Auditing Theory - Preboard # 1

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Auditing Theory - Preboard # 1 - Quiz

This is a MOCK BOARD Exam composed of 50 questions. Please assess yourself truthfully. Take this quiz only once so that you will not be banned from taking again. Provide as your fullname and school so that we could give proper commendations. Thank you and Good Luck!


Questions and Answers
  • 1. 

    Which of the following best describes “high level of assurance”?

    • A.

      It refers to the professional accountant having obtained evidence based on procedures agreed upon between the practitioner and the intended users to be satisfied that findings be reported to the intended users.

    • B.

      It refers to the professional accountant having obtained sufficient external and internal appropriate evidence to be satisfied that the subject matter is plausible in the circumstances.

    • C.

      It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria.

    • D.

      It refers to the professional accountant having obtained sufficient evidence to conclude that he has no knowledge of any required modifications to be made in the financial statements in order for them to conform of prescribed criteria.

    Correct Answer
    C. It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria.
    Explanation
    The correct answer describes "high level of assurance" as the professional accountant obtaining sufficient appropriate evidence to conclude that the subject matter conforms in all material respects with identified suitable criteria. This means that the accountant has gathered enough evidence to be confident that the subject matter being assessed meets the necessary standards and requirements.

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  • 2. 

    Which statement is incorrect regarding an engagement to perform agreed-upon procedures?

    • A.

      An auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings.

    • B.

      The recipients of the report must form their own conclusions from the report by the auditor.

    • C.

      The report is restricted to those parties that have agreed to the procedures to be performed.

    • D.

      The report on factual findings is expressed in the form of negative assurance.

    Correct Answer
    D. The report on factual findings is expressed in the form of negative assurance.
    Explanation
    The statement "The report on factual findings is expressed in the form of negative assurance" is incorrect. In an engagement to perform agreed-upon procedures, the auditor is responsible for performing specific procedures and reporting the factual findings. The report is not expressed in the form of negative assurance, which is a type of assurance provided in an audit engagement. Instead, the report typically includes the procedures performed, the findings, and any additional information required by the engagement agreement.

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  • 3. 

    Which of the following engagements provides third parties the highest level of assurance about the client’s financial statements?

    • A.

      Audit

    • B.

      Review

    • C.

      Agreed-upon procedures

    • D.

      Compilation

    Correct Answer
    A. Audit
    Explanation
    An audit provides the highest level of assurance about the client's financial statements. During an audit, the auditor conducts a thorough examination of the financial records, internal controls, and supporting evidence to express an opinion on the fairness and accuracy of the financial statements. This involves obtaining a deep understanding of the client's business, performing extensive testing, and obtaining corroborating evidence. The audit process is more comprehensive and rigorous compared to other engagements like reviews, agreed-upon procedures, or compilations, which provide lower levels of assurance.

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  • 4. 

    In which of the following situations can third parties assume responsibility of the auditor regarding association with financial information?

    • A.

      When the auditor attaches a report to that information.

    • B.

      When the auditor consents to the use of the auditor's name in a professional connection.

    • C.

      Either a or b.

    • D.

      Neither a nor b.

    Correct Answer
    C. Either a or b.
    Explanation
    When the auditor attaches a report to the financial information or when the auditor consents to the use of their name in a professional connection, third parties can assume responsibility for the auditor's association with the financial information. This means that if the auditor includes a report or gives consent for their name to be used, they are indicating their involvement and endorsement of the financial information, and third parties can rely on this association. Therefore, either situation (a or b) allows third parties to assume responsibility for the auditor's association with the financial information.

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  • 5. 

    Which statement is incorrect regarding assurance engagement risk?

    • A.

      Engagement risk is the risk that the practitioner will express an inappropriate conclusion that the subject matter conforms in all material respects with suitable criteria.

    • B.

      All components of the engagement risk model will be significant for all assurance engagements.

    • C.

      The extent to which the practitioner considers the relevant components of engagement risk will be affected by the engagement circumstances.

    • D.

      Business risk is not part of engagement risk and does not affect the application of Philippine Standard on Assurance Engagements.

    Correct Answer
    B. All components of the engagement risk model will be significant for all assurance engagements.
    Explanation
    The statement "All components of the engagement risk model will be significant for all assurance engagements" is incorrect. The engagement risk model consists of three components: inherent risk, control risk, and detection risk. These components are assessed to determine the overall engagement risk. However, the significance of each component may vary depending on the specific circumstances of the engagement. Therefore, it is not accurate to say that all components will be significant for all assurance engagements.

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  • 6. 

    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.

    • A.

      Reasonable assurance

    • B.

      Positive assurance

    • C.

      Moderate assurance

    • D.

      Negative assurance

    Correct Answer
    A. Reasonable assurance
    Explanation
    Reasonable assurance is the appropriate explanation for the given concept. Reasonable assurance is a concept in auditing that refers to the level of confidence the auditor has in concluding that there are no material misstatements in the financial statements. It is the highest level of assurance that auditors can provide, indicating that they have conducted the audit in accordance with professional standards and have obtained sufficient and appropriate audit evidence to support their conclusion. This concept emphasizes the auditor's responsibility to obtain enough evidence to provide a reasonable level of assurance to users of the financial statements.

