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AUDTHEO > Auditing Theory (250 Questions) > Flashcards

Auditing Theory (250 Questions) Flashcards

1
Q 
250. Which of the following is a prospective financial information for general use upon which an accountant may appropriately report?
A.	Financial projection	
B.	Partial presentation
C.	Pro forma financial statement
D.	Financial forecast
A

D. Financial forecast.

Forecast - uses current and historical data to predict future behavior

Projection - uses assumptions. “What if” scenarios

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2
Q
  1. The following statements relate to the examination of prospective financial information. Which is false?

A. The auditor should express an opinion as to whether the results shown in the prospective financial information will be achieved.
B. Before accepting an engagement to examine prospective financial information, the auditor should consider the intended use of the information.
C. The auditor should not accept, or should withdraw from, an engagement to examine prospective financial information when the assumptions are clearly unrealistic.
D. When in the auditor’s judgment an appropriate level of satisfaction has been obtained, the auditor is not precluded from expressing positive assurance regarding the assumptions.

A

A. The auditor should express an opinion as to whether the results shown in the prospective financial information will be achieved.

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3
Q
  1. When an accountant examines prospective financial statements, the accountant’s report should include a separate paragraph that

A. Contains an opinion as to whether the prospective financial statements are properly prepared on the basis of the assumptions and are presented in accordance with generally accepted accounting principles in the Philippines.
B. Provides an explanation of the differences between an examination and an audit.
C. States that the accountant is responsible for events and circumstances up to 1 year after the report’s date.
D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the prospective financial statements.

A

A. Contains an opinion as to whether the prospective financial statements are properly prepared on the basis of the assumptions and are presented in accordance with generally accepted accounting principles in the Philippines.

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4
Q
  1. A financial forecast consists of prospective financial statements that present an entity’s expected financial position, results of operations, and cash flows. A forecast

A. Is based on the most conservative estimates.
B. Present estimates given one or more hypothetical assumptions.
C. Unlike a projection, may contain a range.
D. Is based on assumptions reflecting conditions expected to exist and courses of action expected to be taken.

A

D. Is based on assumptions reflecting conditions expected to exist and courses of action expected to be taken.

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5
Q 
246. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity’s expected financial position, results of operations, and cash flows.  Such prospective financial statements are known as
A.	Pro forma financial statements	
B.	Financial projections
C.	Partial presentations
D.	Financial forecasts
A

B. Financial projections

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6
Q
  1. An accountant may accept an engagement to apply agreed-upon procedures that are not sufficient to express an opinion on one or more specified accounts or items of a financial statement provided that

A. The accountant’s report does not enumerate the procedures performed.
B. The financial statements are prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles.
C. Distribution of the accountant’s report is restricted.
D. The accountant is also the entity’s continuing auditor.

A

C. Distribution of the accountant’s report is restricted.

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7
Q
  1. Negative assurance may be expressed when an accountant is requested to report agreed-upon procedures to specified
    (1) Elements of a Accounts of a Financial Statement
    (2) Accounts of a Financial Statement
A.	Yes	Yes
B.	Yes	No
C.	No	No
D.	No	Yes
A

C. No, no.

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8
Q
  1. Which of the following should not be included in an accountant’s report based upon the compilation of an entity’s financial statements?
    A. A statement that a compilation of the company’s financial statements was made in accordance with the Philippine Standard on Related Services applicable to compilation engagements.
    B. A statement that management is responsible for the financial statements.
    C. A statement that the accountant has not audited or reviewed the statements.
    D. A statement that the accountant does not express an opinion but provides only negative assurance on the statements.
A

D. A statement that the accountant does not express an opinion but provides only negative assurance on the statements.

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9
Q
  1. When compiling an entity’s financial statements, an accountant would be least likely to
    A. Perform analytical procedures designed to identify relationships that appear to be unusual.
    B. Read the compiled financial statements and consider whether they appear to include adequate disclosure.
    C. Obtain an acknowledgment from management of its responsibility for the financial statements.
    D. Plan the work so that an effective engagement will be performed.
A

