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2020 Diagnostic: Auditing Theory

Question #1

Which of the following should an auditor obtain from the predecessor auditor prior to
accepting an audit engagement?
Analysis of balance sheet accounts All matter of continuing accounting significance
Facts that might bear on the integrity of management Analysis of income statement

Question #2

Normally, who is the maker and the recipient of the management representation letter?
Auditor, management, respectively Auditor, auditor, respectively. Management,
management, respectively Management, auditor, respectively

Question #3

Overall responses to address the risks of material misstatement at the financial statement
include:
Assigning more experienced staff or those with special skills or using experts
All of the answers
Incorporating additional elements of unpredictability in the selection of further audit
procedures
Emphasizing to the audit team the need to maintain professional skepticism in gathering
and evaluating audit evidence

Question #4

The real time feature normally would be least useful when applied to accounting for a firms
Property and equipment Receivables Merchandise inventory Cash in bank

Question #5

Security given by a borrower to a lender as a pledge for repayment of a loan, rarely given in
the case of inter-bank business.
Encumbrance Line of credit Collateral Options

Question #6

Which type of subsequent events requires consideration by management and evaluation by

the auditor?
Neither are correct Subsequent events that have a direct effect on the financial
statements but for which disclosure is advisable Subsequent events that have a direct
effect on the financial statements and require adjustments Both are correct
Question #7

Which of the following represents a situation in which the auditors may disclose client
information to outside parties?
Showing the client's bank statement to a neighbor who is a shareholder to emphasize its
cash position. Explaining to the local television news station why the client is likely to miss
payroll in the forthcoming periods. Complying with a validly issued and enforceable
subpoena or summons. Bringing working papers to a professional CPA workshop as an
example of quality work.

Question #8

Which of the following statements is true with regard to the relationship among audit risk,
audit evidence and materiality?
where inherent risk is high and control risk is low, the auditor may safely ignore inherent
risk the lower the inherent risk and control risk, the lower the aggregate materiality
threshold aggregate materiality thresholds should not change under conditions of
changing risk levels. 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 #9

After obtaining a sufficient understanding of internal control, the auditor:

Determines the assessed levels of detection risk and inherent risk
Assesses the need to apply GAAS
Assesses detection risk to determine the acceptable level of inherent risk
Determines the preliminary assessment of control risk

Question #10

An auditor ordinarily examines invoices from lawyers primarily in order to:

Asses the legal ramifications of litigation in progress. Estimate the peso amount of
contingent liabilities. Identify possible unasserted litigation, claims, and assessments.
Substantiate accruals.

Question #11

The phrase Accordingly, we do not express an opinion on the financial statements... indicates
adverse opinion unqualified opinion disclaimer of opinion qualified opinion

Question #12

The misapplication of accounting principles may be caused by:

Neither fraud, nor error Fraud or error. Error only Fraud only

Question #13
If supplementary information that is not required by the applicable financial reporting
framework is presented with the audited financial statements, the auditor shall
issue an adverse opinion due to departure from the applicable financial reporting
framework. issue a qualified opinion due to disagreement with management evaluate
whether such supplementary information is clearly differentiated from the audited financial
statements withdraw from the engagement

Question #14

Which of the following will an auditor least likely discuss with the former auditors of a
potential client prior to acceptance?
Fees charged for services. Disagreements with management regarding accounting
principles. Predecessor auditor understanding of the reasons for the change of auditors.
Integrity of management.

Question #15

Which of the following is not one of the requirements before accepting an assurance
engagement?
The practitioner should be competent and independent
The practitioner should accept the engagement only if the subject matter is identifiable and
in the form that can be subjected to evidence gathering procedures
The responsible party and the intended user of the assurance report should be from
different organizations
The practitioner should accept the engagement only if the subject matter is the
responsibility of another party

Question #16

Which one of the following best describes the assurance process?

Assembling and filing tax returns and related supplemental information. Gathering
evidence about specific and known assertions. Assisting management in the successful
operations of the company. Proving the accuracy of the books and records.

Question #17

In testing the completeness assertion for an audit, an auditor ordinarily works from the:
Supporting evidence to the accounting records Accounting records to the supporting
evidence. Potentially unrecorded items to the financial statements. Financial
unrecorded items to the financial statements.

Question #18

This terms refers to financial information that is prepared and presented in accordance with
an applicable financial reporting framework and comprises either a complete or a condensed
set of financial statements for a period that is shorter than the entitys financial year.
 Historical financial information. Prospective financial information. Interim
financial information. Truncated financial information.

