FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

ACT1207 – AUDITING AND ASSURANCE PRINCIPLES: AUDITING SPECIALIZED INDUSTRIES

RIAN CEASAR P. SOLIMAN, CPA, MBA

REVIEW OF ACCOUNTING PROCESS

RISK-BASED AUDIT PROCESS

1. The overall objectives of the auditor in conducting an audit of financial statements are
a. To obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether caused by fraud or error and to report on the financial statements.
b. To obtain conclusive evidence about whether the financial statements are fairly presented in accordance
with the applicable financial reporting framework.
c. To detect all misstatements in the financial statements, whether due to fraud or error.
d. All of the above are correct.

2. The auditor is required to maintain professional skepticism throughout the audit. Which of the following
statements concerning professional skepticism is incorrect?
a. A belief that management and those charged with governance are honest and have integrity relieves the
auditor of the need to maintain professional skepticism.
b. Maintaining professional skepticism throughout the audit reduces the risk of using inappropriate
assumptions in determining the nature, timing, and extent of the audit procedures and evaluating the
results thereof.
c. Professional skepticism is necessary to the critical assessment of audit evidence.
d. Professional skepticism is an attitude that includes questioning contradictory audit evidence obtained.

3. Professional judgment
a. Should be exercised in planning and performing an audit of financial statements but need not be
documented.
b. Can be used as the justification for the decisions made by the auditor that are not supported by the facts
and circumstances of the engagement.
c. Is necessary in the evaluation of management’s judgment in applying the entity’s applicable financial
reporting framework.
d. Is not used in making decisions about materiality and audit risk.

4. Which of the following statements is (are) incorrect regarding assurance services?

a. Assurance services can be provided either on information or processes.
b. The third party who receives the assurance generally does not pay for the assurance received.
c. Assurance services always involve a report by one person to a third party on which an independent
organization provides assurance.
d. All of the above.

5. Which of the following procedures is not one of the features of a risk-based audit process in accordance with
PSAs?
a. Identify and assess risks of material misstatement, whether due to fraud or error, based on an
understanding of the entity and its environment, including the entity’s internal control.
b. Obtain sufficient appropriate audit evidence about whether material misstatements exist, through
designing and implementing appropriate responses to the assessed risks.
c. Form an opinion on the financial statements based on conclusions drawn from the audit evidence obtained.

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 d. Subject all available evidence related to entity’s financial statements to testing to get reasonable assurance
that the financial statements are free from material misstatements.

6. Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and
presentation of financial statements. Although financial reporting frameworks may discuss materiality in
different terms, they generally explain that
a. Misstatements, including omissions, are considered to be material if they, individually or in the aggregate,
could reasonably be expected to influence the economic decisions of users taken on the basis of the
financial statements.
b. Judgments about materiality are made in the light of surrounding circumstances and are affected by the
size or nature of a misstatement, or a combination of both.
c. Judgments about matters that are material to users of the financial statements are based on a consideration
of the common financial information needs of users as a group. The possible effect of misstatements on
specific individual users, whose needs may vary widely, is not considered.
d. All of the above

7. What are the two elements of the risk of material misstatement at the assertion level?
a. Inherent risk and detection risk
b. Audit risk and detection risk
c. Inherent risk and control risk
d. Detection risk and control risk

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

9. Which statement is incorrect regarding audit evidence?

a. Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit
opinion is based.
b. Audit evidence includes the information contained in the accounting records underlying the financial
statements and other information.
c. Audit evidence is cumulative in nature.
d. Auditors are expected to address all information that may exist.

10. Which of the following means available to the auditor for selecting items for testing is required under PSA
500?
a. All items or 100% examination.
b. Specific items.
c. Audit sampling.
d. No particular means is required.

ANS: A, A, C, C, D, D, C, D, D, D

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RISK ASSESSMENT

1. Which of the following would an auditor least likely perform as part of the auditor’s preliminary engagement
activities or pre-planning or pre-engagement phase?
a. Perform procedures regarding the continuance of the client relationship and specific engagement.
b. Evaluate compliance with ethical requirements, including independence.
c. Establish an understanding of the terms of the engagement.
d. Obtain understanding of the legal and regulatory framework applicable to the entity.

2. A CPA who has never audited a commercial bank

a. May not accept such an engagement.
b. May accept the engagement only if the accounting firm specializes in the audit of commercial banks.
c. May accept the engagement after attaining a suitable level of understanding of the transactions and
accounting practices unique to commercial banking.
d. May accept the engagement because training as a CPA transcends unique industry characteristics.

3. 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 will include procedures
to verify the reason given by the client for termination.
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to provide
the confidential relationship between the auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and request permission for the contact.

