PrE 1: AUDITING AND ASSURANCE PRINCIPLE | Mae

1. The objective of audit is “to enhance the degree of confidence” of intended users in the financial statements
 True
 False
2. The knowledge of the business may be general or particular
 True
 False
3. Establishing whether the preconditions for an audit are present is an essential planning requirement
 True
 False
4. Inherent risk is a risk that the auditor gives an inappropriate audit opinion
 True
 False
5. Auditing came from the Greek word “audire” which means “to hear”
 True
 False
6. Materiality refers to the analysis of significant ratios and trends including the resulting investigation of fluctuations and
relationships that are inconsistent with other relevant information or which deviate from predicted amounts.
 True
 False
7. Materiality provides a threshold or cut-off point
 True
 False
8. Enhancing the auditor’s understanding of the client’s business is an analytical procedure performed at the execution stage
 True
 False
9. The Overall Audit Plan sets out in broad terms the nature, timing, and extent of the audit procedures to be performed.
 True
 False
10. The risk of material misstatement is composed of Inherent risks. Control risks and Detection risk.
 True
 False

MARCH 15, 2021

1. When engaged in the practice of public accounting, the most fundamental and cornerstone of the philosophical structure of
auditing is:
 Independence
 Due professional care
 Familiarity with business practice and concept
 General competence
2. An independent auditor aids in the communication of economic data because the audit,
 Assure the readers of financial statements that any fraudulent activity has been corrected
 Lends credibility to the financial statements
 Confirms the accuracy of management’s financial representations
 Guarantees that financial data are fairly stated
3. A concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no
material misstatements in the financial statements taken as a whole.
 Scope of an audit
 Reasonable assurance
 Absolute assurance
 Audit process
 PrE 1: AUDITING AND ASSURANCE PRINCIPLE | Mae

4. The financial reporting framework adopted by management and, where appropriate, those charged with governance in the
preparation and presentation of the financial statements that is acceptable in view of the nature of the entity and the
objective of the financial statements, or that is required by law or regulation
 Applicable financial reporting framework
 Appropriate financial reporting framework
 Financial reporting framework
 Philippine Financial Reporting Standards
5. The essence of the audit function is to:
 Assurance the consistent application of correct accounting procedures
 Examine individual transactions so that the auditor may certify as to their validity
 Detect fraud
 Determine whether the client’s financial statements are fairly stated
6. Which of the following best describes the objective of an audit of financial statements?
 To express an assurance as to the future viability of the entity whose financial statements are being audited
 To express an opinion whether the financial statements are prepared in all material respects, in accordance with
an applicable financial reporting framework
 To express an assurance about the management’s efficiency or effectiveness in conducting the operations of entity
 To express an opinion whether the financial statements are prepared in accordance with prescribed criteria
7. It refers to person(s) with executive responsibility for the conduct of the entity’s operations
 Board of Trustees
 Those charged with governance
 Board of directors
 Management
8. In conducting an audit of financial statements, the overall objectives of the auditor are:
 To obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error
 To report on the financial statements, and communicate as required by the PSAs, in accordance with the auditor’s
finding
 Both of the above
 None of the above

MARCH 26, 2021

1. Which of the following is least likely to be considered a risk assessment procedure?

 Confirmation of ending accounts receivable
 Analytical procedures
 Observation of the performance of certain accounting procedures
 Inspection of documents
2. Having evaluated inherent risk and control risk, the auditor determines detection risk
 At a level that equates the joint probability of inherent risk, control risk and detection risk with overall audit risk
 As a product of further study of the business and industry and application of analytical procedures
 By performing substantive audit tests
 As a complement of the overall audit risk
3. Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting?
 Domination of management by top executives
 Large amounts of cash processed
 Negative cash flows from operations
 Small high-peso inventory items
4. The factor that distinguishes constructive fraud from actual fraud is:
 Intent

5. It is the ability of the company to anticipate potential business risks and to avoid them.
 PrE 1: AUDITING AND ASSURANCE PRINCIPLE | Mae

 Entity’s risk assessment process

 Control environment
 Control activities
 Monitoring of activities
6. Which of the following statement is an example of an inherent limitation internal control?
 Errors may arise from mistakes in judgments
 Computers process large number of transactions
 Procedures are designed to assure that transactions are executed as management authorities
 The effectiveness of control procedures depends on segregation of duties
7. The probability of an auditor’s procedures leading to the conclusion that a material errors does not exist in an account
balance when, in fact, such error does exist is referred to as:
 Detection risk
 Prevention risk
 Inherent risk
 Control risk
8. While assessing the risks of material misstatement, auditors identify risks, relate risk to what could go wrong consider the
magnitude of risks and
 Consider the likelihood that the risk could result in material misstatements
 Assess the risk of misstatements due to illegal acts
 Consider the complexity of the transactions involved
 Determine materiality levels
9. Which of the following activities would be least likely to strengthen a company’s internal control?
 Maintaining insurance for fire and theft.
 Fixing responsibility for the performance of employee duties
 Carefully selecting and training employees.
 Separating accounting and other financial operations
10. If control risk is at high level, a test of control should be performed.
 True
 False