1.

Involves intentional misstatements, including omissions of amounts or disclosures in financial statements, to deceive
financial statement users
a. Fraud c. Error
b. Fraudulent financial reporting d. Management fraud

2. The primary difference between financial statement errors and fraud is the
a. Errors are intentional misstatements by management while fraud involves unintentional mistakes or omissions
b. Errors are unintentional mistakes or omissions while fraud involves intentional misstatements
c. There is no difference as error and fraud have the same meaning
d. Errors are more likely to provide an indication that an illegal act may have occurred

3. Which of the following, if material would be fraud?

a. Errors in application of accounting principles
b. Clerical errors in accounting data underlying the financial statements
c. Misinterpretation of facts that existed when the financial statements were prepared
d. Misappropriation of assets

4. Which of the following is an example of misappropriation of assets?

a. An altered document c. Unauthorized credit card use
b. An unrecorded transaction d. Misapplication of an accounting principle

5. Individuals who commit fraud are ordinarily able to rationalize the act and also have an
Incentive Opportunity
a. Yes Yes
b. Yes No
c. No Yes
d. No No

6. Which of the following is true?

a. Auditors are responsible for detecting all fraudulent financial reporting
b. Auditors must specifically consider fraud risk from overstating liabilities
c. Auditors must specifically consider fraud risk from management overrides of controls
d. All of the above are true

7. Which of the following factors is most important concerning an auditor’s responsibility to detect errors and fraud?
a. The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of
accounting principles
b. The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate
the financial statements
c. The possibility that management fraud, defalcations, and the misapplication of assets may indicate the existence of
illegal acts
d. The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material
misstatements

8. An auditor is not required to plan the audit to cover information that is indicative of:
a. Adverse relationships between the entity and its employees
b. Fraudulent financial reporting
c. Misappropriation of assets
d. Errors

9. Which of the following statement reflects an auditor’s responsibility for detecting misstatements due to 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 misstatements due to errors and fraud that are caused by departures from
PFRS
c. An auditor is not responsible for detecting misstatements due to errors and fraud unless the application of PSA would
results in such detection
d. An auditor should design the audit to provide reasonable assurance of detecting misstatements due to errors and fraud
that are material to the financial statement
10. Which statement is incorrect regarding the auditor’s responsibility to consider fraud and error in the audit of financial
statements?
a. The entitled to accept records and documents as genuine
b. The auditor may be held responsible for the prevention of fraud and error
c. The auditor should consider the risk of material misstatements in the financial statements resulting from fraud or error
d. The risk of not detecting a material misstatement resulting from error is lower than the risk of not detecting a material
misstatement resulting from fraud

11. When is the auditor responsible for detecting fraud?

a. When the fraud did not result from collusion
b. When third parties are likely to rely on the client’s financial statements
c. When the client’s system of internal control is judged by the auditor to be inadequate
d. When the application of PSAs would have uncovered the fraud

12. The following are examples of circumstances that may indicate the possibility that the financial statements may
contain a material misstatement resulting from fraud, except
a. Undue time pressures imposed by management to resolve complex or contentious issues
b. Complaints by management about the conduct of the audit or management intimidation of engagement team members,
particularly in connection with the auditor’s critical assessment of audit evidence or in the resolution of potential
disagreements with management
c. Unusual delays by the entity in providing requested information
d. A willingness to address identified weaknesses in internal control on a timely basis

13. When the auditor believes a misstatement is or may be the result of fraud but that the effect of the misstatement is not
material to the financial statements, which of the following steps is required?
a. Consider the implications for other aspects of the audit
b. Resign from the audit
c. Commence a fraud examination
d. Contact regulatory authorities

14. According to PSA 240 Redrafted, the auditor may consider withdrawing from the engagement
a. When the entity does not take the remedial action regarding fraud, even if it’s not material to the financial statements
b. If the fraud is perpetrated through the connivance of some employees
c. When the fraudulent act affects the financial statements, even if such effect is reflected in the financial statements
d. When the auditor is unable to gather evidence that will corroborate his suspicion that possible occurrence of fraud may
have materially affected the financial statements

15. The term “error” refers to an unintentional misstatement in financial statements, including the omission of an amount
or a disclosure such as:
a. Misrepresentation in or intentional omission from, the financial statements of events, transactions or other significant
information
b. An incorrect accounting estimate arising from oversight or misinterpretation of facts
c. Deception such as manipulation, falsification, or alteration of accounting records or supporting documents from which
the financial statements are prepared
d. Causing an entity to pay goods and services not received

