SAN PABLO COLLEGES AUDITING & ASSURANCE PRINCIPLES

San Pablo City, Laguna

1. A measure of how willing the auditor is to accept that the financial statements may be materially misstated
after the audit is completed and an unqualified opinion has been issued is the
a. Inherent risk c. Statistical risk
b. Acceptable audit risk d. Financial risk

2. The auditor commits a Type I error if

a. A qualified report is issued when the financial statements do not contain any material misstatements
b. An unqualified report is issued when the financial statements are materially misstated
c. The risk of material misstatement exceeds the level of assurance
d. The cost of additional testing is greater than the expected benefit of risk reduction

3. Unless a precise statement of what constitutes an attribute is made in advance, the staff person who
performs the audit procedure will have no guidelines
a. For identifying deviations
b. To determine what documents to obtain and review for the observation tests
c. To use when evaluating the results of analytical review procedures
d. For performing all three of the above

4. A matter whose outcome depends on future actions or events not under the direct control of the entity but
that may affect the financial statements
a. Uncertainty c. Provision
b. Inconsistency d. Significant risk

5. The date on which those with the recognized authority assert that they have prepared the entity’s complete
set of financial statements, including the related notes, and that they have taken responsibility for them
a. Date of the financial statements c. Date of the auditor’s report
b. Date of approval of the financial statements d. Date of the financial statements are issued

6. The date of the end of the latest period covered by the financial statements, which is not normally the date
of the most recent balance sheet in the financial statements subject to audit
a. Date of management approval c. Date of the audit report
b. Date of the financial statements d. Date of the financial statements issuance

7. When considering the use of management’s written representations as audit evidence about the
completeness assertion, an auditor should understand that such representations
a. Complement, but do not replace, substantive test designed to support assertion
b. Constitute sufficient evidence to support the assertion when considered in combination with reliance on
internal accounting controls
c. Are not parts of the evidential matter considered to support the assertion
d. Replace reliance on internal accounting controls as evidence to support the assertion

8. A representation letter issued by a client

a. Is essential for preparation of the audit program
b. Is a substitute for testing
c. Does not reduce the auditor’s responsibility
d. Reduces the auditor’s responsibility only to the extent that is relied upon

9. To which of the following matters would materiality limits not apply in obtaining written management
representations?
a. The availability of minutes of stockholder’s and director’s meeting
b. Losses from purchase commitments at prices in excess of market value
c. The disclosure of compensating balance arrangements involving related parties
d. Reductions of obsolete inventory to net realizable value

10. Which of the following expressions is least likely to be included in client’s representation letter?
a. No events have occurred subsequent to the balance sheet date that require adjustment to, or
disclosure in, the financial statements
b. The company has complied with all aspects of contractual agreements that would have a material
effect on the financial statements in the event of noncompliance
c. Management acknowledges responsibility for illegal actions committed by employees
d. Management has made available all financial statements and related data
 SAN PABLO COLLEGES AUDITING & ASSURANCE PRINCIPLES
San Pablo City, Laguna

11. An audit committee’s responsibility normally would not include

a. Discussing the meaning and significance of audited financial statements
b. Discussing problems and experience with independent auditors in completing the audit of annual
financial statements
c. Nominating the independent auditors
d. Discussing the audit programs of the independent auditors

12. An auditor is obligated to communicate a proposed audit adjustment to an entity’s audit committee only if
the adjustment
a. Has not been recorded before the end of the auditor’s field work
b. Has a significant effect on the entity’s financial reporting process
c. Is a recurring matter that was proposed to management in prior year
d. Results from correction of a prior period’s departure from GAAP

13. A document issued by an entity, ordinarily on an annual basis, which includes its financial statements
together with the auditor’s report thereon
a. Auditor’s report c. Annual report
b. Statement of management’s responsibility d. Management assertions

14. The primary reason an auditor requests a letter of inquiry be sent to a client’s attorney is to provide the
auditor with
a. The probable outcome of asserted claims and pending or threatened litigation
b. Corroboration of the information furnished by management about litigation, claims and assessments
c. The attorney’s opinions of the client’s historical experiences in recent similar litigation.
d. A description and evaluation of litigation, claims and assessments that existed at the balance sheet
date