4. The audit plan sets the scope, timing and direction of the audit, and guides the development of the more
detailed audit strategy.
baliktad yung concept
The audit strategy is more detailed than the audit plan and includes the nature, timing and extent of audit
procedures to be performed by engagement team members in order to obtain sufficient appropriate audit
evidence to reduce audit risk to an acceptably low level.
a. True, True c. False, False
b. True, False d. False, True

5. In planning an examination, the auditor would consider all of the following matters, except
a. Anticipated reliance on internal controls.
b. Preliminary judgment about materiality levels for audit purposes.
c. Financial statement items likely to require adjustment. hindi siya planning
d. The kind of opinion (unqualified, qualified, disclaimer, or adverse), likely to be given.

6. In designing written audit programs, an auditor should establish specific audit objectives that relate primarily
to the:
a. Timing of audit procedures.
b. Cost–benefit of gathering evidence.
c. Selected audit techniques.
d. Financial statement assertions.

7. Which one of the following statements is incorrect concerning the concept of materiality?
a. Materiality is determined by references to guidelines established by the AASC and PICPA.
b. Materiality depends on the size and nature of an item or misstatement relative to other items in the
financial statements.
there is no guideline, it is based on professional judgment
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 c. Materiality thresholds may change between the planning and review stages of an audit.
d. Materiality is a matter of professional judgment.

8. Audit risk and materiality are considered at the level of

a. Overall financial statements.
b. Assertions relating to individual account balance, class of transactions, or disclosure.
c. Both a and b.
d. Neither a nor b.

9. What are the auditor’s procedures and sources of information to obtain understanding of the entity and its
environment, including internal control?
a. Risk assessment procedures (RAP).
b. Information obtained in prior period audits.
c. Discussions among the audit team.
d. All of the above.

10. Which of the following is most likely to be considered a risk assessment procedure?
a. Analytical procedures.
b. Confirmation of ending accounts receivable.
c. Inventory count observation.
d. Cash count.

11. According to PSA 315, an auditor uses the understanding of internal control to:
a. Identify types of potential misstatements
b. Consider factors that affect the risks of material misstatement
c. Design the nature, timing and extent of further audit procedures
d. All of the above

12. Control environment component of internal control

a. Consists of the policies and procedures that help ensure that management directives are carried out.
b. Includes the governance and management functions and the attitudes, awareness, and actions of those
charged with governance and management concerning the entity’s internal control and its importance in
the entity.
c. Is the entity’s process for identifying business risks relevant to financial reporting objectives and deciding
about actions to address those risks, and the results thereof.
d. Consists of the procedures and records established to initiate, authorize, record, process, and report entity
transactions, events and conditions and to maintain accountability for the related assets, liabilities, and
equity.

13. Statement 1: Entity-level internal controls are pervasive controls that relate to the overall operations of an
entity.

Statement 2: Transaction-level internal controls are specific controls that ensure transactions are accurately
and timely recorded, authorized, and processed.
a. True, true
b. True, false
c. False, true
d. False, false

14. PSAs require the auditor to obtain understanding of the entity’s internal control structure
a. For first time audit clients.
b. For every audit.
c. Whenever the auditor wishes or sees necessary.

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 d. Sufficient to find any frauds that may exist.

15. A procedure that involves tracing a transaction from its origination through the company's information
systems until it is reflected in the company's financial report is referred to as a(n)
a. Analytical analysis.
b. Substantive procedure.
c. Test of a control.
d. Walk-through

16. Audit risk consists of inherent risk, control risk, and detection risk. Which of the following statements is not
true regarding audit risk assessment?
a. The auditor studies the business and industry and applies analytical procedures as a basis for assessing
inherent risk.
b. The auditor studies and evaluates internal control policies and procedures for assessing control risk.
c. The auditor designs substantive audit procedures to reduce detection risk to an acceptable level.
d. When control risk and inherent risk are high, the auditor increases detection risk to maintain overall audit
risk at the desired level.

17. Significant risks are assessed risks of material misstatement that, in the auditor’s judgment, require special
audit consideration. The auditor is _______ to determine whether any of the risks identified are, in the
auditor’s judgment, a significant risk.
a. encouraged c. required
b. not permitted d. allowed

ANS: D, C, D, C, D, D, A, C, D, A, D, B, A. B, D, D, C

RISK RESPONSE

1. The auditor should determine overall responses to address the risks of material misstatement at the financial
statement level. Such responses least likely include
a. Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating
audit evidence
b. Assigning more experienced staff or those with special skills or using experts.
c. Incorporating additional elements of unpredictability in the selection of further audit procedures to be
performed.
d. Performing substantive procedures at an interim date instead of at period end.

2. An auditor’s responses at assertion level least likely include

a. General audit approach such as substantive procedures alone, or combined approach of tests of controls
and substantive procedures, for the overall direction of the audit.
b. Test of controls of credit approval process of sales for valuation assertion of accounts receivable.
c. Test of details of inventory balances to actual inventory during the physical count for existence assertion.
d. Substantive analytical procedures for completeness assertion of accounts payable.

3. After documenting internal control in an audit engagement, the auditor may perform tests on
a. those controls that the auditor plans to rely on.
b. those controls in which deficiencies were identified.
c. those controls that have a material effect on the financial statement balances.
d. a random sample of the controls that were reviewed.

