FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS, AND FINANCE

AUDITING THEORY REVIEW

1. Which of the following best describes “high level of assurance”?

A. It refers to the professional accountant having obtained evidence based on procedures agreed upon
between the practitioner and the intended users to be satisfied that findings be reported to the intended
users.
B. It refers to the professional accountant having obtained sufficient external and internal appropriate
evidence to be satisfied that the subject matter is plausible in the circumstances.
C. It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that
the subject matter conforms in all material respects with identified suitable criteria.
D. It refers to the professional accountant having obtained sufficient evidence to conclude that he has no
knowledge of any required modifications to be made in the financial statements in order for them to
conform of prescribed criteria.
2. Assurance services least likely involve
A. Implementing a system that improves the processing of information.
B. Improving the quality of information for decision purposes.
C. Improving the quality of the decision model used.
D. Improving the relevance of information.
3. In making a decision to accept or continue with a client, the auditor should consider:
A. B. C. D.
Its own independence Yes No Yes No
Its ability to service a client properly Yes Yes Yes No
The integrity of the client’s management Yes Yes No Yes
4. Arrangements concerning which of the following are least likely to be included in engagement letter? A
A. A predecessor auditor.
B. Fees and billing.
C. CPA investment in client securities.
D. Other services to be provided in addition to the audit.
5. In designing written audit programs, an auditor should establish specific audit objectives that related primarily
to the
A. Timing of audit procedures.
B. Cost-benefit of gathering evidence.
C. Selected audit techniques.
D. Financial statement assertions.
6. Which of the following nonfinancial information would an auditor most likely consider in performing analytical
procedures during the planning phase of an audit?
A. Square footage of selling space.
B. Turnover of personnel in the accounting department.
C. Objectivity of audit committee members.
D. Management’s plans to repurchase stock.
7. Which of the following procedures would an auditor most likely include in the planning phase of a financial
statement audit?
A. Obtain an understanding of the entity’s risk assessment process.
B. Identify specific internal control activities designed to prevent fraud.
C. Evaluate the reasonableness of the entity’s accounting estimates.
D. Perform cutoff tests of the entity’s sales and purchases.
8. The element of the audit planning process most likely to be agreed upon with the client before implementation
of the audit strategy is the determination of the
A. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
B. Procedures to be undertaken to discover litigation, claims, and assessments.
C. Pending legal matters to be included in the inquiry of the client’s attorney.
D. Timing of inventory observation procedures to be performed.
9. The management’s assessment of the entity’s ability to continue as a going concern covers a period of:
A. Not longer than 12 months from balance date.
B. Not longer than 12 months from the date of audit report.
C. At least 12 months from the balance sheet date.
D. At least 12 months from the date of audit report.
10. Adequate audit planning helps ensure that appropriate attention is devoted:
A. B. C. D.
To important areas of the audit Yes Yes Yes Yes
So that potential problems are promptly identified Yes Yes No No
So that the work is completed expeditiously No Yes No Yes
11. An auditor obtains knowledge about a new client’s 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 takes as a
whole to be materially misstated.
D. Understand the events and transactions that may have an effect on the client’s financial statements.
12. Which item would not be contained in an audit program?
A. Staff assigned to the audit.
B. List of specific tasks to be performed.
C. Documentation of system being reviewed.
D. Estimated time required to perform each task.
13. When planning an examination, an auditor should
A. Consider whether the extent of substantive tests may be reduced based on the results of the internal
control questionnaire.
B. Make preliminary judgments about materiality levels for audit purposes.
C. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them
D. Prepare a preliminary draft of the management representation letter.
14. Which of the following is most likely a fraud risk factor?
A. A. Management has a practice of conveying forecast information to analysts, creditors, and other third
parties.
B. Turnover of management has been low throughout the preceding five-year period.
C. Several claims against the senior management are outstanding alleging a violation of the securities law.
