AUDITING THEORY Red Sirug

AUDIT PLANNING
(200 Multiple Choice Questions)

1. The extent of audit planning will vary according to the following:

a. Auditor’s experience with the entity.
b. The nature and complexity of the audit engagement.
c. Size of the entity.
d. All of the above.

2. The audit plan should (select the exception)

a. Be flexible
b. Precede performance of procedures
c. Succeed action
d. Be cost-beneficial

3. The establishment of an overall audit strategy involves

I. Determining the characteristics of the engagement that define its scope.
II. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and
the nature of the communications required.
III. Considering the important factors that will determine the focus of the engagement team's
efforts.
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III

4. Which of the following procedures would an auditor be most likely to perform in planning a
financial statement audit?
a. Reviewing investment transactions of the audit period to determine whether related parties
were created.
b. Obtaining a written representation letter from the client to emphasize management's
responsibilities.
c. Performing analytical procedures to identify areas that may represent specific risks.
d. Reading the minutes of stockholder and director meetings to discover whether any unusual
transactions have occurred.

5. In the planning stage of an audit engagement, the auditor is required to perform audit
procedures to obtain an understanding of the entity and its environment, including its internal
control. These procedures are called
a. Substantive tests
b. Tests of controls
c. Risk assessment procedures
d. Dual-purpose tests

6. In planning the audit engagement, the auditor should consider each of the following, except
a. Matters relating to the entity's business and the industry in which it operates.
b. Materiality level and audit risk.
c. The kind of opinion (unmodified, qualified, or adverse) that is likely to be expressed.
d. The entity's accounting policies and procedures.

7. The auditor's understanding of the entity and its environment consists of an understanding of
the following aspects except
a. Industry, regulatory, and other external factors, including the applicable financial reporting
framework.
b. Nature of the entity, including the entity's selection and application of accounting policies.
c. Measurement and review of the entity's financial performance.
d. Entity's selection and screening process of marketing and production personnel.

8. PSA 315 requires that the auditor should obtain an understanding of the entity's selection and
application of accounting policies and consider whether they are appropriate for its business
and consistent with the applicable financial reporting framework and accounting polices used
in the relevant industry. The understanding does not encompass
a. The methods the entity uses to account for significant and unusual transactions.
b. The effect of significant accounting policies in contractual or emerging areas for which there
is lack of authoritative guidance or consensus.
c. Criteria in the selection of the company's chief accounting executive.

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 d. Changes in the entity's accounting policies.

9. PSA 315 requires that the auditor should obtain an understanding' of relevant industry,
regulatory and other external factors including the applicable financial reporting framework.
Which of the following is not an example of matters relating to regulatory environment that the
auditor would usually consider?
a. Regulatory framework for a regulated industry.
b. Product technology relating to the entity's product.
c. Legislation and regulation significantly affecting the entity's operation.
d. Taxation.

10. PSA 315 requires that the auditor should obtain an understanding of relevant industry,
regulatory and other external factors including the applicable financial reporting framework.
Which of the following is not among the items that relate to industry conditions?
a. Energy, supply and cost
b. Inflation and currency revaluation
c. Market and competition
d. Cyclical or seasonal activity

11. PSA requires that the auditor should obtain an understanding of the entity's objectives and
strategies, and the related business risks that may result in material misstatement of the
financial statements. Which of the following is not an example of business risks that may have
financial consequences and may affect the financial statements?
a. A contracting customer base due to industry consolidation that may increase the risk of
misstatement associated with the valuation of receivables.
b. Contracting economy.
c. New accounting requirements.
d. Use of new IT.

12. The risk of material financial statement misstatement may be greater when the following
conditions exist except
a. When there is greater management intervention to specify the accounting treatment.
b. When there is greater manual intervention for data collection and processing.
c. When there is sufficient personnel with appropriate accounting and financial reporting skills.
d. Complex calculations or accounting principles is involved.