A. Perform analytical procedures designed to identify relationships that appear to be unusual.

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10
Q
  1. When compiling the financial statements of an entity, an accountant should
    A. Review agreements with financial institutions for restrictions on cash balances.
    B. Understand the accounting principles and practices of the entity’s industry.
    C. Inquire of key personnel concerning related parties and subsequent events.
    D. Perform ratio analyses of the financial data of comparable prior periods.
A

B. Understand the accounting principles and practices of the entity’s industry.

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11
Q
  1. An accountant who reviews the financial statements of an entity should issue a report stating that a review
    A. Provides less assurance than an audit.
    B. Provides negative assurance that internal control is functioning as designed.
    C. Provides only limited assurance that the financial statements are fairly presented.
    D. Is substantially more in scope than a compilation.
A

A. Provides less assurance than an audit.

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12
Q
  1. Financial statements of an entity that have been reviewed by an accountant should be accompanied by a report stating that
    A. The scope of the inquiry and analytical procedures performed by the accountant has not been restricted.
    B. The financial statements are the responsibility of the company’s management.
    C. A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
    D. A review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements.
A

B. The financial statements are the responsibility of the company’s management.

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13
Q
  1. An accountant’s report on a review of the financial statements of an entity should state that the accountant
    A. Does not express an opinion or any form of limited assurance on the financial statements.
    B. Conducted the review in accordance with the Philippine Standard on Review Engagements.
    C. Obtained reasonable assurance about whether the financial statements are free of material misstatements.
    D. Examined evidence, on a test basis, supporting the amounts and disclosures in the financial statements.
A

B. Conducted the review in accordance with the Philippine Standard on Review Engagements.

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14
Q
  1. Financial statements of an entity that have been reviewed by an accountant should be accompanied by a report stating that a review
    A. Provides only limited assurance that the financial statements are fairly presented.
    B. Includes examining, on a test basis, information that is the representation of management.
    C. Consists principally of inquiries of company personnel and analytical procedures applied to financial data.
    D. Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit.
A

C. Consists principally of inquiries of company personnel and analytical procedures applied to financial data.

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15
Q
  1. The following statements relate to unaudited prior year financial statements that are presented in comparative form with audited current year financial statements. Which is incorrect?
    A. The incoming auditor should state in the auditor’s report that the comparative financial statements are unaudited.
    B. The incoming auditor need not perform audit procedures regarding opening balances of the current period.
    C. Clear disclosure in the financial statements that the comparative financial statements are unaudited is encouraged.
    D. In situations where the incoming auditor identifies that the prior year unaudited figures are materially misstated, the auditor should request management to revise the prior year’s figures or if management refuses to do so, appropriately modify the report.
A

B. The incoming auditor need not perform audit procedures regarding opening balances of the current period.

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16
Q
  1. The predecessor auditor, who is satisfied after properly communicating with the incoming auditor, has reissued his/her auditor’s report on prior year financial statements. The predecessor auditor’s report should

A. Refer to the work of the incoming auditor in the scope and opinion paragraphs.
B. Refer to the report of the incoming auditor only in the scope paragraph.
C. Refer to both the work and the report of the incoming auditor only in the opinion paragraph.
D. Not refer to the report or the work of the incoming auditor.

A

D. Not refer to the report or the work of the incoming auditor.

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17
Q
  1. J, CPA, audited JST Company’s prior-year financial statements. These statements are presented with those of the current year for comparative purposes without J’s auditor’s report, which expressed a qualified opinion. In drafting the current year’s auditor’s report, S, CPA, the incoming auditor, should

I. Not name J as the predecessor auditor.

II. Indicate the type of report issued by J.

III. Indicate the substantive reasons for J’s qualification.

IV. Indicate the date of J’s auditor’s report.

A

I, II, III, IV

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18
Q
  1. When the prior period financial statements are not audited, the incoming auditor should state in the auditor’s report that