16. Which of the following is not typically a characteristic of fraud?

a. Collusion c. Falsified documentation
b. Concealment d. Unintentional

17. Which of the following is most likely to be an example of fraud?

a. Defalcations occurring due to invalid electronic approvals
b. Mistakes in the application of accounting principles
c. Mistakes in processing data
d. Unreasonable accounting estimates arising from oversight

18. The most difficult type of misstatement to detect is fraud based on

a. The overrecording of transactions
b. The nonrecording of transactions
c. Recorded transactions in subsidiaries
d. Related party receivables
19. Fraudulent financial reporting is often called
a. Management fraud
b. Defalcations
c. Theft of assets
d. Employee fraud

20. The principal reason for an independent auditor to gather and evaluate audit evidence is to
a. Form an opinion on the financial statements
b. Detect fraud
c. Evaluate management
d. Evaluate internal control

21. Evidential matters supporting the financial statements consist of accounting records and other information available to
the auditor. Other information can be found in
a. The subsidiary ledgers
b. Worksheet supporting cost allocation
c. Minutes of directors’ meetings
d. Adjusting entries

22. Identify the nature of the evidential matter (AR - Accounting Records; OI - Other Information)
I. Lawyer’s reply on status of legal cases
II. Minutes of board and stockholders meetings
III. Worksheets in support of cost allocations
IV. Benchmarking
V. Invoices, paid checks, vouchers
I II III IV V
a. OI AR OI AR AR
b. AR OI AR OI AR
c. OI OI AR OI AR
d. AR AR OI AR AR

23. Generally, what source of audit evidence would most persuasively support audit conclusions?
a. External
b. Inquiry
c. Oral
d. Informal

24. Which statement is incorrect regarding the audit evidence?

a. The greater the risk, the more 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 not a substitute for obtaining audit evidence regarding
another assertion

25. Which of the following is a general principle relating to the reliability of audit evidence?
a. Audit evidence obtained from indirect sources rather than directly is more reliable than evidence obtained directly by
the auditor
b. Audit evidence provided by photocopies is more reliable than that provided by facsimiles
c. Audit evidence obtained from knowledgeable independent sources outside the client company is more reliable than
audit evidence obtained from non-independent sources
d. Audit evidence provided by original documents is more reliable than audit evidence generated through a system of
effective controls

26. Which of the following is correct?

a. The evidence that the auditor accumulates remains the same from audit to audit but the general objectives vary,
depending on the circumstances
b. The general audit objectives remain the same from audit to audit but the evidence varies, depending on the
circumstances
c. The circumstances may vary from audit to audit but the evidence accumulated remains the same
d. The general audit objectives may vary from audit to audit but the circumstances remain the same
27. Each of the following might by itself form a valid basis for an auditor to decide to omit a test except for the
a. Relative risk involved
b. Degree of reliance on the relevant internal controls
c. Difficulty and expense involved in testing a particular item
d. Relationship between the cost of obtaining evidence and its usefulness

28. Which of the following types of audit evidence is the least persuasive?
a. Prenumbered purchase order forms
b. Bank statements obtained from the client
c. Test counts of inventory performed by the auditor
d. Correspondence from the client’s attorney about litigation

29. Theoretically, which of the following would not have an effect on the amount of audit evidence gathered by the
auditor?
a. The type of opinion to be issued
b. The auditor’s evaluation of internal control
c. The types of audit evidence available to the auditor
d. Whether or not the client reports to the Securities and Exchange Commission

30. Which of the following is not a basic procedure used in an audit?

a. Risk assessment procedures
b. Substantive procedures
c. Tests of controls
d. Tests of direct evidence

31. Reperformance
a. Consists of looking at a process or procedure being performed by others
b. Consists of seeking information of knowledgeable persons, both financial and nonfinancial, throughout the entity or
outside the party
c. Is the process of obtaining a representation of information or of an existing condition directly from a third party
d. Is the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s
internal control

32. Which of the following statements concerning evidence is correct?

a. Appropriate evidence supporting management’s assertions should be convincing rather than merely persuasive
b. An effective internal control structure contributes little to the reliability of the evidence created within the entity
c. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be
obtained
d. A client’s accounting records cannot be considered sufficient audit evidence to support the financial statements

33. Example of other information

a. Books of original entry
b. Reconciliation statement
c. Cost allocation work sheet
d. Minutes of meetings

34. Which of the following statements concerning audit evidence is correct?

a. To be competent, audit evidence should be either persuasive or relevant but need not be both
b. The measure of the validity of audit evidence lies in the auditor’s judgment
c. The difficulty and expense of obtaining audit evidence concerning an account balance is valid basis for omitting the test
d. A client’s accounting data can be sufficient audit evidence to support the financial statements