13. A time budget is an estimate of the total hours an audit is expected to take. The following are
among the factors to be considered in developing this budget, except
a. Client's size as indicated by its gross assets, sales, number of employees.
b. Location of client facilities.
c. The competence and experience of available staff.
d. Whether the audit is performed during the interim or at year-end.

14. Auditors perform analytical procedures in the planning stage of an audit for the purpose of:
a. Determining which of the financial statement assertions are the most important for the
client's financial statements.
b. Determining the nature, timing, and extent of audit procedures for auditing the inventory.
c. Deciding the matters to cover in an engagement.
d. Identifying unusual conditions that deserve more auditing effort.

15. For initial audits, additional matters the auditor may consider in the overall audit strategy and
audit plan include the following except
a. Major issues including the application of accounting principles or any auditing and reporting
standards discussed with management.
b. Confirmation of material accounts receivable balance at the end of the year.
c. Planned audit procedure to obtain sufficient appropriate audit evidence regarding opening
balances.
d. Assignment of firm personnel with appropriate levels of capabilities and competence to
respond to anticipated significant risks.

16. In considering the work to be performed by other auditors, the following should be taken into
account except
a. The number of locations.
b. The expected use of audit evidence obtained in prior audits.
c. The involvement of experts.
d. The involvement of other auditors in the audit of components such as subsidiaries,
branches, and divisions.

17. Which of the following would not be found in the corporate charter?

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 a. The date of incorporation.
b. The rules and procedures adopted by the stockholders.
c. The kinds and amount of capital stock authorized.
d. The types of business activity that the corporation is allowed to conduct.

18. Which of the following would not usually be included in the minutes of the board of directors
and/or stockholders?
a. Declaration of dividends.
b. Authorization of long-term loans.
c. Authorization of individuals to sign checks.
d. The duties and powers of the corporate officers.

19. Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?
a. Reading the current year's interim financial statements.
b. Selecting a sample of vendor's invoices for comparison to receiving reports.
c. Coordinating the assistance of entity personnel in data preparation.
d. Discussing matters that may affect the audit with firm personnel responsible for non-audit
services to the entity.

20. An extensive 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 Securities and Exchange Commission.
b. At the client's premises.
c. From the predecessor auditor.
d. From the permanent file.

21. Which of the following is not an inherent risk that is common to all clients in certain industries?
a. Accounts receivable collection in the consumer loan industry.
b. Potential inventory obsolescence in the fashion clothes industry.
c. Brand loyalty in the cosmetics industry.
d. Reserve for loss in the casualty insurance industry.

22. Transactions with related parties are important to the auditors because they will be disclosed in
the financial statements if material. Generally accepted accounting principles would not require
disclosure of
a. Loans to officers during the year which had been repaid before the balance sheet date.
b. The nature of the related-party relationship.
c. A description of transactions, including peso amounts.
d. The amounts due from and to related parties.

23. Which of the following would not be classified as a related-party transaction?

a. Sales of merchandise between affiliated companies.
b. An advance of one week's salary to an employee.
c. Loans or credit sales to the principal owner or client.
d. Exchanges of equipment between two companies owned by the same person.

24. Most auditors assess inherent risk as high for related parties and related-party transactions
because
a. Of the accounting disclosure requirement.
b. Of the lack of independence between the parties.
c. Both a and b.
d. It is required by generally accepted accounting principles.

25. Risk assessment procedures include the following, except

a. Analytical procedures.
b. Confirmation of accounts receivable.
c. Observation and inspection.
d. Inquiries of management

26. PSA 315 requires:

a. Obtaining an understanding of the entity and its environment
b. Identifying and assessing the risks of material misstatement
c. Discussion among engagement team members about the risk of material misstatement in
the financial statements.
d. All of the above

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27. When the continuing auditor intends to use information about the entity and its environment
obtained in prior periods, the auditor should:
a. Seek permission with the client in using the prior period information obtained by the
auditor.
b. Determine whether changes have occurred that may affect the relevance of such
information in the current audit.
c. Determine whether to equitably reduce the audit fee due to lower audit effort expended
during the engagement.
d. Assess control risk as "high" for the assertions affected by the prior-period information.