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  • 7. 

    Which statement is incorrect regarding the external auditor’s consideration of the work of internal auditing?

    • A.

      The external auditor should consider the activities of internal auditing and their effect, if any, on external audit procedures.

    • B.

      The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach.

    • C.

      During the course of planning the audit, the external auditor should perform a preliminary assessment of the internal audit function when it appears that internal auditing is relevant to the external audit of the financial statements in specific audit areas.

    • D.

      When the external auditor intends to use specific work of internal auditing, the external auditor need not evaluate and test that work to confirm its adequacy for the external auditor's purposes.

    Correct Answer
    D. When the external auditor intends to use specific work of internal auditing, the external auditor need not evaluate and test that work to confirm its adequacy for the external auditor's purposes.
    Explanation
    The statement is incorrect because the external auditor should evaluate and test the specific work of internal auditing to confirm its adequacy for the external auditor's purposes. This is important to ensure that the work of internal auditing is reliable and can be relied upon by the external auditor in forming their opinion on the financial statements.

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  • 8. 

    The independent auditor lends credibility to client’s financial statements by

    • A.

      Maintaining a clear-cut distinction between management’s representations and the auditor’s representation.

    • B.

      Testifying under oath about client’s financial statements.

    • C.

      Stating in the auditor’s management letter that the examination was made in accordance with generally accepted auditing standards.

    • D.

      Attaching an auditor’s opinion to the client’s financial statements.

    Correct Answer
    D. Attaching an auditor’s opinion to the client’s financial statements.
    Explanation
    The independent auditor lends credibility to client's financial statements by attaching an auditor's opinion to the client's financial statements. This opinion is a formal statement expressing the auditor's professional judgment on the fairness and reliability of the financial statements. It provides assurance to users of the financial statements that they have been prepared in accordance with the applicable accounting standards and present a true and fair view of the client's financial position and performance. The auditor's opinion adds credibility and enhances the trustworthiness of the financial statements, as it is an independent assessment by a qualified professional.

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  • 9. 

    Which of the following is responsible for the fairness of representations made in financial statements?

    • A.

      The independent auditor.

    • B.

      The internal auditor.

    • C.

      The client's management.

    • D.

      The audit committee.

    Correct Answer
    C. The client's management.
    Explanation
    The client's management is responsible for the fairness of representations made in financial statements. They are in charge of preparing and presenting the financial statements in accordance with the applicable accounting standards and regulations. The management is responsible for ensuring that the financial statements are accurate, complete, and provide a true and fair view of the company's financial position and performance. They have the primary responsibility for the integrity and accuracy of the financial information presented in the statements.

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  • 10. 

    The exposure period allowed for each exposure draft of PSA to be considered by the organizations and persons to whom it is sent for comment is generally

    • A.

      Four months

    • B.

      Three months

    • C.

      Two months

    • D.

      Six months

    Correct Answer
    B. Three months
    Explanation
    The exposure period allowed for each exposure draft of PSA to be considered by the organizations and persons to whom it is sent for comment is generally three months. This period of time allows stakeholders to thoroughly review the draft, provide feedback, and suggest any necessary changes or improvements. It provides a reasonable timeframe for all interested parties to analyze the document and submit their comments, ensuring a comprehensive and inclusive review process.

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  • 11. 

    Which statement is incorrect regarding the pronouncements of ASPC?

    • A.

      The PSAs and Interpretations may also have application, as appropriate, to other related activities of auditors.

    • B.

      PSAs contain basic principles and essential procedures (identified in bold type black lettering) together with related guidance in the form of explanatory and other material.

    • C.

      PSAs need only be applied to material matters.

    • D.

      The Interpretations have the same authority as the PAPSs.

    Correct Answer
    D. The Interpretations have the same authority as the PAPSs.
    Explanation
    The statement "The Interpretations have the same authority as the PAPSs" is incorrect. The correct answer is that the Interpretations do not have the same authority as the PSAs. The PSAs are the main pronouncements issued by the Auditing Standards and Practices Council (ASPC) and have the highest level of authority. The Interpretations provide additional guidance and clarification on specific matters, but they do not carry the same level of authority as the PSAs.

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  • 12. 

    The following should be occupied only by a duly registered CPA, except

    • A.

      Any position in any business or company in the private sector which requires supervising the recording of financial transactions.

    • B.

      Any position in any business or company in the private sector which requires preparation of financial statements.

    • C.

      Any position in any business or company in the private sector which requires coordinating with the internal auditors for the audit of financial statements.

    • D.

      The position of the dean that supervises the BSA program of an educational institution.

    Correct Answer
    C. Any position in any business or company in the private sector which requires coordinating with the internal auditors for the audit of financial statements.
    Explanation
    The position of coordinating with internal auditors for the audit of financial statements does not necessarily require a duly registered CPA. While this position involves working with financial statements and auditing processes, it does not specifically require the individual to be a CPA. On the other hand, the other options mentioned in the question all involve tasks that typically require a CPA, such as supervising the recording of financial transactions, preparing financial statements, and overseeing a BSA program in an educational institution.