15. When considering the use of management’s written representations as audit evidence about the
completeness assertion, an auditor should understand that such representations
a. Complement, but do not replace, substantive test designed to support the assertion
b. Constitute sufficient evidence to support the assertion when considered in the combination with
reliance on internal accounting controls
c. Are not parts of the evidential matter considered to support the assertion
d. Replace reliance on internal accounting controls as evidence to support the assertion

16. S1: Assumptions become more speculative as the length of the period covered by prospective information
decreases
S2: The ability of management to make best-estimate assumptions decreases as the length of the period
covered by prospective information increases
a. True, true c. False, false
b. False, true d. True, false

17. The evidence considered most appropriate or competent by auditors is best described as
a. Internal documents such as sales invoice copies produced under conditions of strong internal control
b. Written representations made by the president of the company
c. Documentary evidence obtained directly from independent external sources
d. Direct personal knowledge obtained through physical observation and mathematical recalculation

18. The permanent file of an auditor’s working papers generally would not include
a. Bond indenture agreement c. Working trial balance
b. Lease agreements d. Flowchart of internal control

19. The audit working paper that reflects the major components of an amount reported in the
financial statements is the
a. Interbank transfer schedule c. Supporting schedule
b. Carry forward schedule. d. Lead schedule

20. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in
the subsequent year provide assurance about management’s assertion of
a. Presentation. c. Rights.
b. Completeness. d. Existence.

21. Which of the following is not an expert upon whose work an auditor may rely?
a. Actuary. c. Internal auditor.
b. Appraiser. d. Engineer.
 SAN PABLO COLLEGES AUDITING & ASSURANCE PRINCIPLES
San Pablo City, Laguna

22. A purpose of a management representation letter is to reduce

a. Audit risk to an aggregate level of misstatement that could be considered material.
b. An auditor’s responsibility to detect material misstatements only to the extent that the letter is relied
on.
c. The possibility of a misunderstanding concerning management’s responsibility for the
financial statements.
d. The scope of an auditor’s procedures concerning related-party transactions and subsequent events.

23. The primary reason an auditor requests letters of inquiry be sent to a client’s attorneys is to
provide the auditor with
a. The probable outcome of asserted claims and pending or threatened litigation.
b. Corroboration of the information furnished by management about litigation, claims, and assessments.
c. The attorneys’ opinions of the client’s historical experiences in recent similar litigation.
d. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date.

24. The accuracy of information included in footnotes accompanying the audited financial statements issued by a
company whose shares are traded on a stock exchange is the primary responsibility of
a. The stock exchange officials
b. The independent auditor
c. The company's management
d. The Securities and Exchange Commission

25. Which of the following best describes the concept of risk assessment on which auditors can
provide independent assurance?
a. The risk that financial statements are misstated because of fraud
b. The risk that financial statements are misstated because of error or fraud
c. Whether management has systems in place to evaluate and effectively manage the entity's business risks
d. Developing client acceptance and continuance practices that minimize the likelihood of lawsuits against
the auditor

26. As the acceptable level of detection risk decreases, an auditor may change the
a. Timing of tests of controls by performing them at an interim date rather than at year-end
b. Nature of substantive procedures from less effective to more effective procedures
c. Timing of tests of controls by performing them at several dates rather than at one time
d. Assessed level of risk of material misstatement to a higher amount

27. The auditor is most likely to presume that a high risk of a fraud exists if
a. The entity is a multinational company that does business in numerous foreign countries
b. The entity does business with several related parties
c. Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft
d. Inadequate employee training results in lengthy EDP exception reports each month

28. Which of the following is correct concerning required auditor communications about fraud?
a. Fraud that involves senior management should be reported directly by the auditor to
the audit
committee regardless of the amount involved
b. Fraud with a material effect on the financial statements should be reported directly by the auditor to the
Securities and Exchange Commission
c. Any requirement to disclose fraud outside the entity is the responsibility of management and not that of
the auditor
d. The professional standards provide no requirements related to the communication of fraud,
but the auditor should use professional judgment in determining communication responsibilities