28. Experience has shown that certain conditions in an organization are symptoms of possible
management fraud. Which of the following conditions would not be considered an indicator of
possible fraud?
a. Managers are regularly assuming subordinates' duties
b. Managers are subject to formal performance reviews on a regular basis.
c. Managers are dealing in matters outside their profit center's scope
d. Managers are not complying with corporate directives and procedures

29. Relevant industry conditions include the following, except:

a. The market and competition, including demand, capacity and price competition.
b. Regulatory framework for a regulated industry.
c. Cyclical or seasonal activity.
d. Product technology relating to the entity's products.

30. The nature of the entity refers to the following, except:

a. The types of investments that it is making and plans to make.
b. Other external factors, such as general economic conditions.
c. The way that the entity is structured and how it is financed.
d. The entity's operations, its ownership, and governance.

31. These result from significant conditions, events, circumstances, actions or inactions that could
adversely affect the entity’s ability to achieve its objectives and execute its strategies or
through the setting of inappropriate objectives and strategies.
a. Business failure
b. Information risk
c. Business obstacles
d. Business risk

32. These are the operational approaches by which management intends to achieve its objectives.
a. Business risk approaches
b. Strategies
c. Planning methods
d. Operational plans.

33. The auditor's understanding of the entity and its environment consists an understanding of the
following aspects:
a. Industry, regulatory and other external factors, including the applicable financial reporting
framework
b. Nature of the entity, including the entity's selection and application of accounting policies
c. Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements
d. All of these.

34. An auditor obtains an understanding of the entity and its environment in order to
a. Make constructive suggestions concerning improvements to the client's internal control.
b. Understand the events and transactions that may have an effect on the client's financial
statements.
c. Evaluate whether the aggregation of known misstatements causes the financial statements
taken as a whole to be materially misstated.
d. Develop an attitude of professional skepticism concerning management's financial
statement assertions.

35. Orange Corp. has a few large accounts receivable that total P2,000,000. Yellow Corp. has a
large number of small accounts receivable that also total P2,000,000. The importance of an
error in any one account is, therefore, greater for Orange Corp. than for Yellow Corp. This is an
example of the auditor's concept of:
a. Materiality.
b. Reasonable assurance.
c. Comparative analysis

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 d. Relative risk.

36. In considering materiality for planning purposes, an auditor believes that misstatements
aggregating P10,000 would have a material effect on an entity's income statement, but that
misstatements would have to aggregate P20,000 to materially affect the balance sheet.
Ordinarily, it would be appropriate to design auditing procedures that would be expected to
detect misstatements that aggregate:
a. P10,000
b. P15,000.
c. P20,000.
d. P30,000.

37. When the auditors allocate the preliminary judgment about materiality to account balances,
the materiality allocated to any given account balance is referred to as:
a. The materiality range.
b. Planning materiality..
c. Tolerable misstatement.
d. Tolerable materiality.

38. The relationship between materiality and audit risk is:

a. Indeterminable
b. Direct.
c. Inverse.
d. Materiality and audit risk have no relationship

39. The establishment of the overall audit strategy involves

a. Determining the characteristics of the engagement that defines its scope.
b. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and
the nature of the communications required.
c. Considering the important factors that will determine the focus of the engagement team's
efforts.
d. All of the answers

40. Which of the following is least likely to be required on an audit?

a. Test appropriateness of journal entries and adjustment
b. Make a legal determination of whether fraud has occurred
c. Review accounting estimates for biases
d. Evaluate the business rationale for significant, unusual transactions

41. Which of the following should be included in the audit plan?

I. The nature, timing and extent of planned risk assessment procedures.
II. The nature, timing and extent of planned further audit procedures at the assertion level.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

42. Which of the following matters would an auditor least likely consider when setting the direction
of the audit?
a. The selection of the engagement team and the assignment of audit work to the team
members.
b. The engagement budget which includes consideration of the appropriate amount of time to
allot for areas where there may be higher risks of material misstatement.
c. The availability of client personnel and data.
d. The manner in which the auditor emphasizes to engagement team members the need to
maintain a
questioning mind and to exercise professional skepticism in the gathering and evaluation of
audit evidence.