I. The corresponding figures are unaudited.

II. The incoming auditor is not required to perform procedures regarding opening balances of the current period.

A

I only

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19
Q
  1. According to PSA 710, the incoming auditor may refer to the predecessor auditor’s report on the corresponding figures in the incoming auditor’s report for the current period. The incoming auditor’s report should indicate

I. That the financial statements of the prior period were audited by another auditor.

II. The type of report issued by the predecessor auditor.

III. The date of the predecessor auditor’s report.

A

I, II, III

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20
Q
  1. In which of the following circumstances would an auditor’s report least likely include specific reference to the corresponding figures?

A. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modification is resolved and properly dealt with in the financial statements.
B. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modification is unresolved, and results in a modification of the auditor’s report regarding the current period figures.
C. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modification is unresolved, but does not result in a modification of the auditor’s report regarding the current period figures.
D. When the auditor’s report on the prior period financial statements containing a material misstatement included an unmodified opinion and the prior period financial statements have not been revised and reissued, and the corresponding figures have not been properly restated and/or appropriate disclosures have not been made.

A

A. When the auditor’s report on the prior period, as previously issued, included a modified opinion and the matter which gave rise to the modification is resolved and properly dealt with in the financial statements.

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21
Q
  1. There are two broad financial reporting frameworks for comparatives: the corresponding figures and the comparative financial statements. Which of the following statements is correct concerning these reporting frameworks?
    A. Under the corresponding figures framework, the corresponding figures for the prior period(s) are integral part of the current period financial statements.
    B. Under the corresponding figures framework, the corresponding figures for the prior period(s) are considered separate financial statements.
    C. Under the comparative financial statements framework, the comparative financial statements for the prior period(s) are intended to be read in conjunction with the amounts and other disclosures relating to the current period.
    D. Under the comparative financial statements framework, the amounts and other disclosures for the prior period(s) form part of the current period financial statements.
A

A. Under the corresponding figures framework, the corresponding figures for the prior period(s) are integral part of the current period financial statements.

Comparative financial statements – Comparative information where amounts and other disclosures for the prior period are included for comparison with the financial statements of the current period but, if audited, are referred to in the auditor’s opinion. The level of
information included in those comparative financial statements is comparable with that of the financial statements of the current period.

Corresponding figures – Comparative information where amounts and other disclosures for the prior period are included as an integral part of the current period financial statements, and are intended to be read only in relation to the amounts and other disclosures relating to the current period (referred to as “current period figures”). The level of detail presented in the corresponding amounts and disclosures is dictated primarily by its relevance to the current period figures.

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22
Q
  1. An auditor should disclose the substantive reasons for expressing an adverse opinion in the Basis for Adverse Opinion paragraph
    A. Following the opinion paragraph.
    B. Preceding the opinion paragraph.
    C. Following the introductory paragraph.
    D. Within the notes to the financial statements.
A

B. Preceding the opinion paragraph.

Format [KEY: IMABA]:

  1. Introductory Paragraph
  2. Management Responsibility for F/S
  3. Auditor’s Responsibility
  4. Basis for Adverse Opinion
  5. Adverse Opinion
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23
Q
  1. In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?

A. The auditor wishes to emphasize an unusually important subsequent event.
B. The financial statements fail to disclose information that is required by Philippine Financial Reporting Standards.
C. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity’s ability to continue as a going concern.
D. The auditor did not observe the entity’s physical inventory and is unable to become satisfied as to its balance by other auditing procedures.

A

B. The financial statements fail to disclose information that is required by Philippine Financial Reporting Standards.

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24
Q
  1. An auditor may express a qualified opinion under which of the following circumstances?
  2. Lack of sufficient appropriate evidence?
  3. Restriction on the scope of the audit?
A

Yes, yes

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25
Q
  1. An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may
    A. Disclaim an opinion on the financial statements after explaining the material inconsistency in an emphasis of matter paragraph.
    B. Revise the auditor’s report to include an other matter paragraph describing the material inconsistency.
    C. Express a qualified opinion after discussing the matter with the client’s directors.
    D. Consider the matter closed because the other information is not in the audited statements.
A

B. Revise the auditor’s report to include an other matter paragraph describing the material inconsistency. This does not modify the opinion itself. The Other Matters paragraph appears after the Opinon paragraph.