35. Which of the following statements is incorrect regarding the reliability of audit evidence?
a. Oral representation by the client management is not valid evidence
b. Audit evidence obtained directly by the auditor is more reliable than that one provided by the client management
c. The effectiveness of accounting and internal control adds to the reliability of internal audit evidence
d. While internal audit evidence is considered to be acceptable, the auditor usually prefers audit evidence form external
sources
36. Which of the following elements ultimately determines the specific auditing procedures necessary under
circumstances to afford reasonable basis for an opinion?
a. Auditor judgment
b. Materiality
c. Relative risk
d. Reasonable assurance

37. Observation
a. Consists of looking at a process or procedure being performed by others.
b. Consists of seeking information of knowledgeable persons, both financial and non-financial, throughout the entity or
outside the party.
c. Is the process of obtaining a representation of information or of an existing condition directly from a third party.
d. Is the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s
internal control.

38. It is the process designed and effected by those charged with governance, management, and other personnel to provide
reasonable assurance about the achievement of the entity’s objectives.
a. Internal auditing c. Business strategy
b. Internal control d. Accounting process

39. This internal control component is the foundation for all other components. It sets the tone of the organization,
provides discipline and structure, and influences the control consciousness of employees.
a. Control activities c. Control environment
b. Monitoring of controls d. The entity’s risk assessment process

40. Which of the following are considered control environment elements?

Commitment to Detection Organizational
Competence Risk Structure
a. No Yes No
b. Yes Yes Yes
c. Yes No Yes
d. No No Yes

41. Which of the following statements concerning the relevance of various types of controls to a financial statement audit
is correct?
a. All controls are ordinarily relevant to a financial statement audit
b. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the reliability of
financial reporting may also be relevant
c. Controls over the reliability of financial reporting are ordinarily most directly relevant to a financial statement audit, but
other controls may also be relevant
d. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken

42. Under PSA 315, monitoring of controls is an internal control component that involves a process of assessing the
quality of internal control performance over time. It involves assessing the design and operation of controls on a timely
basis and taking necessary corrective actions. Monitoring of controls is accomplished through ongoing monitoring
activities, separate evaluations, or a combination of the two. An entity’s ongoing monitoring activities often include
a. Periodic reporting by the entity’s internal auditor’s about the functioning of internal control
b. Reviewing the purchasing function
c. Periodic audits by the audit committee
d. The audit of the annual financial statements

43. Control activities constitute one of the five components of internal control. Which of the following is not included in
this internal control component?
a. Segregation of duties c. An internal audit function
b. Performance reviews d. Authorization

44. An internal control system that is working effectively

a. Eliminates risk and potential loss to the entity
b. Cannot be circumvented by management
c. Reduces the need for management to review exception reports on a day-to-day basis
d. Is unaffected by changing circumstances and conditions encountered by the entity
45. When considering an entity’s system of internal control, one of the auditor’s major concerns is to ascertain whether
internal control is designed to provide reasonable assurance that
a. Financial statements are fairly presented
b. The accounting manager reviews all accounting transactions
c. Profit margins are maximized and operational efficiency is optimized
d. Corporate morale problems are addressed immediately and effectively

46. When obtaining knowledge about an entity’s internal control, it is important for the auditor to consider the
competence of its employees, because their competence bears directly and importantly upon the
a. Cost-benefit relationship of internal control
b. Comparison of recorded accountability with assets
c. Achievement of the objectives of internal control
d. Timing of substantive tests to be performed

47. Control activities are the policies and procedures that help ensure that management directives are carried out. These
include activities relating to authorization, performance reviews, information processing, physical controls, and
segregation of duties. There is proper segregation of duties when an individual who
a. Records a transaction does not compare the accounting record of the asset with the asset itself
b. Authorizes a transaction records it
c. Authorizes a transaction maintains custody of the asset that resulted from the transaction
d. Maintains custody of an asset has access to the accounting records for the asset

48. An auditor should obtain sufficient knowledge of an entity’s information system, including the related business
processes relevant to financial reporting, to understand the
a. Policies used to detect the concealment of fraud
b. Policies used to prepare significant accounting estimates
c. Safeguards used to limit access to computer facilities
d. Procedures used to assure proper authorization of transactions

49. The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor
with
a. Knowledge necessary to plan the audit c. Information necessary to prepare flowcharts
b. A basis for modifying tests of controls d. Evidence to use in reducing detection risk

50. In obtaining an understanding of internal control relevant to the audit, an auditor is required to obtain knowledge about
the
a. Effectiveness of controls that have been implemented
b. Consistency with which controls are currently being applied
c. Design of the controls pertaining to internal control components
d. Controls related to each class of transactions and account balance