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  • 13. 

    Which of the following is not represented in the Auditing and Assurance Standards Council?

    • A.

      Board of Accountancy

    • B.

      Bangko Sentral ng Pilipinas

    • C.

      Bureau of Internal Revenue

    • D.

      Securities and Exchange Commission

    Correct Answer
    C. Bureau of Internal Revenue
    Explanation
    The Bureau of Internal Revenue is not represented in the Auditing and Assurance Standards Council. The Auditing and Assurance Standards Council is responsible for setting auditing and assurance standards in the Philippines, and it includes representatives from various organizations such as the Board of Accountancy, Bangko Sentral ng Pilipinas, and Securities and Exchange Commission. The Bureau of Internal Revenue, on the other hand, is responsible for the assessment and collection of taxes in the Philippines and is not directly involved in setting auditing and assurance standards.

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  • 14. 

    A study, appraisal, or review by the BOA or its duly authorized representatives, of the quality of audit of financial statements through a review of the quality control measures instituted by an Individual CPA, Firm or Partnership of CPAs engaged in the practice of public accountancy.

    • A.

      Peer review

    • B.

      Quality review

    • C.

      Analytical review

    • D.

      Administrative review

    Correct Answer
    B. Quality review
    Explanation
    A quality review refers to a study or appraisal conducted by the BOA or its authorized representatives to assess the quality of audit of financial statements. This review involves evaluating the quality control measures implemented by an Individual CPA, Firm, or Partnership of CPAs engaged in public accountancy. The purpose of the quality review is to ensure that the audit work meets the required standards and is conducted with the necessary level of professionalism and competence.

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  • 15. 

    Emong, CPA is applying for renewal of his professional license. He is exempted from the CPE requirements

    • A.

      If he is at least 65 years old.

    • B.

      If he is working abroad and he has been out of the country for at least two years immediately prior to the date of renewal.

    • C.

      Either a or b.

    • D.

      Under no circumstances.

    Correct Answer
    C. Either a or b.
    Explanation
    The correct answer is "Either a or b." This means that Emong, CPA is exempted from the CPE requirements if he meets either condition a or condition b. Condition a states that he is exempted if he is at least 65 years old. Condition b states that he is exempted if he is working abroad and has been out of the country for at least two years immediately prior to the date of renewal. Therefore, if Emong meets either of these conditions, he does not need to fulfill the CPE requirements for license renewal.

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  • 16. 

    The following statements relate to RA 9298. Which statement is true?

    • A.

      The Professional Regulation Commission has the authority to remove any member of the Board of Accountancy for negligence, incompetence, or any other just cause.

    • B.

      Insanity is not a ground for proceeding against a CPA.

    • C.

      A person shall be considered to be in the professional practice of accounting if, as an officer in a private enterprise, he makes decisions requiring professional accounting knowledge.

    • D.

      After three years, subject to certain conditions, the Board of Accountancy may order the reinstatement of a CPA whose certificate of registration has been revoked.

    Correct Answer
    C. A person shall be considered to be in the professional practice of accounting if, as an officer in a private enterprise, he makes decisions requiring professional accounting knowledge.
    Explanation
    The correct answer is "A person shall be considered to be in the professional practice of accounting if, as an officer in a private enterprise, he makes decisions requiring professional accounting knowledge." This statement is true because it defines the criteria for someone to be considered engaged in the professional practice of accounting. It states that if a person, as an officer in a private enterprise, is making decisions that require professional accounting knowledge, they are considered to be practicing accounting professionally.

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  • 17. 

    There is a need for assurance that all services obtained from a professional accountant are carried out to the highest standards of performance. This statement relates to

    • A.

      Credibility

    • B.

      Professionalism

    • C.

      Quality of Services

    • D.

      Confidence

    Correct Answer
    C. Quality of Services
    Explanation
    This statement relates to the quality of services provided by a professional accountant. It emphasizes the importance of ensuring that all services obtained from a professional accountant are carried out to the highest standards of performance. This implies that there is a need for assurance that the services provided are of high quality and meet the expectations and requirements of the clients.

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  • 18. 

    Indicate the normal pattern of development for a professional accountant. I. A period of work experience. II. High standard of general education. III. Specific education, training and examination in professionally relevant subjects

    • A.

      I, II, III

    • B.

      II, III, I

    • C.

      III, II, I

    • D.

      II, I, III

    Correct Answer
    B. II, III, I
    Explanation
    A professional accountant typically follows a pattern of development that begins with a high standard of general education (II). This provides a strong foundation for further education, training, and examination in professionally relevant subjects (III). Once the necessary knowledge and skills are acquired, the individual then enters a period of work experience (I) to apply and further develop their expertise. Therefore, the correct order of the normal pattern of development for a professional accountant is II, III, I.

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  • 19. 

    A partner or employee of the firm serving as an officer or as a director on the board of an assurance client will most likely create

    • A.

      Intimidation threat

    • B.

      Self-review threat

    • C.

      Advocacy threat

    • D.