D. The company has shown the ability to generate a positive cash flow from operations, while reporting
earnings and earnings growth.
15. A Company showed a large restructuring charge on its income statement in 2019 and has experienced a
constantly rising earnings trend since that time. This would most nearly represent an example of
A. Using immaterial transactions to increase reported earnings to meet analysts' expectations
B. Big bath accounting.
C. Cookie jar reserves.
D. Creative acquisition accounting.
16. Which of the following should the auditor likely to do when the application of planned audit procedures indicates
the possible existence of fraud or error?
A. The auditor should resign in order to avoid legal responsibility.
B. He should discuss the matter with the person whom he believes is involved with the irregularities.
C. He should consider the potential effect on the financial statements.
D. He should refer the suspected fraud or error to the internal auditor.
17. Generally, the decision to notify parties outside the client's organization regarding an illegal act is the
responsibility of the
A. Independent auditor.
B. Management.
C. Outside legal counsel.
D. Internal auditors.
18. Margaret Manufacturing, Inc. sought a P2,000,000 loan from Bank of P.I. Bank of P.I insisted that audited financial
statements be submitted before granting credit. Margaret agreed. An audit was performed by an independent
auditor who submitted an audit report to Margaret that was to be used solely for the purpose of negotiating a
loan from the bank. Bank of P.I., upon reading the audited financial statements, decided in good faith not to
extend the credit desired. Certain ratios, used routinely by Bank of P.I. in reaching credit decisions, were judged
insufficient. Margaret used copies of the audited financial statements to obtain credit elsewhere. Despite
complying with Philippine Standards on Auditing, the independent auditor failed to discover a sophisticated
embezzlement scheme perpetrated by Margaret's chief financial officer. The auditor is liable to
A. Third parties who relied on the audited financial statements to extend credit.
B. Margaret to repay the audit fee because Bank of P.I. did not extend credit.
C. Margaret for any losses Margaret suffered as a result of failing to discover the embezzlement.
D. None of the parties.
19. Which of the following is appropriate about risk assessment?
A. Detection risk is eliminated if an auditor were to examine 100 percent of the account balance or class of
transactions
B. There is an inverse relationship between detection risk and the combined level of inherent and control
risk.
C. The assessed level of inherent and control risk can be sufficiently low, thus resulting to eliminating the
need for substantive tests.
D. Audit risk may be more appropriately determined by assessing inherent and control risk separately.
20. The auditor should perform which of the following as risk assessment procedure?
A. Analytical procedures
B. Confirmation
C. Recalculation
D. Reperformance
21. Which of the following situations will normally result to decrease in the extent of audit procedures?
A. Increase in the risk of material misstatement.
B. Increase in the degree of assurance the auditor plans to obtain.
C. Increase in materiality level.
D. None of the above.
22. While performing an audit, Sebastian decides to restrict the risk of misstatement to 3%.What must the acceptable
level of detection risk be if inherent risk is 25% and control risk is 40%?
A. 0.3%
B. 30%
C. 12%
D.33.3%
23. Detection risk is
A. The risk that the auditor gives an inappropriate audit opinion when the financial statements are
materially misstated.
B. The risk that a misstatement, that could occur in an account balance or class of transactions and that
could be material individually or when aggregated with misstatements in other balances or classes, will
not be prevented or detected and corrected on a timely basis by the accounting and internal control
systems.
C. The risk that an auditor's substantive procedures will not detect a misstatement that exists in an
account balance or class of transactions that could be material, individually or when aggregated with
misstatements in other balances or classes.
D. The susceptibility of an account balance or class of transactions to misstatement that could be material,
individually or when aggregated with misstatements in other balances of classes, assuming that there
were no related internal controls.
24. In considering materiality for planning purposes, an auditor believes that misstatements aggregating P100,000
would have a material effect on an entity’s income statement, but the misstatements would have to aggregate
P200,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures
that would be expected to detect misstatements that aggregate
A. P100,000
B. P200,000
C. P150,000