29. 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 the aggregate level of misstatements that could be material to any
one of the financial statements individually
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 is influenced by the auditor's perception of the
needs of a reasonable person who will rely on the financial statements

30. Which of the following are ordinarily designed to detect possible material monetary errors in the financial
statements?
a. Tests of controls
b. Analytical procedures
c. Computer controls
d. Post-audit review of audit documents
 SAN PABLO COLLEGES AUDITING & ASSURANCE PRINCIPLES
San Pablo City, Laguna

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

32. In assessing the competence of an internal auditor, an independent CPA most likely would obtain information
about the
a. Quality of the internal auditor's work
b. Organization's commitment to integrity and ethical values
c. Influence of management on the scope of the internal auditor's duties
d. Organizational levels to which the internal auditor reports

33. The auditor generally gives most emphasis to ratio and trend analysis in the examination of the
a. Statement of Changes in Stockholders' Equity and Retained earnings
b. Income Statement
c. Balance Sheet
d. Statement of Cash Flows

34. Which of the following would be least likely to be comparable between similar corporations
in the same industry or line of business?
a. Earnings per share
b. Return on total assets before interest and taxes
c. Accounts receivable turnover
d. Operating cycle

35. In correct order, general types of audit tests include:

a. Substantive procedures, tests of controls, and risk assessment procedures.
b. Substantive procedures, risk assessment procedures, and tests of controls.
c. Risk assessment procedures, tests of controls, and substantive procedures.
d. Risk assessment procedures, substantive procedures, and tests of controls.

36. An advantage of using systems flowcharts to document information about internal control instead of using
internal control questionnaires is that systems flowcharts
a. Identify whether segregation of duties prevent collusion
b. Provide a visual depiction of clients' activities
c. Indicate whether controls are operating effectively
d. Reduce the need to observe clients' employees performing routine tasks

37. Which of the following audit tests would be regarded as a test of controls?
a. Tests of the specific items making up the balance in a given general ledger account
b. Tests comparing inventory pricing to vendors' invoices
c. Tests of the signatures on canceled checks to the board of director's authorizations
d. Tests of the additions to property, plant, and equipment by physical inspections

38. A substantive strategy differs from a reliance strategy in that a substantive strategy includes
a. Increased implementation of detailed tests of transactions and balances
b. Extra tests of controls
c. Increased emphasis on verbal representations from management
d. Setting control risk at a minimum level

39. Which of the following best describes the primary purpose of audit procedures?
a. To detect errors or fraud
b. To comply with generally accounting principles
c. To gather sufficient, appropriate evidence
d. To verify the accuracy of account balances

40. Which of the following acts are considered a fraud?

I. Alteration of records or documents.
II. Misinterpretation of facts.
III. Misappropriation of assets.
IV. Recording of transactions without substance.
V. Clerical mistakes.
a. III
b. I and III only
c. I, III, and IV only
d. All of them

41. When the auditor has to determine the need to use the work of an expert, he would consider the following
except:
a. The cost of using the services of an expert.
b. The quantity and quality of other audit evidence available.
 SAN PABLO COLLEGES AUDITING & ASSURANCE PRINCIPLES
San Pablo City, Laguna

c. The materiality of the financial statement item being considered

d. The risk of misstatement based on the nature and complexity of the matter being considered.

42. Which of the following does not require the services of an expert?
a. Valuations of certain types of assets like land and buildings.
b. Legal opinions concerning interpretations of engagements, rules and regulations.
c. Determination of amounts using specialized techniques.
d. Application of accounting methods in computing inventory balances.

43. As an auditor which of the following would be classified as an error?

a. Intentional omission of the recording of a transaction to benefit a third party.
b. Misappropriation of assets for the benefit of management.
c. Misinterpretation by management of the facts that existed when the financial statements were
prepared.
d. Preparation of records by employee to cover fraudulent transactions.