      Familiarity threat

    Correct Answer
    B. Self-review threat
    Explanation
    When a partner or employee of a firm serves as an officer or director on the board of an assurance client, it creates a self-review threat. This is because the individual may be involved in making decisions that could impact the assurance engagement, and their objectivity and independence may be compromised. They may be influenced by their own actions or decisions made in their role as an officer or director, leading to a potential bias in their assessment of the assurance client's financial statements or other information. This can undermine the credibility and reliability of the assurance process.

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  • 20. 

    Which of the following least likely create a self-review threat?

    • A.

      A former officer, director or employee of the assurance client serve as a member of the assurance team.

    • B.

      A director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement has been a member of the assurance team or partner of the firm.

    • C.

      Assisting an audit client in matters such as preparing accounting records or financial statements.

    • D.

      A firm, or network firm, provides internal audit services to an audit client.

    Correct Answer
    B. A director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement has been a member of the assurance team or partner of the firm.
    Explanation
    This answer least likely creates a self-review threat because it involves a person in a position of authority within the assurance client who has direct and significant influence over the subject matter of the assurance engagement. Having someone with this level of influence on the team or as a partner of the firm could compromise the objectivity and independence of the assurance process. It is important to avoid any potential conflicts of interest that could arise from such a situation.

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  • 21. 

    This process may include, particularly in the case of large complex audits, requesting personnel not otherwise involved in the audit to perform certain additional procedures.

    • A.

      Direction

    • B.

      Supervision

    • C.

      Review

    • D.

      All of these

    Correct Answer
    C. Review
    Explanation
    The given statement suggests that in large complex audits, it is common to involve personnel who are not directly involved in the audit to perform additional procedures. This implies that these personnel are responsible for reviewing the audit process and ensuring its accuracy and completeness. Therefore, the correct answer is "Review."

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  • 22. 

    Which of the following is least likely a factor that affects the extent of quality control procedures?

    • A.

      The size of the firm.

    • B.

      The type of clients that the firm serves.

    • C.

      The number of practice offices.

    • D.

      The nature of the practice.

    Correct Answer
    B. The type of clients that the firm serves.
    Explanation
    The type of clients that the firm serves is least likely to affect the extent of quality control procedures. Quality control procedures are primarily determined by factors such as the size of the firm, the number of practice offices, and the nature of the practice. The type of clients may vary in terms of their needs and expectations, but it is not a direct factor that affects the extent of quality control procedures.

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  • 23. 

    Which statement is incorrect regarding the auditor’s responsibility to consider fraud and error in the audit of financial statements?

    • A.

      The auditor is entitled to accept records and documents as genuine.

    • B.

      The auditor is 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.

    Correct Answer
    B. The auditor is may be held responsible for the prevention of fraud and error.
    Explanation
    The statement "The auditor is may be held responsible for the prevention of fraud and error" is incorrect. The auditor's responsibility is to detect and report fraud and error, not to prevent them. The auditor's role is to provide reasonable assurance that the financial statements are free from material misstatements, whether due to fraud or error. While the auditor can provide recommendations and suggestions to improve internal controls and prevent fraud and error, the ultimate responsibility for prevention lies with management.

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  • 24. 

    Which statement is incorrect regarding “fraud risk factors”?

    • A.

      Using the auditor’s knowledge of the business, the auditor may identify events or conditions that provide an opportunity, a motive or a means to commit fraud, or indicate that fraud may already have occurred.

    • B.

      A missing document, an out of balance general ledger, or an analytical procedure that does not make sense may be the result of circumstances other than fraud.

    • C.

      Fraud risk factors indicate the existence of fraud because they often have been present in circumstances where frauds have occurred.

    • D.

      The presence of fraud risk factors may affect the auditor’s assessment of inherent risk or control risk.

    Correct Answer
    C. Fraud risk factors indicate the existence of fraud because they often have been present in circumstances where frauds have occurred.
    Explanation
    Fraud risk factors do not necessarily indicate the existence of fraud, as they may also be present in circumstances where fraud has not occurred. These risk factors serve as indicators or red flags that suggest the possibility of fraud, but further investigation is required to confirm whether fraud has indeed taken place. Therefore, the statement that fraud risk factors indicate the existence of fraud is incorrect.

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  • 25. 

    Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and least likely to be detected by an auditor?

    • A.

      Understating the sales journal.

    • B.

      Overstating the accounts receivable control account.

    • C.

      Overstating the accounts receivable subsidiary ledger.

    • D.

      Understating the cash receipts journal.

    Correct Answer
    A. Understating the sales journal.
    Explanation
    Understating the sales journal would conceal the misappropriation of cash receipts from sales on account because it would result in lower recorded sales. If the sales journal is understated, it would appear that fewer sales were made, and therefore, fewer cash receipts should be expected. This would make it less likely for the auditor to detect the missing cash receipts. By understating the sales journal, the fraudster can hide the misappropriated cash and avoid suspicion from the auditor.

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  • 26. 

    Example of the type of information that may come to the auditor's attention that may indicate that noncompliance with laws or regulations has occurred most likely include

    • A.

      Payments for specified services or loans to consultants, related parties, employees or government employees.

