a general rule, the auditor performs substantive tests of balances as of the balance sheet date and tests of transactions during the interim as well as the year-end audit.
    D. If internal control is weak, the auditor should confirm accounts
    receivable as of a point in time at least one month prior to the client’s
    fiscal year-end.

Answer 80

C. As a general rule, the auditor performs substantive tests of balances as of the balance sheet date and tests of transactions during the interim as well as the year-end audit.

Question 81

81. Which of the following is true about the audit procedure of
    confirming accounts payable?
    A. Confirmation of payables is most appropriate when the auditor expects understatement errors.
    B. It is not productive to mail second requests.
    C. The auditor is not required by current professional pronouncements to justify his or her opinion on financial statements when payables are not confirmed.
    D. Payables are usually confirmed as of an interim date.

Answer 81

C. The auditor is not required by current professional pronouncements to justify his or her opinion on financial statements when payables are not confirmed.

Question 82

82. Assume an auditor’s interim consideration of internal control in the expenditure/disbursement cycle reveals that control risk can be assessed below the maximum and detection risk above the minimum for some assertions. Based on the foregoing, which of the following is true about
    the substantive tests applied to accounts payable?
    A. The auditor is more apt to confirm payable balances.
    B. The auditor is less apt to perform substantive tests at the balance
    sheet date.
    C. The auditor is more apt to increase the extent of substantive tests.
    D. The auditor is more apt to ignore the risk of incorrect acceptance
    when sampling accounts payable.

Answer 82

B. The auditor is less apt to perform substantive tests at the balance
sheet date.

Question 83

83. Which of the following statements is true with respect to management representations?
    A. Management representations are dated as of the balance sheet date.
    B. Management representations may serve as a substitute to various types of substantive procedures.
    C. Management representations are signed by the auditor and delivered to the client’s officers.
    D. Management representations are used to corroborate information obtained during the audit.

Answer 83

D. Management representations are used to corroborate information obtained during the audit.

Question 84

84. Which of the following statements is true?
    A. It is more difficult to discover unrecorded transactions or events
    than to verify recorded information
    B. It is more difficult to verily recorded information than to discover unrecorded transactions or events
    C. It is equally difficult to verify recorded information and to discover unrecorded transactions or events.
    D. None of the given choices is true.

Answer 84

A. It is more difficult to discover unrecorded transactions or events
than to verify recorded information

Question 85

85. Which of the following statements is true concerning analytical procedures?
    A. Analytical procedures usually involve comparisons of ratios developed from recorded amounts with assertions developed by the management.
    B. Analytical procedures used in planning an audit ordinarily use data aggregated at a high level.
    C. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk.
    D. Analytical procedures are more efficient, but not more effective,
    than tests of details and transactions

Answer 85

B. Analytical procedures used in planning an audit ordinarily use data aggregated at a high level.

Question 86

86. Which of the following statements regarding assurance services is/are true with respect to internal auditors?
    I. Assurance services by internal auditors can be provided only to
    internal management and the audit committee: that is. They cannot be
    provided to outside entities.
    II. Assurance services require the specification of assertions to be
    tested. III. Assurance services can be provided bray in the areas of
    controls and financial reporting.
    A. I and II
    B. II only
    C. I, II, and III
    D. None of the above

Answer 86

B. II only

Question 87

87. Which of the following statements is/are true regarding independence and objectivity as applied to internal auditing?
    I. Independence is a departmental feature that affects the scope of
    audits.
    II. Only the audit committee can determine independence.
    III. Objectivity is a personal feature that is to be exhibited by all
    internal audit team members on an audit.
    A. I and II
    B. I and III
    C. I, II, and III
    D. Ill only

Answer 87

B. I and III

Question 88

88. Which of the following statements is true concerning interim financial information?
    A. An audit of interim financial information is required for SEC-registered companies.
    B. The accountant needs to obtain sufficient knowledge of the entity’s
    business and industry before undertaking an engagement on interim financial information.
    C. An accountant may not report on financial information presented
    separately from the audited financial statements.
    D. Interim financial information may not be included as part of a note to audited financial statements.

Answer 88

B. The accountant needs to obtain sufficient knowledge of the entity’s
business and industry before undertaking an engagement on interim financial information.

Question 89

89. Which of the following statement is true?
    A. If the auditor assesses the level of control risk at the maximum, no
    documentation of the reason is necessary
    B. If the auditor assesses the level control risk at less than maximum,
    no documentation of the reason is necessary
    C. If the auditor assesses the level of control risk at the maximum,
    documentation of the reason is necessary
    D. All of the given choices

Answer 89

A. If the auditor assesses the level of control risk at the maximum, no
documentation of the reason is necessary

Question 90

90. Which of the following statements about the existence and
    completeness objectives are not true?
    A. The existence and completeness objectives emphasize opposite audit concerns
    B. Existence deals with overstatements and completeness deals with understatements
    C. Existence deals with understatements and completeness’ deals with
    overstatements
    D. The completeness objective deals with unrecorded transactions

Answer 90

C. Existence deals with understatements and completeness’ deals with
overstatements

Question 91

91. Which of the following statements about the failure of the auditor of detecting material misstatements always true?
    A. The auditor’s failure to discover material misstatements is an
    evidence of inadequate planning: performance or judgment.
    B. The auditor did not comply with Philippine Standards on Auditing.
    C. The auditor has the burden of defending the quality of his audit.
    D. Such a failure is an indication of the absence of the auditor‘s,
    professional competence and due care.

