Deadline April 22 (LUNCH 12:00)

Auditing theory Class

Submit to:

Co_joseph_yap@yahoo.com

BUCOT, MARIA ALIZAH L.

1. An auditor’s engagement letter most likely would include a statement that

a. Lists potential control deficiencies discovered during the prior-year’s audit
b. Explains the analytical procedures that the auditor expects to apply
c. Describes the auditor’s responsibility to evaluate going-concern issues
d. Limits the auditor’s responsibility to detect errors and fraud

2. A CPA may reduce the audit work on a first time audit by reviewing the working papers of the predecessor auditor. The
predecessor should permit the successor to review working papers relating to matters of continuing significance such as
those that relate to
a. Extent of reliance on the work of specialists
b. Fees arrangements and summaries of payments
c. Analysis of contingencies
d. Staff hours required to complete the engagement

3. Which of the following statements reflects an auditor’s responsibility for detecting errors and fraud?
a. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud involving
employee collusion or management override
b. An auditor should plan the audit to detect errors and fraud that are caused by departures from GAAP
c. An auditor is not responsible for detecting errors and fraud unless the application of GAAS would result in such detection
d. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to
the financial statements

4. If the client refuses to accept an audit report that is qualified due to a known existence of an illegal act, the auditor should
a. Issue an adverse opinion if management agrees to fully disclose the matter
b. Withdraw from the engagement and communicate the reasons to the audit committee in writing
c. Withdraw from the engagement and communicate the reasons to the Securities and Exchange Commission or other
regulatory body in writing
d. Issue an unqualified opinion if management agrees to fully disclose the matter

5. The exercise of due professional care requires that an auditor

a. Examine all available corroborating evidence
b. Critically review the judgment exercised at every level of supervision
c. Reduce control risk below the maximum
d. Attain the proper balance of professional experience and formal education

6. Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising
from fraudulent financial reporting?
a. Several members of management have recently purchased additional shares of the entity’s stock.
b. Several members of the board of directors have recently sold shares of the entity’s stock
c. The entity distributes financial forecasts to financial analysts that predict conservative operating results.
d. Management is interested in maintaining the entity’s earnings trend by using aggressive accounting practices.

7. A CPA establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform
services for a current client. One of the main purposes for establishing such policies and procedures is
a. To enable the auditor to attest to the integrity or reliability of a client
b. To comply with the quality control standards established by regulatory bodies
c. To lessen the exposure to litigation resulting from failure to detect fraud in client financial statements
d. To minimize the likelihood of association with clients whose management lacks integrity

8. Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor,
the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a complete report of the
circumstances leading to the termination, with the understanding that all information disclosed will be kept confidential
b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures to verify
the reason given by the client for the termination
c. Not communicate with the predecessor auditor because this would violate the confidential relationship between the
auditor and the client
d. Advise the client of the intention to contact the predecessor auditor and request permission for the contact
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9. The following statements relate to business risk. Select the incorrect statement:
a. Business risk is broader than the risk of material misstatement
b. Most business risks do not have financial consequences, though they may have an effect on the financial statements
of an entity.
c. Usually, management identifies business risks and develops approaches to address them
d. Smaller entities often do not set their objectives and strategies, or manage the related business risks, through formal
plans or processes

10. An audit made in accordance with Philippine Standards on Auditing (PSA) generally should
a. Be expected to provide assurance that noncompliance with laws and regulations will be detected if the internal control
is effective.
b. Be relied upon to disclose indirect effect noncompliance with laws and regulations.
c. Encompass a plan to search actively for noncompliance with laws and regulations which relate to operating aspects.
d. Not be relied upon to provide reasonable assurance that all noncompliance with laws and regulations will be detected.

11. Monitoring, as an element of quality control policies of a firm, requires:

a. Providing reasonable assurance that the firm’s other quality control policies and procedures are effectively operating.
b. Designates individuals as specialists to serve as authoritative sources and define their authority in consultative
situations.
c. Ensuring that personnel are sufficiently directed, supervised and their work being reviewed adequately.
d. Identify the right personnel to be assigned in an audit engagement

12. Which of the following documentation is required for an audit in accordance with Philippine Standards of Auditing?
a. A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity’s controls.
b. A client engagement letter that summarizes the timing and details of the auditor’s planned fieldwork.
c. An indication in the working papers that the accounting records agree or reconcile with the financial statements.
d. The basis for the auditor’s conclusions when the assessed level of control risk is at the maximum level for all financial
statement assertions

13. An engagement quality control review is required to be performed:

a. immediately after the reassessment of control risk
b. for all audits of financial statements of listed entities
c. for all types of audits, regardless of the subject matter of the engagement
d. at engagement completion after the report is issued

14. What aspects are most important in determining the eligibility of engagement quality control reviewers?
a. Technical qualifications and objectivity
b. Integrity and objectivity
c. Competence and independence
d. All of these