    • B.

      Payments for goods or services made to the country from which the goods or services originated.

    • C.

      Purchasing at prices significantly above or below market price.

    • D.

      Sales commissions or agent's fees that appear reasonable in relation to those ordinarily paid by the entity or in its industry or to the services actually received.

    Correct Answer
    C. Purchasing at prices significantly above or below market price.
    Explanation
    The purchasing of goods at prices significantly above or below market price may indicate noncompliance with laws or regulations. This could suggest potential bribery or corruption, as well as fraudulent activities such as kickbacks or bid rigging. Purchasing goods at prices significantly above market price could indicate that the entity is overpaying for goods in order to benefit someone involved in the transaction. Conversely, purchasing goods at prices significantly below market price could indicate that the entity is receiving illicit benefits or engaging in illegal activities to obtain goods at a lower cost.

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  • 27. 

    When the auditor knows that an illegal act has occurred, the auditor must

    • A.

      Issue an adverse opinion.

    • B.

      Withdraw from the engagement.

    • C.

      Report it to the proper government authorities.

    • D.

      Consider the effects on the financial statements, including the adequacy of disclosure.

    Correct Answer
    D. Consider the effects on the financial statements, including the adequacy of disclosure.
    Explanation
    When the auditor knows that an illegal act has occurred, they must consider the effects on the financial statements, including the adequacy of disclosure. This means that the auditor needs to assess how the illegal act impacts the financial statements and whether it has been properly disclosed. They need to evaluate if the illegal act has resulted in any misstatements or inaccuracies in the financial statements and whether additional disclosure is required to inform users of the financial statements about the impact of the illegal act. This is important for maintaining the integrity and transparency of the financial reporting process.

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  • 28. 

    Which statement is correct regarding the auditor’s communications of audit matters with those charged with governance?

    • A.

      The auditor’s communications of matters include all audit matters of governance interest.

    • B.

      An audit of financial statements is designed to identify all matters that may be relevant to those charged with governance.

    • C.

      The auditor’s communications with those charged with governance may be made orally or in writing.

    • D.

      None of the above.

    Correct Answer
    C. The auditor’s communications with those charged with governance may be made orally or in writing.
    Explanation
    The correct answer is that the auditor's communications with those charged with governance may be made orally or in writing. This means that the auditor has the flexibility to communicate with the individuals responsible for governance through either spoken or written means. This allows for effective communication and ensures that the necessary information is conveyed to those in charge of making important decisions.

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  • 29. 

    It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably before

    • A.

      The performance of substantive testing.

    • B.

      The commencement of the engagement.

    • C.

      The completion of audit.

    • D.

      Before the issuance of audit report.

    Correct Answer
    B. The commencement of the engagement.
    Explanation
    Sending an engagement letter before the commencement of the engagement is important for both the client and the auditor. This letter outlines the scope of the audit, the responsibilities of both parties, and the terms of the engagement. It helps to establish clear communication and expectations from the start, ensuring that both parties are aware of their roles and responsibilities. It also serves as a legal document that can be referred to in case of any disputes or misunderstandings during the audit process. Therefore, sending the engagement letter before the commencement of the engagement is crucial for a smooth and effective audit.

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  • 30. 

    When a change in the type of engagement from higher to lower level of assurance is reasonably justified, the report based on the revised engagement (choose the incorrect one)

    • A.

      Should not contain a separate paragraph that refers to the original engagement.

    • B.

      Should not refer to any procedures that may have been performed in the original engagement.

    • C.

      Should qualify the opinion due to scope limitation.

    • D.

      Omits reference to the original engagement.

    Correct Answer
    C. Should qualify the opinion due to scope limitation.
    Explanation
    The correct answer is "Should qualify the opinion due to scope limitation." This is because when there is a change in the type of engagement from higher to lower level of assurance, the report should not qualify the opinion due to scope limitation. Instead, it should omit reference to the original engagement and should not contain a separate paragraph that refers to the original engagement. It should also not refer to any procedures that may have been performed in the original engagement.

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  • 31. 

    A basic tool used by the auditor to control the audit work and review the progress of the audit.

    • A.

      Audit program

    • B.

      Progress flowchart

    • C.

      Engagement letter.

    • D.

      Time and Expense Summary

    Correct Answer
    A. Audit program
    Explanation
    An audit program is a basic tool used by auditors to control the audit work and review the progress of the audit. It outlines the procedures and steps to be followed during the audit, including the objectives, scope, and timing of the audit. The audit program serves as a guide for the auditor to ensure that all necessary areas are covered and that the audit is conducted in an efficient and effective manner. It helps the auditor to stay organized, track progress, and ensure that all necessary tasks are completed.

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  • 32. 

    Which of the following is not normally a planning procedure?

    • A.

      Assess the conclusions reached and the evaluation of the overall financial statement presentation through the use analytical procedures.

    • B.

      Consider the risk of the existence of related-party transactions.

    • C.

      Consider the nature of the audit reports expected to be rendered.

    • D.

      Identify items likely to require adjustments.

