Chapter 7 Questions

Question 1

T/F
The ethical responsibility requiring that a person or persons should possess professional competence and exercise due care is met by a full and thorough understanding of the fields of business and finance

Answer 1

FALSE
Professional competence and due care is obtained through a combination of education and experience. It cannot be obtained through education alone.

Question 2

T/F
Sufficiency of evidential matter refers to the quantity of the evidence gathered

Answer 2

TRUE

Question 3

T/F
The concept of materiality would be least important to an auditor in determining transactions that should be reviewed.

Answer 3

FALSE
Materiality is one of the major factors considered in determining transactions that would be reviewed.

Question 4

T/F
The risk of material misstatement of the financial statements is generally lesser when account balances and classes of transactions include accounting estimates rather than essentially factual data

Answer 4

FALSE
Risk of material misstatement is greater when transactions and balances involved estimates

Question 5

T/F
The auditor’s judgement ultimately determines the specific procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion

Answer 5

TRUE

Question 6

T/F
“Unrestricted access to whatever record, documentation and other information requested in connection with the audit” is usually one of the items documented in an audit engagement letter

Answer 6

TRUE

Question 7

T/F
In the case of recurring audits, the auditor need not send a new engagement letter, except in certain circumstances

Answer 7

TRUE

Question 7

T/F
if justifiable, terms of the new engagement must be agreed with the client, and the auditor will issue a report based on the new engagement

Answer 7

TRUE

Question 8

T/F
If the engagement is revised from an audit to a review, the review report should not mention the original engagement

Answer 8

TRUE

Question 9

T/F
Regarding communications between the auditors, the predecessor auditor has the duty to initiate communications with the successor auditor

Answer 9

FALSE
The successor auditor has the duty to initiate communication with the predecessor auditor, since the latter is bound by the duty of confidentiality.

Question 10

T/F
Planning means developing a general audit plan and a detailed audit strategy for the unexpected nature, timing and extent of the audit

Answer 10

TRUE

Question 11

T/F
The primary objective of an auditor to study and evaluate existing internal control is to obtain a basis for the expression of an auditor’s opinion

Answer 11

FALSE
The primary objective of the study and evaluation of internal control is to determine the nature, extent and timing of substantive tests to be performed

Question 12

T/F
One of the areas covered by PSAs is that the report shall state whether the financial statements are presented in accordance with generally accepted accounting principles

Answer 12

TRUE

Question 13

T/F
Absolute certainty in auditing is rarely attainable because much of the evidence available to the auditor is persuasive rather than conclusive in nature

Answer 13

TRUE

Question 14

T/F
The engagement partner us responsible for the debriefing process

Answer 14

TRUE

Question 15

the independent auditor is most concerned with which of the ff:

a. Accuracy and reliability of accounting data
b. Promotion of operational efficiency
c. Adherence to prescribed managerial policies
d. Attainment of the organization’s objecitve

Answer 15

A
Please change choice A to Fairness and reliability of accounting data.

Question 16

Auditing standards differ from auditing procedures in that procedures relate to:

a. Measures of performance
b. Audit principles
c. Acts to be performed
d. Audit judgements

Answer 16

C

Question 17

One of the following refers to an ethical responsibility of the auditor:

a. confirm the cash balances
b. Exercise due professional care
c. Join professional society
d. Destroy confidential relationship with client

Answer 17

B

Question 18

The ethical requirement of “professional competence and due care” should mean that a CPA who accepts an engagement has a duty to perform:

a.As a professional possessed with the degree of skills customarily held by others in the profession
b. With necessary diligence and w/o fault or error
c. As a professional who will assume responsibility for damages caused by his error of judgement
d. To the satisfaction of the audit committee and third parties who may rely upon his result

Answer 18

A

Question 19

Which of the following is mandatory if the auditor is to comply with Philippine Standards on Auditing?

A. Possession by the auditor of adequate technical training.
B. Use of analytical procedures in audit engagements.
C. Use of statistical sampling whenever feasible on an audit engagement.
D. Confirmation by the auditor of material accounts receivable balances.

Answer 19

A

Question 20

Which of the following best describes why publicly traded corporations follow the practice of having the outside auditor traded appointed by the board of directors or elected by the stockholders?

A. To comply with the regulations of the FRSC
B. To encourage a policy of, rotation of the independent auditors.
C. To emphasize auditor independence from the management or the corporation. D. To provide the corporate owners with an opportunity to voice their opinion concerning the quality of the auditing firm selected by the directors.

Answer 20

C

Question 21

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding:

A. Disagreements which the predecessor had with the client concerning auditing procedures and accounting principles. the client
B. The predecessor’s evaluation of matters of continuing matters of continuing accounting significance.
C. The degree of cooperation concerning the inquiry of the client’s legal counsel.
D. The predecessor’s assessments of inherent risk and judgments about materiality.

Answer 21

A

Question 22

If permission from the client to discuss its affairs with the proposed auditor is denied by the client, the predecessor auditor should:

A. Keep silent of the denial.
B. Disclose the fact that the permissīon to disclose is denied by the client.
C. Disclose adequately to proposed auditor all noncompliance made by the client.
D. Seek legal advice before responding to the proposed auditor.

Answer 22

B

Question 23

The primary purpose of the engagement letter is to:

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

Answer 23

B

Question 24

Which of the following is least likely to be included in an audit engagement letter?