44. Which of the following circumstances least likely indicate the possibility of fraud or error?
a. Unrealistic time deadlines for audit completion imposed by management.
b. Limitation in audit scope imposed by management.
c. Conservative application of accounting principles.
d. Significant difficult-to-audit figures in the accounts.

45. Which of the following is NOT a requirement of the Sarbanes-Oxley Act?

a. Audit firms cannot provide most types of nonaudit services to their public company audit clients
b. Audit firms are required to rotate audit partners off audit engagements every five years for
public company audits
c. Firms that audit public companies are subject to inspection by the PCAOB
d. A certain number of hours, which is based on the size of the company being audited, must be spent on
each audit engagement

46. With regard to detecting fraud, auditing standards require auditors to

a. Perform procedures designed to detect all instances of fraud that might affect the financial statements
b. Provide reasonable assurance that the financial statements are not materially misstated because of
fraud
c. Issue an unqualified opinion only when the auditor is satisfied that no instances of fraud have occurred
d. Design the audit program to meet financial statement users' expectations concerning fraud

47. An internal auditor is likely to be more concerned with _________________ than the external auditor.
a. Internal administrative procedures c. The efficiency of operations
b. Cost accounting procedures d. Internal control

48. The achieved (actual) level of audit risk

a. Can always be accurately assessed by the auditor
b. Should be greater than or equal to acceptable audit risk
c. Can never be known with certainty
d. Is the same for all audit clients

49. In general, material frauds perpetrated by which of the following are most difficult to detect?
a. Internal auditor c. Cashier
b. Keypunch operator d. Controller

50. All of the following represent an increased opportunity to commit fraud except:
a. Significant related party transactions
b. The auditor's relationship with management is strained
c. Management is dominated by a single person
d. The financial statements included highly subjective estimates

51. The auditor is most likely to presume that a high risk of a fraud exists if
a. The entity is a multinational company that does business in numerous foreign countries
b. The entity does business with several related parties
c. Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft
d. Inadequate employee training results in lengthy EDP exception reports each month

52. Which of the following is correct concerning required auditor communications about fraud?
a. Fraud that involves senior management should be reported directly by the auditor to the audit
committee regardless of the amount involved
b. Fraud with a material effect on the financial statements should be reported directly by the auditor to the
Securities and Exchange Commission
c. Any requirement to disclose fraud outside the entity is the responsibility of management and not that of
the auditor
d. The professional standards provide no requirements related to the communication of fraud, but
the auditor should use professional judgment in determining communication responsibilities
 SAN PABLO COLLEGES AUDITING & ASSURANCE PRINCIPLES
San Pablo City, Laguna

53. An example of audit evidence with a medium level of reliability is:

a. Scanning. c. Observation.
b. Recalculation. d. All of the above.

54. Audit documentation prepared on audits of publicly held clients is the property of the
a. Shareholders c. The management of the entity being audited
b. The auditor d. The SEC

55. All of the following are typically in the current file except
a. Adjusting journal entries c. Chart of accounts
b. Copies of the audit report d. Lead schedules

56. You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which
account balance assertion for inventory should you be most concerned about verifying?
a. Existence or occurrence c. Rights and obligations
b. Completeness d. Valuation or allocation

57. Each of the following might, by itself, form a valid basis for an auditor to reduce substantive testing except for
a. Difficulty and expense involved in testing a particular item
b. Assessment of control risk at a low level
c. Low inherent risk involved
d. Relationship between the cost of obtaining evidence and its usefulness

58. Your audit client is under intense pressure to meet an earnings target. Which transaction assertion for
transactions within the purchasing process are you most concerned with?
a. Existence or occurrence c. Rights and obligations
b. Completeness d. Presentation and disclosure

59. Which of the following are ordinarily designed to detect possible material monetary errors in the financial
statements?
a. Tests of controls c. Computer controls
b. Analytical procedures d. Post-audit review of audit documents

60. In assessing the competence of an internal auditor, an independent CPA most likely would obtain information
about the
a. Quality of the internal auditor's work
b. Organization's commitment to integrity and ethical values
c. Influence of management on the scope of the internal auditor's duties
d. Organizational levels to which the internal auditor reports