    Correct Answer
    A. Assess the conclusions reached and the evaluation of the overall financial statement presentation through the use analytical procedures.
    Explanation
    The correct answer is "Assess the conclusions reached and the evaluation of the overall financial statement presentation through the use analytical procedures." This is not normally a planning procedure because it involves evaluating the financial statement presentation, which is typically done during the audit process rather than during the planning stage. Planning procedures usually involve assessing risks, considering audit reports, and identifying items requiring adjustments to plan the audit effectively.

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  • 33. 

    An understanding of the client’s business and industry and knowledge about the company’s operations are essential for doing an adequate audit. For a new client, most of this information is obtained

    • A.

      From the predecessor auditor.

    • B.

      From the SEC.

    • C.

      At the client’s premises.

    • D.

      From the permanent file.

    Correct Answer
    C. At the client’s premises.
    Explanation
    In order to conduct an adequate audit, it is important to have an understanding of the client's business and industry as well as knowledge about the company's operations. This information is typically obtained at the client's premises, where auditors can directly observe and gather relevant data and information. By being physically present at the client's premises, auditors can assess the company's operations, review documents and records, and interact with key personnel to gain a comprehensive understanding of the client's business and industry.

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  • 34. 

    The management’s assessment of the entity’s ability to continue as a going concern covers a period of:

    • A.

      Not longer than 12 months from balance date.

    • B.

      At least 12 months from the balance sheet date.

    • C.

      Not longer than 12 months from the date of audit report.

    • D.

      At least 12 months from the date of audit report.

    Correct Answer
    B. At least 12 months from the balance sheet date.
    Explanation
    The management's assessment of the entity's ability to continue as a going concern covers a period of at least 12 months from the balance sheet date. This means that the management evaluates the entity's ability to operate and meet its financial obligations for at least the next 12 months from the date of the balance sheet. This assessment is important for financial reporting purposes as it provides information about the entity's financial stability and its ability to continue operating in the foreseeable future.

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  • 35. 

    Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?

    • A.

      The results of the internal control questionnaire.

    • B.

      The contents of the management representation letter

    • C.

      The entity’s annualized interim financial statements.

    • D.

      The anticipated sample size of the planned substantive tests.

    Correct Answer
    C. The entity’s annualized interim financial statements.
    Explanation
    An auditor would most likely use the entity's annualized interim financial statements in determining the auditor's preliminary judgment about materiality. This is because the interim financial statements provide a snapshot of the entity's financial performance and position for a specific period, which can help the auditor assess the materiality of any potential misstatements or errors. The results of the internal control questionnaire may be used to assess the effectiveness of internal controls, but may not directly relate to materiality. The contents of the management representation letter provide management's assertions but may not provide sufficient information for determining materiality. The anticipated sample size of the planned substantive tests may be used to determine the extent of testing, but may not directly relate to materiality.

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  • 36. 

    How can the audit program best be described at the beginning of the audit process?

    • A.

      Tentative.

    • B.

      Comprehensive.

    • C.

      Conclusive.

    • D.

      Optional.

    Correct Answer
    A. Tentative.
    Explanation
    At the beginning of the audit process, the audit program can best be described as tentative. This means that it is not yet finalized or set in stone. The audit program is a plan that outlines the procedures and steps that will be followed during the audit. However, at the beginning of the process, the auditor may still be gathering information, assessing risks, and determining the scope of the audit. Therefore, the audit program is likely to be subject to change and adjustments as more information becomes available.

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  • 37. 

    Which of the following is appropriate about risk assessment?

    • A.

      Detection risk is eliminated if an auditor were to examine 100 percent of the account balance or class of transactions

    • B.

      There is an inverse relationship between detection risk and the combined level of inherent and control risk.

    • C.

      The assessed level of inherent and control risk can be sufficiently low, thus resulting to eliminating the need for substantive tests.

    • D.

      Audit risk may be more appropriately determined by assessing inherent and control risk separately.

    Correct Answer
    B. There is an inverse relationship between detection risk and the combined level of inherent and control risk.
    Explanation
    The statement "There is an inverse relationship between detection risk and the combined level of inherent and control risk" is appropriate about risk assessment because detection risk is the risk that the auditor will not detect a material misstatement in the financial statements. It is influenced by the level of inherent risk and control risk. When the level of inherent risk and control risk is high, the auditor will need to perform more substantive tests to reduce detection risk. Conversely, when the level of inherent risk and control risk is low, the auditor can rely more on the controls in place and perform fewer substantive tests, resulting in a lower detection risk.

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  • 38. 

    Which of the following most directly illustrates inherent risk?

    • A.

      Inadequate segregation of duties

    • B.

      Confirmation of receivables by an auditor fails to detect a material misstatement.

    • C.

      ABC Company, a client company, lacks sufficient working capital to continue operations.

    • D.

      A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.

    Correct Answer
    C. ABC Company, a client company, lacks sufficient working capital to continue operations.
  • 39. 

    Which of the following is a valid statement about the assessment of control risk?

    • A.

      There is a positive relationship between detection risk and the combined level of inherent and control risk.

    • B.