Answer 91

C. The auditor has the burden of defending the quality of his audit.

Question 92

92. Which of the following statements concerning analytical procedures is true?
    A. Analytical procedures may be omitted entirely for some financial
    statement audits
    B. Analytical procedures used in planning the audit should not use
    nonfinancial information
    C. Analytical procedures usually are effective and efficient for tests
    of controls
    D. Analytical procedures alone may provide the appropriate level of
    assurance for some assertions

Answer 92

D. Analytical procedures alone may provide the appropriate level of
assurance for some assertions

Question 93

93. Which of the following is true of the report based on-an agreed-upon procedures engagement?
    A. The report is restricted to those parties who have agreed to those
    specific procedures to be performed.
    B. The CPA provides the recipients of the report a tinged assurance
    reasonableness of the assertion(s) presented in the financial
    information.
    C. The report states that the auditor has not recognized any basis that
    requires revision of financial statements.
    D. The report should state that the procedures performed are limited to analytical procedures and inquiry.

Answer 93

A. The report is restricted to those parties who have agreed to those
specific procedures to be performed.

Question 94

94. Audit risk consists of inherent risk, control risk; and detection
    risk. Which of the following statements is true?
    a. Cash is more susceptible to theft than an inventory of coal because
    it has a greater inherent risk.
    b. 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
    c. Detection risk is a function of the efficiency of an auditing
    procedure.
    d. The existing levels of inherent risk, control risk, and detection
    risk can be changed at the discretion of the auditor.

Answer 94

a. Cash is more susceptible to theft than an inventory of coal because
it has a greater inherent risk.
b. The risk that material

Question 95

95. An internal auditor is testing purchase order to detect possible
    instances of fraudulent activity by an employee. Believing the occurrence rate of the fraudulent purchase orders to be quite low (almost zero) the
    internal auditor would like to specify the probability of observing at least one irregularity if its true rate of occurrence is greater than
    expected. The most appropriate sampling technique for this situation is
    a. Sequential sampling
    b. Variable estimation sampling
    c. Attribute estimation sampling
    d. Discovery sampling

Answer 95

d. Discovery sampling

Question 96

96. Which of the following is a true statement?
    a. The extent of the audit procedures performed on the corresponding figures is significantly less than scope of the audit for the current figures.
    b. When the financial statements of the prior period have been audited
    by another auditor, the current auditor must insist that there would be division of responsibility with respect to audit
    c. When the financial statements of the prior period have been audited
    by another auditor, the successor auditor must insist that audit of the
    financial statements of the prior periods be performed by the successor.
    d. When the comparatives are presented as corresponding figures, the auditor must specifically refer to the predecessor in the introductory
    paragraph of the auditor’s report.

Answer 96

a. The extent of the audit procedures performed on the corresponding figures is significantly less than scope of the audit for the current figures.

Question 97

97. Holding other planning considerations equal, a decrease in the amount of misstatement in a class of transactions that an auditor could tolerate most likely would cause the auditor to
    A. the planned substantive tests prior to the balance sheet date
    B. Perform the planned auditing procedures close to the balance sheet date
    C. increase the assessed level of control risk for relevant financial
    statement assertions
    D. decrease the extent of auditing procedures to be applied to the class of transactions

Answer 97

B. Perform the planned auditing procedures close to the balance sheet date

Question 98

98. Which of the following is most likely to be a response to the
    auditor’s assessment that the risk of material misstatement due to fraud for the existence of inventory is high?
    A. Request that inventories be counted prior to year-end.
    B. Perform analytical procedures rather than taking test counts
    C. Observe test counts of inventory at certain location on an unannounced basis
    D. Request that inventory counts at the various locations be counted on
    different dates so as to allow the same auditor to be present at every
    count.

Answer 98

C. Observe test counts of inventory at certain location on an unannounced basis

Question 99

99. After obtaining an understanding of internal control and assessing the risk of material misstatement, an auditor decided to perform tests of controls. The auditor MOST likely decided that
    A. additional evidence to support a further reduction in the risk of
    material misstatement is not available
    B. it would be efficient to perform test of controls that would result
    in a reduction in planned substantive tests
    C. there were many internal control weaknesses that could allow
    misstatements to enter the accounting system.
    D. an increase in the assessed level of the risk of material misstatement
    is justified for certain financial statement assertions

Answer 99

A. additional evidence to support a further reduction in the risk of
material misstatement is not available

Question 100

100. An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence concerning management’s assertion of
     A. completeness.
     C. rights
     B. existence
     D. valuation

Answer 100

A. completeness.