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26
Q
  1. When audited financial statements are presented in a document (e.g., annual report) containing other information, the auditor
    A. Should read the other information to consider whether it is inconsistent with the audited financial statements.
    B. Has no responsibility for the other information because it is not part of the basic financial statements.
    C. Has an obligation to perform auditing procedures to corroborate the other information.
    D. Is required to express a qualified opinion if the other information has a material misstatement of fact.
A

A. Should read the other information to consider whether it is inconsistent with the audited financial statements.

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27
Q
  1. Which of the following terms is used in the standard to describe the effects on the financial statements of misstatements or the possible effects on the financial statements, if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence?
    A. Persuasive C. Material
    B. Pervasive D. Extensive
A

B. Pervasive

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28
Q
  1. When would the auditor refer to the work of an appraiser in the auditor’s report?

A. An adverse opinion is expressed based on a difference of opinion between the client and the outside appraiser as to the value of certain assets.
B. A disclaimer of opinion is expressed because of a scope limitation imposed on the auditor by the appraiser.
C. A qualified opinion is expressed because of a matter unrelated to the work of the appraiser.
D. An unqualified opinion is expressed and an emphasis of matter paragraph is added to disclose the use of the appraiser’s work.

A

A. An adverse opinion is expressed based on a difference of opinion between the client and the outside appraiser as to the value of certain assets.

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29
Q
  1. A note to the financial statements of the Prudent Bank indicates that all of the records relating to the bank’s business operations are stored on magnetic disks, and that no emergency backup systems or duplicate disks are stored because the bank and its auditors consider the occurrence of a catastrophe to be remote. Based upon this note, the auditor’s report should express
    A. A qualified opinion C. An adverse opinion
    B. An unmodified opinion D. A “subject to” opinion
A

B. An unmodified opinion

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30
Q
  1. An independent auditor discovers that a payroll supervisor of the company being audited has misappropriated P50,000. The company’s total assets and income before tax are P70 million and P15 million, respectively. Assuming no other issues affect the report, the auditor’s report will most likely contain a/an
    A. Unmodified opinion C. Adverse opinion.
    B. Disclaimer of opinion D. Scope qualification
A

A. Unmodified opinion

31
Q
  1. In which of the following circumstances would an auditor most likely add an emphasis of matter paragraph to the auditor’s report while expressing an unqualified opinion?
    A. There is a substantial doubt about the entity’s ability to continue as a going concern.
    B. Management’s estimates of the effects of future events are unreasonable.
    C. No depreciation has been provided in the financial statements.
    D. Certain transactions cannot be tested because of management’s records retention policy.
A

A. There is a substantial doubt about the entity’s ability to continue as a going concern.

32
Q
  1. The following statements relate to the date of the auditor’s report. Which is false?
    A. The auditor should date the report as of the completion date of the audit.
    B. The date of the auditor’s report should not be earlier than the date on which the financial statements are signed or approved by management.
    C. The date of the auditor’s report should not be later than the date on which the financial statements are signed or approved by management.
    D. The date of the auditor’s report should always be later than the date of the financial statements (i.e., the balance sheet date).
A

C. The date of the auditor’s report should not be later than the date on which the financial statements are signed or approved by management.