      The auditor should consider the assessed levels of inherent and control risks in determining the nature, timing, and extent of substantive procedures required to eliminate audit risk.

    • C.

      Misstatements discovered by conducting substantive procedures may cause the auditor to modify the previous assessment of control risk.

    • D.

      The assessed level of inherent and control risks can be sufficiently low in order to eliminate the auditor’s need to perform substantive tests on some assertions.The assessed level of inherent and control risks can be sufficiently low in order to eliminate the auditor’s need to perform substantive tests on some assertions.

    Correct Answer
    C. Misstatements discovered by conducting substantive procedures may cause the auditor to modify the previous assessment of control risk.
    Explanation
    Misstatements discovered during substantive procedures can indicate that the control risk was assessed too low, meaning that the controls in place were not as effective as previously believed. This may lead the auditor to modify their assessment of control risk, potentially increasing it to a higher level. This adjustment is necessary to ensure that the auditor appropriately addresses the risk of material misstatement in the financial statements.

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  • 40. 

    The auditor should perform which of the following as risk assessment procedure?

    • A.

      Analytical procedures

    • B.

      Confirmation

    • C.

      Recalculation

    • D.

      Reperformance

    Correct Answer
    A. Analytical procedures
    Explanation
    Analytical procedures are a risk assessment procedure that involves evaluating financial information through the examination of relationships and trends. This helps auditors to identify any unusual or unexpected fluctuations or patterns that may indicate potential risks or errors in the financial statements. By analyzing the data, auditors can gain insights into the overall financial health of the organization and assess the risk of material misstatement. Therefore, analytical procedures are an essential tool for auditors to assess risks and plan their audit procedures accordingly.

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  • 41. 

    Which of the following is least likely a potential benefit of effectiveness and efficiency for an entity’s internal control that IT provides?

    • A.

      Enhance the timeliness, availability, and accuracy of information.

    • B.

      Enhance the ability to monitor the performance of the entity’s activities and its policies and procedures.

    • C.

      Eliminate the risk that controls will be circumvented.

    • D.

      Consistently apply predefined business rules and perform complex calculations in processing large volumes of transactions or data.

    Correct Answer
    C. Eliminate the risk that controls will be circumvented.
    Explanation
    The least likely potential benefit of effectiveness and efficiency for an entity's internal control that IT provides is the elimination of the risk that controls will be circumvented. While IT can enhance the timeliness, availability, and accuracy of information, enhance the ability to monitor performance, and consistently apply predefined business rules and perform complex calculations, it cannot completely eliminate the risk of controls being circumvented. There will always be a possibility of human error or intentional manipulation of controls, regardless of the level of IT implementation.

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  • 42. 

    Control environment

    • 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, record, process, and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities, and equity.

    Correct Answer
    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.
    Explanation
    The control environment refers to the governance and management functions within an entity, as well as the attitudes, awareness, and actions of those in charge of governance and management. This includes their understanding and emphasis on the importance of internal control in the entity. The control environment sets the tone for the organization and influences the behavior and actions of individuals within it, ensuring that management directives are carried out effectively. It is a crucial component of an entity's overall internal control system.

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  • 43. 

    Which of the following situations will normally result to increase in the extent of audit procedures?

    • A.

      Decrease in the risk of material misstatement.

    • B.

      Decrease in the degree of assurance the auditor plans to obtain.

    • C.

      Decrease in materiality level.

    • D.

      None of the above.

    Correct Answer
    C. Decrease in materiality level.
    Explanation
    A decrease in the materiality level means that the auditor is lowering the threshold for what is considered significant or material in the financial statements. This means that smaller errors or misstatements are now considered important and need to be investigated. As a result, the auditor will need to perform more extensive audit procedures to ensure that these smaller errors are not present in the financial statements. Therefore, a decrease in materiality level will normally result in an increase in the extent of audit procedures.

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  • 44. 

    The auditor should determine overall responses to address the risks of material misstatement at the financial statement level. Such responses most likely include

    • A.

      Assigning less experienced staff.

    • B.

      Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence.

    • C.

      Performing predictable further audit procedures.

    • D.

      Performing substantive procedures at an interim date instead of at period end.

    Correct Answer
    B. Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence.
    Explanation
    The auditor should determine overall responses to address the risks of material misstatement at the financial statement level. This includes emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence. Professional skepticism ensures that auditors critically assess the evidence obtained and remain alert to the possibility of material misstatements. This response helps to mitigate the risk of overlooking potential misstatements and enhances the overall quality of the audit process. Assigning less experienced staff, performing predictable further audit procedures, and performing substantive procedures at an interim date are not directly related to addressing the risks of material misstatement at the financial statement level.

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  • 45. 

    Which statement is incorrect regarding the nature, timing and extent of tests of controls?

    • A.

      Those controls subject to testing by performing inquiry combined with inspection or reperformance ordinarily provide more assurance than those controls for which the audit evidence consists solely of inquiry and observation.

    • B.

      If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test the operating effectiveness of such controls at least once in every third audit.

    • C.

      The length of time period between retesting controls is a matter of professional judgment, but cannot exceed three years.

    • D.

      The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the greater is the extent of the auditor’s tests of controls.