Question #19

This environment exists when a computer of any type or size is involved in the processing by
the entity of financial information of significance to the audit, whether that computer is
operated by the entity or by a third party, such as a service bureau.
CIS environment
Information system
Process alignment
Database areas

Question #20

The underlying reason for a code of professional ethics is

The need for public confidence in the quality service of the profession
That it provides a safeguard against unscrupulous people.
To provide the BOA with a basis for measuring the performance of the practitioners
That it is required by legislation

Question #21

Proper segregation of functional responsibilities in an effective structure of internal control

calls for separation of the functions of
Authorization, execution, and payment Authorization, recording, and custody
Authorization, payment, and recording Custody, execution, and reporting

Question #22

Bagyo, Fredie, Gener, CPAs did not finish the audit of Spy-Gamba, Inc. because the senior
auditor was terminated and a new audit lead was not assigned to the engagement. Litigation
against Bagyo, Fredie, Gener, CPAs will most likely result from which claim?
Misappropriation of assets Negligence Fraud Breach of contract

Question #23

This refers to the computer programs designed to perform specific data processing tasks such
as payroll, billing or inventory processing.
Systems software
Application software
Computer software
Dataware

Question #24
Which of the following generalizations is incorrect about the reliability of evidence gathered
by practitioners?
Evidence in the form of documents and written representation is more likely to be reliable
Evidence obtained indirectly by the practitioner is more likely reliable than that obtained
directly
Evidence generated internally is more reliable when subject to appropriate controls within
the entity
Evidence from external sources is more reliable than that generated internally

Question #25

A generic term used to categorize a wide variety of financial instruments whose value depends
on an underlying rate or price, such as interest rates, exchange rates, equity prices, or
commodity prices.
Asset / liability management Hedge Derivatives Commodity

Question #26

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

Question #27

An auditor who concludes that a material (but not pervasive) uncertainty is not adequately
disclosed in the financial statements should issue a (an)
qualified opinion disclaimer opinion unqualified opinion adverse opinion

Question #28

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

Question #29

In determining estimates of fees, an auditor may take into account each of the following,
except the
Attainment of specific findings
Degree of responsibility assumed by undertaking the engagement
 Value of the service to the client
Skills required to perform the service

Question #30

In the consideration of internal control, the effectiveness of the design of controls is tested by:
Decision tables Substantive tests Flowcharts Tests of controls

Question #31

Fraud may be most properly defined as:

False representation or concealment of a material fact to the benefit or detriment of an
individual or organization. The use of company assets for ones own personnel purposes.
Outright theft of company assets without falsification of records to conceal the act.
Extortion in which the threat of physical violence is used to coerce someone to part to
something in value.

Question #32

To whom can a professional accountant disclose confidential information obtained during

professional engagement?
None of these
Close family members
Fellow CPAs
Immediate family members

Question #33

Which of the following is not one of the elements of an assurance engagement?

An opinion about whether the subject matter conform, in all material respects, with
identified criteria A subject matter Suitable criteria Sufficient appropriate evidence

Question #34

The audit risk model consists of: AR=IR x CR x DR. The detection risk is the dependent variable.
What is the acceptable level of detection risk if the assessed level of inherent risk is high and
the control risk is medium?
Lower
Lowest
Higher
Medium

Question #35

The entire set of data about which the auditor wishes to draw conclusions is called
Sampling unit Population Sample Sampling frame
Question #36

According to the Code of Professional Conduct, Rule 101, which activity requires a higher level
of independence for the auditor?
Assurance services Bookkeeping services Tax services Consulting services

Question #37

Objectivity refers to a practitioners ability:

To choose independently between accounting principles and auditing standards. To
remain impartial. To identify assertions that are appropriate. To be unyielding in all
disputes.

Question #38

Fraudulent financial reporting is often called

Theft of assets Defalcation Management fraud Employee fraud

Question #39

When a professional accountant is asked to provide a second opinion, the professional

accountant has a responsibility to identify potential threat to fundamental principles. If the
identified threat is other than clearly insignificant, appropriate safeguards should be applied.
Which of the following safeguards could possibly eliminate the threat that arises when
providing second opinions?
Seek client's permission to contact the existing accountant
Engage the services of an expert
Involving another firm to perform or re-perform part of the engagement
Contact the existing accountant without obtaining the client's permission

Question #40

Select the incorrect statement?

The auditor is required to comply with the Code of Professional Ethics for Certified Public
Accountants promulgated by the Board of Accountancy. The auditor need not exercise
professional skepticism recognizing that in a review engagement, only a moderate level of
assurance is expressed. The auditor should conduct a review in accordance with Philippine
Standards on Review Engagements. All of the statements are incorrect.