61. A substantive strategy differs from a reliance strategy in that a substantive strategy includes
a. Increased implementation of detailed tests of transactions and balances
b. Extra tests of controls
c. Increased emphasis on verbal representations from management
d. Setting control risk at a minimum level

62. Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an
auditor should obtain written management representations acknowledging that management has
a. Identified and disclosed all laws and regulations that have a direct material effect on its financial
statements.
b. Implemented internal control policies and procedures designed to detect all illegal acts.
c. Expressed both positive and negative assurance to the auditor that the entity complied with all laws
and regulations.
d. Employed internal auditor who can report their findings, opinion, and conclusions objectively without
fear of political repercussion.

63. Which of the following is generally included or shown in the auditor’s working papers?
a. The procedures used by the auditor to verify the personnel financial status of members of the client’s
management team.
b. Analyses that are designed to be a part of, or a substitute for, the client’s accounting records.
c. Excerpts from authoritative pronouncements that support the underlying generally accepted accounting
principles used in preparing the financial statements.
d. The manner in which exceptions and unusual matters disclosed by the auditor’s procedure were
resolved or treated.

64. Which of the following audit procedures would provide the least reliable evidence that the client has legal title
to inventories?
a. Confirmation of inventories at location outside the client’s facilities.
b. Analytical procedures comparing inventory balances to purchasing and sales activities.
c. Observation of physical inventory counts.
d. Examination of paid vendors’ invoices.
 SAN PABLO COLLEGES AUDITING & ASSURANCE PRINCIPLES
San Pablo City, Laguna

65. During the first part of the current fiscal year, the client company began dealing with certain customers on
a consignment basis. Which of the following audit procedures is least likely to bring this new fact to the
auditor’s attention?
a. Tracing of shipping documents to the sales journal.
b. Test of cash receipts transactions.
c. Confirmation of accounts receivable.
d. Observation of physical inventory.

66. Two months before the year-end the bookkeeper erroneously recorded the receipt of a long-term bank loan
by a debit to cash and a credit to sales. Which of the following is the most effective procedure for
detecting this type of error?
a. Analyze the notes payable journal.
b. Analyze bank confirmation information.
c. Prepare a year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule.

67. Which of the following procedures would best detect the theft of valuable items from an inventory that
consists of hundreds of different items selling for P1 to P10 and a few items selling for hundreds of pesos?
a. Maintain a perpetual inventory of only the more valuable items with frequent periodic verification of the
validity of the perpetual inventory record.
b. Have an independent CPA firm prepare a report on the effectiveness of internal control over inventory.
c. Have separate warehouse space for the more valuable items with sequentially numbered tags.
d. Require an authorized officer’s signature on all requisitions for the more valuable items.

68. An auditor may decide to increase the risk of incorrect rejection when
a. Increase reliability form the sample is desired.
b. Many differences (audit value minus recorded value) are expected.
c. Initial sample results do not support the planned level of control risk.
d. The cost and effort of selecting additional sample items is low.

69. According to the PSA Glossary of terms, this means to inquire into matters arising from other procedures to
resolve them
a. Confirm c. Verify
b. Validate d. Investigate

70. The most reliable form of evidence, other than test of subsequent cash receipts, concerning the validity of
a note receivable balance is a (an)
a. Bill of lading c. Customer purchase order
b. External confirmation reply d. Sales invoice

Life is too short to wake up in the morning with regrets. So, love the people who treat you right and forget about
the ones who don’t. And believe that everything happens for a reason…
If you get the chance- take it
If it changes your life – let it
Nobody said that it would be so easy…
They just promised it would be worth it.
~end~ jdr☺

AUDITING & ASSURANCE PRINCIPLES

NAME SCORE

1 11 21 31 41 51 61
2 12 22 32 42 52 62
3 13 23 33 43 53 63
4 14 24 34 44 54 64
5 15 25 35 45 55 65
6 16 26 36 46 56 66
7 17 27 37 47 57 67
8 18 28 38 48 58 68
9 19 29 39 49 59 69
10 20 30 40 50 60 70