33
Q
  1. The auditor should consider the status of legal matters up to the
    A. Balance sheet date.
    B. Date of the auditor’s report.
    C. Date of approval of the financial statements.
    D. Date of issuance of the financial statements.
A

B. Date of the auditor’s report.

34
Q
  1. Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
    A. “I believe that the action can be settled for less than the damages claimed.”
    B. “I believe that the company will be able to defend this action successfully.”
    C. “I believe that the plaintiff’s case against the company is without merit.”
    D. “I believe that the possible liability to the company is nominal in amount.”
A

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

35
Q
  1. In which of the following circumstances would an auditor most likely meet with the client’s legal counsel to discuss the likely outcome of the litigation and claims?
    I. The auditor determines that the matter is a significant risk.
    II. There is a disagreement between management and the entity’s legal counsel.
    III. The subject matter of the litigation is complex.

A. I and II only.
B. II and III only.
C. I and III only.
D. I, II, and III.

A

D. I, II, and III.

36
Q
  1. Management’s refusal to give the auditor permission to communicate with the entity’s legal counsel is most likely to lead to
    A. An adverse opinion.
    B. A qualified opinion or an adverse opinion.
    C. An unqualified opinion.
    D. A qualified opinion or a disclaimer of opinion.
A

D. A qualified opinion or a disclaimer of opinion.

37
Q
  1. The refusal of a client’s lawyer to provide a representation on the legality of a particular act committed by the client is ordinarily
    A. Proper grounds to withdraw from the engagement.
    B. Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of confidentiality.
    C. Considered to be a scope limitation.
    D. Sufficient reason to issue a “subject to” opinion.
A

C. Considered to be a scope limitation.

38
Q
  1. The letter of audit inquiry should be
    A. Prepared and sent by the auditor.
    B. Prepared by management and sent by the auditor.
    C. Prepared and sent by management.
    D. Prepared by the auditor and sent by management.
A

B. Prepared by management and sent by the auditor.

39
Q
  1. The primary reason an auditor requests that letters of inquiry be sent to a client’s attorneys is to provide the auditor with
    A. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date.
    B. The attorneys’ opinions of the client’s historical experiences in recent similar litigation.
    C. Corroboration of the information furnished by management about litigation, claims, and assessments.
    D. The probable outcome of asserted claims and pending or threatened litigation.
A

C. Corroboration of the information furnished by management about litigation, claims, and assessments.

40
Q 
211.	The primary source of information to be reported about litigation, claims, and assessments is the
A.	Independent auditor	
B.	Client’s management
C.	Court records
D.	Client’s lawyer
A

B. Client’s management

41
Q
  1. What type of opinion should be expressed if the client’s management refuses to provide a representation that the auditor considers necessary?
    A. Qualified opinion or a disclaimer of opinion.
    B. Qualified opinion or an adverse opinion.
    C. Adverse opinion or a disclaimer of opinion.
    D. Unqualified opinion.
A

A. Qualified opinion or a disclaimer of opinion.

42
Q
  1. Which of the following statements concerning management representations is incorrect?

A. Representations by management can be a substitute for other audit evidence that the auditor could reasonably expect to be available.
B. If the auditor is unable to obtain sufficient appropriate audit evidence regarding a matter, which has, or may have, a material effect on the financial statements and such audit evidence is expected to be available, this will constitute a limitation in the scope of the audit, even if a representation from management has been received on the matter.
C. If a representation by management is contradicted by other audit evidence, the auditor should investigate the circumstances and, when necessary, reconsider the reliability of other representations by management.
D. The auditor’s working papers would ordinarily include a summary of oral discussions with management or written representations from management.

A

A. Representations by management can be a substitute for other audit evidence that the auditor could reasonably expect to be available.

43
Q 
208. The date of the management representation letter should coincide with the date of the
A.	Statement of Financial Position
B.	Latest related party transaction
C.	Auditor’s report
D.	Latest interim financial information
A

C. Auditor’s report

44
Q
  1. A written representation from a client’s management that, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by the
    A. Chief financial officer and the chair of the board of directors.
    B. Chief executive officer and the chief financial officer.
    C. Chief executive officer, the chair of the board of directors, and the client’s lawyer.
    D. Chair of the audit committee of the board of directors.
A

B. Chief executive officer and the chief financial officer.

45
Q
  1. When considering the use of management’s written representations as audit evidence about the completeness assertion, an auditor should understand that such representations

A. Constitute sufficient appropriate audit evidence to support the assertion when considered in combination with a sufficiently low assessed level of control risk.
B. Are not part of the audit evidence considered to support the assertion.
C. Replace a low assessed level of control risk as audit evidence to support the assertion.
D. Complement, but do not replace, substantive tests designed to support the assertion.