Question #41

If evidence was obtained in the prior year's audit that indicates a key control was operating
effectively:
The tests of the control will be reduced this year
The extent of tests of that control may be reduced this year if the auditor determines that it
is still in place
 The auditor would not test this area gain this year.
It will be unnecessary to test that control this year

Question #42

For assurance engagements regarding historical financial information, limited assurance

engagements are called
compilations reviews audits examinations

Question #43

One of the major differences between auditors and other professionals is that most
professionals
Are not expected to act in the best interest of the public
Need not be concerned about independence
Do not have to pass rigorous examination to be admitted in the profession
Do not need the confidence of the public

Question #44

Which of the following ethical principles implies fair dealings and truthfulness?
Integrity
Objectivity
Professional skepticism
Confidentiality

Question #45

The primary objective of procedures performed to obtain an understanding of the internal

control system is to provide the auditor with:
Evidential matter to use in reducing detection risk. Information necessary to prepare
flowcharts. A basis from which to modify tests of controls. Knowledge necessary to plan
the audit.

Question #46

When computer software or files can be accessed from OL terminals, users should be required
to enter a (n)
A self-diagnosis test
An echo check
Personal identification code
A parity check

Question #47

This means "identifying and capturing the relevant information for transactions or events"
 Processing
Recording
Reporting
None of these

Question #48

Auditors often make use of computer programs that perform routing processing functions
such as sorting and merging. These programs are made available be electronic data processing
companies and others are specifically referred to as
use programs compiler programs utility programs supervisory programs

Question #49

Before releasing the audit report, the auditor should perform which of the following?
Review the financial statements analytically for any inconsistencies. Perform planning
for the subsequent period audit. Instruct the client to release the financial statements to
the bank. Secure a deposit from the client to safeguard against lawsuits.

Question #50

Which of the following has the power to prescribe and/or adopt Code of Ethics for the practice
of accountancy?
Board of Accountancy
Congress
President of the Philippines
PICPA

Question #51

The acceptable level of detection risk and the combined level of inherent risk and control risk
are _____ related.
inversely
not
directly
proportionately

Question #52

When positive confirmations are not returned, the auditor is supposed to use alternative
procedures. Which of the following is not an alternative procedure?
Examination of subsequent cash collections. Examination of supporting documents.
None. All of the three above are alternative procedures. Mailing second and third
confirmations.

Question #53
Generally, advertising and publicity in any medium are acceptable provided it is:
Published in billboard advertisements
Not self-laudatory
Not professionally dignified
Not in good taste

Question #54

Unlike consulting services, assurance services

report on the quality of information make recommendation to management are
two-party contracts report on how to use information

Question #55

If the auditor do not perform tests of controls of certain assertions:

They must assess control risk at the maximum level for these assertions
They have performed a substandard audit
They must issue a qualified opinion
They are not required to communicate reportable conditions relating to those accounts to
management

Question #56

Independence in auditing means

Not having a loan to or from an assurance client
Not having any financial or economic relationship with the client
Taking an unbiased viewpoint
Being an advocate of the assurance client

Question #57

In which of the following situations would an auditor have violated the Code of Ethics in
determining its fee?
A fee based on whether of not the audit report leads to the approval of client's application
for bank loan
A fee that will be established as a result of a bankruptcy proceedings
A fee which is based upon the nature of the engagement rather than upon the actual time
spent on the engagement
A fee based on the degree of responsibility that the service entails

Question #58

The primary deliverable of an audit is (are):

the confirmation documentation. the audit working papers. the audit report. the
financial statements.
Question #59

Planning the audit requires which one of the following?

Performing an overall review of the audited financial statement.

Developing an understanding of the client's business and the industry in which it operates.
Testing specific balances and transactions. Divulging the locations and details of audit
tests to be performed to the client.

Question #60

According to the Philippine Code of Ethics, independence is potentially affected by self-interest,

self-review, advocacy, familiarity and intimidation threats. Which of the following best
describes "advocacy threat?"
This occurs when a member of assurance team was previously a director or officer of the
assurance client.
This occurs when any product or judgment of a previous engagement needs to be re-
evaluated in reaching conclusions on the assurance engagement.
This occurs when a firm or a member of the assurance team could benefit from financial
interest on an assurance client.
This occurs when a firm, or a member of the assurance team, promotes, or may be
perceived to promote, an assurance client's position or opinion to the point that objectivity
may, or may be perceived to be, compromised.