A. Identification of specific audit procedures that the auditor needs to undertake,
B. Description of any letters or reports that the auditor expects to submit to the client. C. A reference to the inherent limitations of an audit that there is an unavoidable risk that some material misstatements may remain undiscovered.
D. Basis on which fees are computed and any billing arrangements.

Answer 24

A

Question 25

If a change in the type of engagement from higher to lower level of assurance is not justified, the auditor should:

A. Qualify the report on the original engagement.
B. Continue with the revised engagement, but make explicit reference about the original engagement
C. Refuse to agree to management’s request on the change of engagement and continue with the original engagement.
D. Withdraw from the engagement.

Answer 25

C

Question 26

This refers to the development of a general strategy and a detailed approach for the expected nature, timing and extent of audit:
A Supervision
B. Direction
C. Audit planning
D. Pre-engagement

Answer 26

C

Question 27

An auditor obtains knowledge about a new clients business and its industry to

A. Make constructive suggestions concerning improvements to the client’s internal control.
B. Develop an attitude of professional skepticism concerning management’s financial statement assertions.
C. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated.
D. Understand the events and transactions that may have effect on the client’s financial statements.

Answer 27

D

Question 28

If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is:

A. Significant
B. Insignificant
C. Material
D. Relevant

Answer 28

C

Question 29

Religious Corp. has a few large accounts receivable that total Pilgrim Corp. has a large number of small accounts P1,000,000. receivable that álso total P1,000,000. The importance of an eror in any one account is, therefore, greater for Religious Corp. than for Pilgrim Corp. This is an example of the auditor’s concept of:

A. Materiality.
B. Comparative analysis
C. Reasonable assurance.
D. Relative risk.

Answer 29

A

Question 30

Which of the following statements is not correct about materiality?

A. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.
B. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.
C. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
D. An auditor’s consideration of materiality in influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements.

Answer 30

B

Question 31

Which of the following relatively small misstatements most Iikely could have a material effect on an entity’s financial statements?

A. An illegal payment to a foreign official that was not recorded.
B. A piece of obsolete office equipment that was not retired.
C. A petty cash fund disbursement that was not properly authorized.
An uncollectible account receivable that was not written off.

Answer 31

A

Question 32

The concept of materiality would be least important to an auditor in determining the

A. Transactions that should be reviewed.
B. Need for disclosure of a particular fact or transaction.
C. Scope of the CPA’s audit program relating to various accounts
D. Effects of direct financial interest in the client upon the CPA’s independence.

Answer 32

D

Question 33

Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function. An effective auditor will:

A. Take any means available to reduce the risk to the lowest possible level.
B. Set the risk level between 5% and 10%. C. Perform the audit procedures first and quantitatively set the risk level before forming an opinion and writing the report. D. Recognize that risks exist and deal with them in an appropriate manner.

Answer 33

D

Question 34

The risk of a material misstatement occurring in an account, assuming an absence of internal. control, is referred to as:

A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk

Answer 34

B

Question 35

The risk that a misstatement that could occur in an account balance or. class. of transactions and that could be material individually or in the aggregate, will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems:

A. Audit risk
B. Inherent risk
C. Control risk.
D. Detection risk

Answer 35

C

Question 36

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are

A. Elements of audit risk while detection risk is not
B. Changed at the auditor’s discretion while detection risk is not.
C. Considered at the individual account-balance level while detection risk is not.
D. Functions of the client and its environment while detection risk is not.

Answer 36

D

Question 37

The risk that an auditor’s procedures will lead to the conclusion that a material error does not exist in an account balance when in fact, such error does exist is referred to as

A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk

Answer 37

D

Question 38

An auditor should design the written audit program so that

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

Answer 38

C

Question 39

The primary purpose of the auditor’s consideration of internal control is to provide a basis for -

A. Determining whether procedures and records. that concerned with the safeguarding of assets are reliable.
B. Constructive suggestions to clients concerning deficiencies in internal control. C. Determining the nature, timing and extent of audit tests be applied.
D.The expression of an opinion.

Answer 39

C

Question 40

Tests of controls are used to test whether còntrols are:

A. Operating effectively.
B. Placed in operatioñ or implemented.
C. Properly incorporated in the financial statements.
D.Properly documented by the client.

Answer 40

A

Question 41

The major reason an independent auditor gathers audit evidence

A. To form an opinion o the financial statements.
B. To detect fraud.
C. To evaluate management.
D. To evaluate internal control.

Answer 41

A

Question 42

Which statement is incorrect regarding appropriateness of audit evidence?

A. Sufficiency and appropriateness are inter-related.
B. Sufficiency is the measure of the quantity of audit evidence.
C. Appropriateness is the measure of the quality of audit evidence.
D. Merely obtaining more audit evidence may compensate for its poor quality.

Answer 42

D

Question 43

Which of the following descriptions refer to substantive tests?

A. Obtain an understanding of the entity and its environment,
B. Test the operating effectiveness of controls.
C. Detect material misstatements at the assertion level.
D. None of the above

Answer 43

C

Question 44

When a company’s financial statements bear an unqualified opinion, readers of the audit report can assume that:

A. The external auditor found no fraud.
B. The company is financial sound and the financial statements are accurate.
C. Internal control is effective.
D. All material, disagreements between the company and external auditor about the application of accounting principles were resolved in the satisfaction of the external auditor.

Answer 44

D
Choice A refers to Existence.
Choice B refers to Completeness.
Choice D refers to rights and obligations.