A

D. Complement, but do not replace, substantive tests designed to support the assertion.

46
Q
  1. When an audit is made in accordance with generally accepted auditing standards, the auditor should always
    A. Observe the taking of physical inventory on the balance sheet date.
    B. Obtain certain written representations from management.
    C. Employ analytical procedures as substantive tests to obtain evidence about specific assertions related to account balances.
    D. Document the understanding of the client’s internal control and the basis for all conclusions about the assessed level of control risk for financial statement assertions.
A

B. Obtain certain written representations from management.

Letter A is not required.

Letter C is not required as a substantive test. Analytical procedures are required at the beginning and closing of the audit.

Letter D is not required. When control risk is assessed at the maximum level, only documentation (not basis) is required. If control risk is assessed at below maximum, basis is also required because the auditor plans to rely on the internal controls.

47
Q
  1. The auditor is required to obtain audit evidence that management
    I. Acknowledges its responsibility for the fair presentation of the financial statements in accordance with applicable financial reporting framework.
    II. Has approved the financial statements.

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

A

C. Both I and II.

48
Q
  1. When an auditor concludes that there is substantial doubt about a continuing audit client’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to

A. Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern.
B. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements.
C. Report to the client’s audit committee that management’s accounting estimates may need to be adjusted.
D. Reissue the prior year’s auditor’s report and add an emphasis of matter paragraph that specifically refers to “substantial doubt” and “going concern.”

A

A. Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern.

49
Q
  1. Harold, CPA, believes there is substantial doubt about the ability of Jersamtan Co. to continue as a going concern for a reasonable period of time. In evaluating Jersamtan’s plans for dealing with the adverse effects of future conditions and events, Harold most likely would consider, as a mitigating factor, Jersamtan’s plans to

A. Postpone expenditures for research and development projects.
B. Purchase production facilities currently being leased from a related party.
C. Strengthen internal controls over cash disbursements.
D. Discuss with lenders the terms of all debt and loan agreements.

A

A. Postpone expenditures for research and development projects.

50
Q
  1. Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern?
    A. Confirmation of bank balances.
    B. Confirmation of accounts receivable from major customers.
    C. Reconciliation of interest expense with debt outstanding.
    D. Review of compliance with terms of debt agreements.
A

D. Review of compliance with terms of debt agreements.

51
Q
  1. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?
    A. Restrictions on the disposal of principal assets are present.
    B. Usual trade credit from suppliers is denied.
    C. Significant related party transactions are pervasive.
    D. Arrearages in principal stock dividends are paid.
A

B. Usual trade credit from suppliers is denied.

52
Q
  1. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?
    A. Cash flows from operating activities are negative.
    B. Stock dividends replace annual cash dividends.
    C. Significant related party transactions are pervasive.
    D. Research and development projects are postponed.
A

A. Cash flows from operating activities are negative.

53
Q
  1. Which of the following statements best describes the auditor’s responsibility concerning the appropriateness of the going concern assumption in the preparation of the financial statements?
    A. The auditor’s responsibility is to make a specific assessment of the entity’s ability to continue as a going concern.
    B. The auditor’s responsibility is to predict future events or conditions that may cause the entity to cease to continue as a going concern.
    C. The auditor’s responsibility is to consider the appropriateness of management’s use of the going concern assumption and consider whether there are material uncertainties about the entity’s ability to continue as a going concern that need to be disclosed in the financial statements.
    D. The auditor’s responsibility is to give a guarantee in the audit report that the entity has the ability to continue as a going concern.
A

C. The auditor’s responsibility is to consider the appropriateness of management’s use of the going concern assumption and consider whether there are material uncertainties about the entity’s ability to continue as a going concern that need to be disclosed in the financial statements.