    Correct Answer
    C. The length of time period between retesting controls is a matter of professional judgment, but cannot exceed three years.
    Explanation
    The statement that is incorrect regarding the nature, timing, and extent of tests of controls is "The length of time period between retesting controls is a matter of professional judgment, but cannot exceed three years." This statement is incorrect because the length of time period between retesting controls is not limited to three years. The timing and frequency of retesting controls should be based on the auditor's professional judgment and assessment of risk, rather than a specific time limit.

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  • 46. 

    Which of the following statements is correct regarding the auditor’s primary objective in performing procedures to obtain an understanding of the internal control structure?

    • A.

      The primary objective is to provide the auditor with an evaluation of the consistency of application of management’s policies.

    • B.

      The primary objective is to provide the auditor with knowledge necessary for audit planning.

    • C.

      The primary objective is to provide the auditor with evidential matter to use in assessing inherent risk.

    • D.

      The primary objective is to provide the auditor with a basis for modifying tests of controls.

    Correct Answer
    B. The primary objective is to provide the auditor with knowledge necessary for audit planning.
    Explanation
    The correct answer is that the primary objective of performing procedures to obtain an understanding of the internal control structure is to provide the auditor with knowledge necessary for audit planning. This means that by understanding the internal control structure, the auditor can assess the risk of material misstatement and plan the appropriate audit procedures to address those risks. This knowledge also helps the auditor in determining the nature, timing, and extent of further audit procedures.

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  • 47. 

    Which of the following would most likely indicate internal control deficiency for the revenue cycle (including cash receipts)?

    • A.

      Credit is granted by a credit department.

    • B.

      Cash receipts received in the mail are received by a secretary with no recordkeeping responsibility.

    • C.

      Cash is deposited weekly.

    • D.

      Cash disbursements over P100,000 does not require two signatures on the check.

    Correct Answer
    C. Cash is deposited weekly.
    Explanation
    Cash is deposited weekly indicates an internal control deficiency for the revenue cycle (including cash receipts) because it increases the risk of misappropriation of cash. By depositing cash only once a week, there is a longer period of time during which cash can be mishandled or stolen. Ideally, cash should be deposited daily or as soon as possible to minimize the risk of loss or theft.

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  • 48. 

    The following statements relate directly to test of controls except

    • A.

      May involve comparisons of financial information with nonfinancial information.

    • B.

      Setting the planned assessed level of control risk at the maximum will eliminate these tests.

    • C.

      Often performed concurrently with obtaining an understanding of internal control.

    • D.

      Inquire of the accounts receivable clerk regarding the effectiveness of the computer program in updating accounts receivable balances.

    Correct Answer
    A. May involve comparisons of financial information with nonfinancial information.
    Explanation
    The correct answer is "May involve comparisons of financial information with nonfinancial information." This statement does not relate directly to the test of controls. Test of controls involves evaluating the effectiveness of internal controls in preventing or detecting material misstatements in financial statements. It includes procedures such as inquiries, observations, and inspections to obtain evidence about the design and implementation of internal controls. Comparisons of financial information with nonfinancial information, on the other hand, are part of substantive procedures in the audit process, which aim to detect material misstatements in the financial statements themselves.

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  • 49. 

    After obtaining an understanding of an entity’s internal controls, an auditor may assess control risk at the maximum for some assertions because the auditor:

    • A.

      Believes internal control activities are unlikely to be effective.

    • B.

      Determines that internal control is not well-documented.

    • C.

      Performs tests of controls to restrict detection of risk to an acceptable level.

    • D.

      Identifies control activities that are likely to prevent material misstatements.

    Correct Answer
    A. Believes internal control activities are unlikely to be effective.
    Explanation
    The auditor may assess control risk at the maximum for some assertions because they believe internal control activities are unlikely to be effective. This means that they do not have confidence in the entity's internal controls to prevent or detect material misstatements. By assessing control risk at the maximum, the auditor will plan and perform more substantive procedures to obtain sufficient and appropriate audit evidence. This is necessary to reduce the risk of not detecting material misstatements in the financial statements.

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  • 50. 

    The report of the service organization auditor on the suitability of design (Type A) will not ordinarily include an opinion by the service organization auditor that:

    • A.

      The description of the service organization's accounting and internal control systems, ordinarily prepared by the management of the service organization is accurate.

    • B.

      The systems' controls have been placed in operation.

    • C.

      The accounting and internal control systems are operating effectively based on the results from the tests of control.

    • D.

      The accounting and internal control systems are suitably designed to achieve their stated objectives.

    Correct Answer
    C. The accounting and internal control systems are operating effectively based on the results from the tests of control.
    Explanation
    The report of the service organization auditor on the suitability of design (Type A) will not ordinarily include an opinion by the service organization auditor that the accounting and internal control systems are operating effectively based on the results from the tests of control. This is because the Type A report focuses on the design of the systems, not their effectiveness in operation. The auditor's opinion will typically address whether the systems are suitably designed to achieve their stated objectives, but not their current effectiveness. The effectiveness of the systems is usually assessed in a separate report, such as a Type 2 report.

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