D. P300,000
25. In considering materiality for planning purposes, an auditor believes that misstatements aggregating P100,000
would have a material effect on an entity’s income statement, but the misstatements would have to aggregate
P200,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures
that would be expected to detect misstatements that aggregate
E. P100,000
F. P200,000
G. P150,000
H. P300,000
26. When control risk is assessed at the maximum level for all financial statement assertions, an auditor should
document the auditor’s
a. b. c. d.
Understanding of the entity’s internal control Yes Yes No Yes
structure elements
Conclusion that control risk is at the maximum No Yes Yes Yes
level
Basis for concluding that control risk is at the No No Yes Yes
maximum level
27. Which statement is correct regarding the audit evidence?
A. The greater the risk, the less audit evidence is likely to be required.
B. The higher the quality, the more may be required
C. Merely obtaining more audit evidence may not compensate for its poor quality.
D. Obtaining audit evidence relating to a particular assertion is a substitute for obtaining audit evidence
regarding another assertion.
28. The auditor considers the status of legal matters up to
A. The date of the audit report
B. The balance sheet date.
C. The issuance of financial statements.
D. Up to the date of receipt of letter from lawyers.
29. Which of the following is not a procedure used by an auditor in the examination of accounts receivable?
A. Confirmation
B. Reconciliation
C. Inquiry
D. Physical count and inspection
30. Which of the following relates to rights and obligations assertion?
A. The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
B. All assets, liabilities and equity interests that should have been recorded have been recorded.
C. Transactions and events that have been recorded have occurred and pertain to the entity.
D. Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts
31. The measure of the quality of audit evidence and its relevance to a particular assertion and its reliability.
A. Sufficiency
B. Significance
C. Appropriateness
D. Assurance
32. Control environment
A. Consists of the policies and procedures that help ensure that management directives are carried out.
B. Includes the governance and management functions and the attitudes, awareness, and actions of those
charged with governance and management concerning the entity’s internal control and its importance in
the entity.
C. Is the entity’s process for identifying business risks relevant to financial reporting objectives and deciding
about actions to address those risks, and the results thereof.
D. Consists of the procedures and records established to initiate, record, process, and report entity
transactions (as well as events and conditions) and to maintain accountability for the related assets,
liabilities, and equity.
33. An auditor for a large service company is performing an audit of the company's cash balance. The auditor is
considering the most appropriate audit procedure to use to ensure that the amount of cash is accurately
recorded on the company's financial statements. The most appropriate audit procedures for the objective are
A. Review collection procedures and perform an analytical review of accounts receivable; confirm balances
of accounts receivable; and verify the existence of appropriate procedures and facilities.
B. Compare cash receipt lists with the receipts journal and bank deposit slips; review the segregation of
duties, observe, and test cash receipts.
C. Review the organizational structure and functional responsibilities; verify the existence and describe
protection procedures for unused checks, including security measures.
D. Examine bank reconciliations, confirm bank balances, and verify cut off of receipts and disbursements;
foot totals of reconciliations and compare to cash account balances.
34. The inability of the client to prepare certain audit requirements may most likely lead the auditor to
A. Withdraw from the engagement.
B. Express qualified opinion or a disclaimer.
C. Express qualified or adverse opinion.
D. Express unqualified opinion with explanatory paragraph.

35. A CPA engaged to examine financial statements observes that the accounting for a certain material item is not in
conformity with generally accepted accounting principles, and that this fact is prominently disclosed in a footnote
to the financial statements. The CPA does not agree with this departure from GAAP and should
A. Not allow the accounting treatment for this item to affect the type of opinion because the deviation from
generally accepted accounting principles was disclosed.
B. Express an unqualified opinion and add an explanatory paragraph emphasizing the matter by reference
to the footnote.
C. Qualify the opinion because of the deviation from generally accepted accounting principles.
D. Disclaim an opinion.

END OF DISCUSSION