54
Q 
197.	PSA 570 (Going Concern) states that a fundamental principle in the preparation of financial statements is the going concern assumption.  Under this assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws and regulations.  The responsibility to make an assessment of an entity’s ability to continue as a going concern rests with the
A.	Auditor	
B.	Entity’s management
C.	SEC
D.	Entity’s creditors
A

B. Entity’s management

55
Q
  1. 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 entity’s sale of a subsidiary that accounts for 30% of the entity’s consolidated sales.
C. The discovery of information regarding a contingency that existed before the financial statements were issued.
D. The final resolution of a lawsuit disclosed in the notes to the financial statements.

A

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

56
Q
  1. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other procedures concerning the audited financial statements, unless

A. Final determinations or resolutions are made of contingencies that had been disclosed in the financial statements.
B. Information about an event that occurred after the date of the auditor’s report comes to the auditor’s attention.
C. The control environment changes after issuance of the report.
D. Information, which existed at the report date and may affect the report, comes to the auditor’s attention.

A

D. Information, which existed at the report date and may affect the report, comes to the auditor’s attention.

57
Q
  1. Which of the following statements best expresses the auditor’s responsibility with respect to facts discovered after the date of the auditor’s report but before the date the financial statements are issued?
    A. The auditor should amend the financial statements.
    B. If the facts discovered will materially affect the financial statements, the auditor should issue a new report which contains either a qualified opinion or an adverse opinion.
    C. The auditor should consider whether the financial statements need amendment, discuss the matter with management, and consider taking actions appropriate in the circumstances.
    D. The auditor should withdraw from the engagement.
A

C. The auditor should consider whether the financial statements need amendment, discuss the matter with management, and consider taking actions appropriate in the circumstances.

58
Q
  1. Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
    A. Inquiring as to whether any unusual adjustments were made after the date of the financial statements.
    B. Confirming a sample of material accounts receivable established after the date of the financial statements.
    C. Comparing the financial statements being reported on with those of the prior period.
    D. Investigating personnel changes in the accounting department occurring after the date of the financial statements.
A

A. Inquiring as to whether any unusual adjustments were made after the date of the financial statements.

59
Q
  1. Which of the following statements best describes the “date of the financial statements?”
    A. The date on which those with the recognized authority assert that they have prepared the entity’s complete set of financial statements, including the related notes, and that they have taken responsibility for them.
    B. The date that the auditor’s report and audited financial statements are made available to third parties.
    C. The date of the end of the latest period covered by the financial statements, which is normally the date of the most recent balance sheet in the financial statements subject to audit.
    D. The date on which the auditor has obtained sufficient appropriate audit evidence on which to base the opinion on the financial statements.
A

C. The date of the end of the latest period covered by the financial statements, which is normally the date of the most recent balance sheet in the financial statements subject to audit.

60
Q
  1. As used in PSA 560 (Subsequent Events), the term “subsequent events” refers to
    I. Events occurring between the date of the financial statements and the date of the auditor’s report.
    II. Facts discovered after the date of the auditor’s report.

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

A

C. Both I and II.

61
Q
  1. After determining that a related party transaction has, in fact, occurred, an auditor should
    A. Obtain an understanding of the business purpose of the transaction.
    B. Substantiate that the transaction was consummated on terms equivalent to an arm’s-length transaction.
    C. Add a separate paragraph to the auditor’s report to explain the transaction.
    D. Perform analytical procedures to verify whether similar transactions occurred, but were not recorded.
A

A. Obtain an understanding of the business purpose of the transaction.

62
Q
  1. An auditor searching for related party transactions should obtain an understanding of each subsidiary’s relationship to the total entity because
    A. This may permit the audit of intercompany account balances to be performed as of concurrent dates.
    B. This may reveal whether particular transactions would have taken place if the parties had not been related.
    C. The business structure may be deliberately designed to obscure related party transactions.
    D. Intercompany transactions may have been consummated on terms equivalent to arm’s-length transactions.
A