15. In the case of an audit, final engagement files should be completely assembled not more than:
a. 60 days after the date of the audit report
b. 30 days after the date of the audit report
c. 10 days after the date of the audit report
d. 5 days after the date of the audit report

16. What is the normal retention period for audit engagement documentation?
a. No shorter than one year from the date of the audit report
b. No shorter than three years from the date of the audit report
c. No shorter than four years from the date of the audit report
d. No shorter than ten years from the date of the audit report

17. A process designed to provide an objective evaluation, before the report is issued, of the significant judgments the
engagement team made and the conclusions they reached in formulating the report.
a. Peer review
b. Engagement quality control review
c. Inspection
d. Monitoring

18. In relation to completed engagements, these are procedures designed to provide evidence of compliance by engagement
teams with the firm’s quality control policies and procedures.
a. Peer review
b. Engagement quality control review
c. Inspection
d. Monitoring

19. An entity whose shares, stock or debt are quoted or listed on a recognized stock exchange, or are marketed under the
regulations of a recognized stock exchange or other equivalent body.
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a. Quoted entity
b. Listed entity
c. Public sector entity
d. Recognized entity

20. S1 CPA firms have as their primary responsibility the performance of the audit function on published financial
statements of all corporations
S2 The value of the CPA’s opinion lies in the fact that he has gathered sufficient, competent, evidential matter to
support his opinion
a. True, False
b. False, True
c. True, True
d. False, False

21. Assurance engagement risk is the risk

a. Of expressing an inappropriate conclusion when the subject matter information is not materially misstated
b. That the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated
c. Through loss from litigation, adverse publicity, or other events arising in connection with a subject matter reported on
d. Of expressing an inappropriate conclusion when the subject matter information is either materially misstated or not
materially misstated

22. An auditor is required to establish an understanding with a client regarding the services to be performed for each
engagement. This understanding generally includes
a. The auditor’s responsibility for determining the preliminary judgments about materiality and audit risk factors
b. Management’s responsibility for identifying mitigating factors when the auditor has doubt about the entity’s ability to
continue as a going concern
c. The auditor’s responsibility for ensuring that the audit committee is aware of any significant deficiencies and material
weaknesses that come to the auditor’s attention
d. Management’s responsibility for providing the auditor with an assessment of the risk of material misstatement due to
fraud.

23. Which of the following statements describes why a properly designed and executed audit may not detect a material
misstatement in the financial statements resulting from fraud?
a. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional
misstatement that is concealed through collusion.
b. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility
concerning fraud.
c. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low
risk of unintentional errors in the financial statements
d. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial
statements taken as a whole
24. Which of the following factors most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting?
a. Large amounts of liquid assets that are easily convertible into cash
b. Low growth and profitability as compared to other entities in the same industry
c. Financial management’s participation in the initial selection of accounting principles
d. An overly complex organizational structure involving unusual line of authority

25. The auditor should have or obtain a knowledge of the client’s business sufficient to:
a. Evaluate whether the financial statements are materially misstated
b. Document material weaknesses in accounting and internal control systems
c. Identify and understand events, transactions and practices that may have effect on financial statements
d. Have an overall evaluation of whether financial assertions are fairly presented in the financial statements

26. To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would:
a. Perform tests of details of transactions and balances
b. Review prior-year working papers and the permanent file for the client
c. Read specialized industry journals
d. Re-evaluate client’s internal control environment

27. When assessing the risk of material misstatement, an auditor is required to document
I. The basis for the assessment
II. Significant risks identified and the related controls that were evaluated
a. I only
b. II only
c. Both I and II
d. Neither I nor II

28. Which of the following procedures would least likely result in the discovery of noncompliance?
a. Reading the minutes of the board of director meetings
b. Making inquiries of the client’s management
c. Performing tests of details of transactions
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d. Reviewing an internal control questionnaire

29. When an auditor becomes aware of a possible noncompliance by a client, the auditor should obtain an understanding of
the nature of the act to
a. Evaluate the effect on the financial statements
b. Determine the reliability of management’s representations
c. Consider whether other similar acts may have occurred
d. Recommend remedial actions to the audit committee

30. Which of the following matters would an auditor most likely communicate to an entity’s audit committee?
a. A list of negative trends that may lead to working capital deficiencies and adverse financial ratios
b. The level of responsibility assumed by management for the preparation of the financial statements
c. Difficulties encountered in achieving a satisfactory response rate from the entity’s customers in confirming accounts
receivables
d. The effects of significant accounting policies adopted by management in emerging areas for which there is no
authoritative guidance.

***END OF EXAMINATION***

BUCOT, MARIA ALIZAH L.

BSA 2A

1 D. 16 D.
2 C. 17 B.
3 D. 18 C.
4 B. 19 B.
5 B. 20 B.
6 D. 21 B.
7 D. 22 C.
8 D. 23 A.
9 B. 24 D.
10 B. 25 C.
11 A. 26 B.
12 C. 27 B.
13 B. 28 D.
14 D. 29 A.
15 A. 30 D.