Question #61

Which of the following descriptions pertain to performance reviews?

Physical security of assets, including adequate safeguards such as secured facilities over
access to assets and records. The assignment of incompatible functions to different people.
Control activities that include reviews and analyses of actual performance versus budgets,
forecasts, and prior period performance Controls performed to check accuracy,
completeness, and authorization of transactions

Question #62

Which of the following is not one of the elements of an assurance engagement?

An opinion about whether the subject matter conform, in all material respects, with
identified criteria
Suitable criteria
A subject matter
Sufficient appropriate evidence

Question #63

Subject matter of an assurance engagement may take many forms including

Data (Yes), Systems (No), Behavior (Yes)
Data (Yes), Systems (Yes), Behavior (No)
 Data (No), Systems (Yes), Behavior (Yes)
Data (Yes), Systems (Yes), Behavior (Yes)

Question #64

A management representation letter would ordinarily be dated:

Five days after the auditors report. The same date as the balance sheet date. Five
days after the balance sheet date. The same date as the auditors report.

Question #65

The objective of a dual-purpose test is to

Test internal controls as well as transactions and balances using the same test procedures.
Detect material misstatements in the client's financial statements
Evaluate whether internal controls are operating effectively.
Identify usual trends or patterns in comparative financial statements

Question #66

Over auditing can be defined as:

Giving an inappropriate unqualified report on financial statements. Auditing a larger
sample size than necessary. Taking more risk than is professionally acceptable.
Auditing too small a sample size .

Question #67

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

Question #68

Which of the following fundamental principles would most likely to be threatened when a
professional accountant accepts an engagement before knowing all the pertinent facts about
the new engagement?
Professional competence and due care
Objectivity
Professional behavior
Integrity

Question #69

A firm of CPAs may use policies such as notifying professional personnel as to the names of
audit clients having publicly-held securities and confirming periodically with such personnel
that prohibited relations do not exist. This is done to achieve effective quality control in which
of the following areas?
Inspection Independence Assignment of personnel Acceptance and continuance
of clients

Question #70

When obtaining an understanding of the accounting and internal control system the auditor
may trace a few transactions through the accounting system. This technique is:
Validity test Walk-through Re performance Control test

Question #71

Test of controls may include the following, except:

Inspection of documentary support for transactions evidencing authorization
Analytical procedures involving comparison of operating expenses with budgeted amount
Re-performance of internal control procedures
Inquiries about, and observation of, internal controls which leave no audit trail

Question #72

General purpose financial statements may be prepared in accordance with the following
framework except:
International Auditing Standards International Financial Reporting Standards for SMEs
International Financial Reporting Standards International Accounting Standards

Question #73

The following are used by the auditor in assessing whether the accounting for assets or
liabilities requiring fair value measurements is appropriate, except.
The auditors understanding of the requirements of the financial reporting framework.
Results of other audit procedures. Knowledge of the business and industry. Number of
personnel involved in the measurement process.

Question #74

A CPA shall not disclose confidential information obtained during an audit engagement in
which one of the following situations?
To a successor auditor without the client's permission
With the consent of the client
In defense of himself when sued by his client
When the security of the state requires

Question #75

The current file of an auditors working papers most likely would include a copy of the:
 Current year schedules and analyses. Long-term customer contracts. Articles of
incorporation and by-laws. Long-term debt agreement.

Question #76

Ethical Principles that are applicable to all CPAs no matter the type of services that are
rendered does not include which factor?
Due professional care Integrity and objectivity Professional behavior Planning
and supervision

Question #77

This type of confirmation request asks the respondent to reply only in the event of
disagreement with the information provided in the request:
Negative confirmation request Blank confirmation request Positive confirmation
request Discovery confirmation request

Question #78

Government auditing often extends beyond examinations leading to the expression of opinion
on the fairness of financial statements and includes audits of efficiency, economy, effectiveness
and:
Accuracy Compliance Evaluation Internal control.

Question #79

Which of the following auditor concerns most likely could be so serious that the auditor
concludes that a financial statement audit cannot be conducted?
procedures requiring segregation of duties are subject to management override the
entity has formal written code of conduct the integrity of the entitys management is
suspicious management fails to modify prescribed controls for changes in conditions

Question #80

In a compilation engagement, the accountant is engaged to use accounting expertise as

opposed to auditing expertise to collect, classify, and summarize financial information. What
type of assurance is provided by the accountant when he/she performs this engagement?
Positive assurance
Limited assurance
Negative assurance
No assurance
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