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4. The main purpose of substantive procedures is to
a. Obtain an understanding of the entity and its environment, including its internal control, to assess the risks
of material misstatement at the financial statement and assertion levels.
b. Test the operating effectiveness of controls in preventing, or detecting and correcting, material
misstatement at the assertion level.
c. Detect material misstatements at the assertion level.
d. All of the above

5. Which of the following is the best example of a substantive procedure?

a. Examining a sample of cash disbursements to testwhether expenses have been properly approved.
b. Confirmation of balances of accounts receivable. there is peso amount involved
c. Comparison of signatures on checks to a list of authorized signers.
d. Flowcharting of the client’s cash receipts system.

6. The auditor will most likely perform extensive tests forpossible understatement of
a. Revenues.
b. Assets expenses / were talking about understatement
c. Liabilities
d. Capital.

7. Which of the following sets of information does anauditor usually confirm on one form?
a. Accounts payable and purchase commitments.
b. Cash in bank and collateral for loans. can be obtain from bank or financial insti
c. Inventory on consignment and contingent liabilities.
d. Accounts receivable and accrued interest receivable

8. Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable
when the auditor has concerns about the receivables
a. Valuation.
b. Classification
c. Existence. confirmation na ang main key siszt
d. Completeness.

9. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or
slow-moving inventory to support management’s financial statement assertion of
a. Valuation.
b. Rights.
c. Existence.
d. Presentation.

10. In establishing the existence and ownership of a long-term investment in the form of publicly traded stock, an
auditor should inspect the securities or
a. Correspond with the investee company to verify thenumber of shares owned
b. Inspect the audited financial statements of the investeecompany.
c. Confirm the number of shares owned that are held by an independent custodian.
d. Determine that the investment is carried at the lowerof cost or market

11. Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment?
a. Accumulated depreciation.
b. Insurance expense.
c. Property, plant, and equipment.
d. Purchase returns and allowances

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12. Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
a. Trace a sample of accounts payable entries recorded justbefore year-end to the unmatched receiving report
file.
b. Compare a sample of purchase orders issued just after year-end with the year-end accounts payable trial
balance.
c. Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor
invoices.
d. Scan the cash disbursements entries recorded just be-fore year-end for indications of unusual
transactions.

13. When a CPA observes that the recorded interest expense seems to be excessive in relation to the balance in the
bonds payable account, the CPA might suspect that
a. Discount on bonds payable is understated.
b. Bonds payable are understated.
c. Bonds payable are overstated.
d. Premium on bonds payable is overstated.

14. An auditor usually obtains evidence of stockholders’equity transactions by reviewing the entity’s
a. Minutes of board of directors meetings.
b. Transfer agent’s records.
c. Canceled stock certificates.
d. Treasury stock certificate book.

ANS: D, A, A, C, B, C, B, C, A, C, D, C, B, A

CONCLUSION AND REPORTING

1. Which of the following is not among the characteristics of the procedures being performed in completing the
audit?
a. They are optional since they have only an indirect impact on the opinion to be expressed.
b. They involve a lot of subjective judgment by the auditor.
c. They do not pertain to specific transaction cycles or accounts.
d. They are usually performed by the audit managers or other senior members of the audit team who have
extensive audit experience with the client.

2. After the auditor has completed all audit procedures, it is necessary to combine the information obtained to
reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective
process that relies heavily on:
a. generally accepted auditing standards.
b. the Code of Professional Ethics.
c. generally accepted accounting principles.
d. the auditor’s professional judgment.

3. What audit opinions would be possible when the audited company refuses to record adequate amortization for
fixed assets? Assume the amount in question exceeds materiality.
a. Only unqualified or adverse opinions are possible.
b. Only qualified or adverse opinions are possible.
c. Only adverse or denial opinions are possible.
d. Only qualified or unqualified opinions are possible.

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4. Under PAS 701, which of the following refers to the term “Key Audit Matters (KAM)”?
a. Matters that were communicated with those charged with governance.
b. Matters that required significant auditor attention.
c. Matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial
statements of the current period.
d. It exists when the magnitude of its potential impact is such that, in the auditor’s judgment, clear disclosure
of the nature and implications of the uncertainty is necessary for the presentation of the financial
statements not to be misleading.

5. Statement 1: The inclusion of an emphasis of matter paragraph in the auditor's report does not affect the
auditor's opinion on the financial statements.

Statement 2: An emphasis of matter paragraph is not used when the issue has been covered as a key audit
matter.
a. True, true c. False, true
b. True, false d. False, false

6. Which of the following circumstances will the auditor least likely add an Other Matter paragraph?
a. The auditor is unable to resign from an engagement even though the possible effect of an inability to obtain
sufficient appropriate audit evidence due to a limitation on the scope of the audit imposed by management
is pervasive.
b. Restriction on distribution of the auditor’s report.
c. Reporting on comparative information, and such information had not been audited or was audited by a
different auditor.
d. Report on the pervasiveness of related party transactions that have been disclosed in the financial
statements.

ANS: A, D, B, C, A, D

END OF MATERIAL

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