C. The business structure may be deliberately designed to obscure related party transactions.

63
Q
  1. Which of the following events most likely indicates the existence of related parties?
    A. Making a loan without scheduled terms for repayment of the funds.
    B. Discussing merger terms with a company that is a major competitor.
    C. Selling real estate at a price that differs significantly from its book value.
    D. Borrowing a large sum of money at a variable rate of interest.
A

A. Making a loan without scheduled terms for repayment of the funds.

64
Q
  1. The auditor should review information provided by those charged with governance and management identifying
    I. The names of all known related parties.
    II. Related party transactions.
    A. I only. C. Both I and II.
    B. II only. D. Neither I nor II.
A

C. Both I and II.

65
Q
  1. Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that
    A. The communication with the audit committee should be revised.
    B. Irregularities exist among the relevant account balances.
    C. Additional substantive tests of details are required.
    D. Internal control activities are not operating effectively.
A

C. Additional substantive tests of details are required.

66
Q
  1. Analytical procedures used in the overall review stage of the audit generally include
    A. Retesting controls that appeared to be ineffective during the assessment of control risk.
    B. Considering unusual or unexpected account balances that were not previously identified.
    C. Gathering evidence concerning account balances that have not changed from the prior year.
    D. Performing tests of transactions to corroborate management’s financial statement assertions.
A

B. Considering unusual or unexpected account balances that were not previously identified.

67
Q
  1. As a result of test of controls of a sample, the auditor assesses control risk higher than necessary. What conclusions can be made about the sample deviation rate and tolerable rate, and population deviation rate and tolerable rate.
A

Sample: Deviation rate exceeds tolerable rate
Population: Deviation rate is less than tolerable rate.

68
Q
  1. Which combination of results in a decrease in sample size in a sample for attributes?

Risk of assessing control risk too low?
Tolerable rate?
Expected population deviation rate?

A

High risk of assessing control risk too low.
High tolerable rate.
Low expected population deviation rate

69
Q 
182.	Which of the following statistical selection techniques is least desirable for use by an auditor?
A.	Systematic selection	
B.	Stratified selection	
C.	Block selection
D.	Sequential selection
A

C. Block selection

70
Q
  1. Which of the following best illustrates the concept of sampling risk?
    A. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.
    B. An auditor may select audit procedures that are not appropriate to achieve the specific objective.
    C. An auditor may fail to recognize errors in the documents examined for the chosen sample.
    D. The documents related to the chosen sample may not be available for inspection.
A

A. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.

71
Q
  1. An advantage of statistical over nonstatistical sampling methods in tests of controls is that the statistical methods
    A. Afford greater assurance than a nonstatistical sample of equal size.
    B. Provide an objective basis for quantitatively evaluating sampling risks.
    C. Can more easily convert the sample into a dual-purpose test useful for substantive testing.
    D. Eliminate the need to use judgment in determining appropriate sample sizes.
A

B. Provide an objective basis for quantitatively evaluating sampling risks.

72
Q
  1. Population, as defined in PSA 530, means the entire set of data from which a sample is selected and about which the auditor wishes to draw conclusions. It is important for the auditor to ensure that the population is
    I. Appropriate to the objective of the audit procedure.
    II. Complete.

A. I only C. Both I and II
B. II only D. Neither I nor II

A

C. Both I and II

73
Q
  1. Audit sampling involves the
    A. Selection of all items over a certain amount.
    B. Application of audit procedures to less than 100% of items within a class of transactions or an account balance such that all items have a chance of selection.
    C. Application of audit procedures to all items that comprise a class of transactions or an account balance.
    D. Application of audit procedures to all items over a certain amount and those that are unusual or have a history of error.
A

B. Application of audit procedures to less than 100% of items within a class of transactions or an account balance such that all items have a chance of selection.

AUDTHEO (7 decks)

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