43. Which of the following matters would an auditor most likely consider when establishing the
scope of the audit?
a. Audit areas where there is a higher risk of material misstatement.
b. The expected audit coverage, including the number and locations of the entity's
components to be included.
c. The entity's timetable for reporting, such as at interim and final stages.
d. The discussion with the entity's management concerning the expected communications on
the status of audit work throughout the engagement and the expected deliverables
resulting from the audit procedures.

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44. An auditor should consider materiality when
I. Determining the nature, timing, and extent of audit procedures.
II. Evaluating the effect of misstatements.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

45. It is the amount or amounts set by the auditor at less than materiality for the financial
statements as a whole to reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements exceeds materiality for the financial
statements as a whole.
a. Lower materiality
b. Lesser materiality
c. Performance materiality
d. Materiality

46. A basic premise underlying analytical procedures is that

a. The study of financial ratios is an acceptable alternative to the investigation of unusual
fluctuations.
b. Plausible relationships among data may reasonably be expected to exist and continue in
the absence of known conditions to the contrary.
c. These procedures cannot replace tests of details of transactions and balances.
d. Statistical tests of financial information may lead to the detection of material
misstatements in the financial statements.

47. Which of the following statements concerning analytical procedures is true?

a. Analytical procedures are more efficient, but not more effective, than tests of details of
transactions.
b. Analytical procedures used as risk assessment procedures use data aggregated at a high
level.
c. Analytical procedures can replace tests of controls in gathering audit evidence to support
the assessed level of control risk.
d. Analytical procedures usually involve comparisons of ratios developed from recorded
amounts with ratios developed by management.

48. In relation to audit planning, the auditor should document the following:
a. The overall audit strategy.
b. The detailed audit plan.
c. Significant changes made during the audit engagement.
d. All of the answers

49. An auditor should design a written audit program so that:

a. All material transactions will be selected for substantive testing.
b. Substantive tests prior to the balance sheet date will be minimized.
c. The audit procedures selected will achieve specific audit objectives.
d. Each account balance will be tested under either tests of controls or tests of transactions.

50. Audit programs are modified to suit the circumstances on particular engagements. A complete
audit program for an engagement generally should be developed
a. Prior to beginning the actual audit work.
b. After the auditor has completed an evaluation of the existing internal accounting control.
c. After reviewing the client's accounting records and procedures.
d. When the audit engagement letter is prepared.

51. Audit programs generally include procedures to test actual transactions and resulting balances.
These procedures are primarily designed to
a. Detect irregularities that result in misstated financial statements.
b. Test the adequacy of internal control.
c. Gather corroborative evidence.
d. Obtain information of informative disclosures.

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

I. Alteration of records or documents.
II. Misinterpretation of facts.
III. Misappropriation of assets.
IV. Recording of transactions without substance.
V. Clerical mistakes.
a. III

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 b. I and III only
c. I, III, and IV only
d. All of them

53. An audit process is a well-defined methodology for organizing an audit to ensure that
a. The evidence gathered is both sufficient and competent.
b. All appropriate audit objectives are specified.
c. All appropriate audit objectives are met.
d. All of these

54. Which of the following is not a potential effect of an auditor's decision that a lower acceptable
audit risk is appropriate?
a. More evidence is required.
b. Less evidence is required.
c. Special care is required in assigning experienced staff.
d. Review of the working papers by personnel who were not assigned to the engagement.

55. For a particular assertion, control risk is the risk that

a. Controls will not detect a material misstatement that occurs.
b. Audit procedures will fail to detect a weak control system.
c. The prescribed control procedures will not be applied uniformly.
d. A material misstatement will occur in the accounting process.

56. The amount of the preliminary judgment about materiality that is allocated to a financial
statement account is referred to as
a. Sampling risk.
b. Risk of incorrect rejection.
c. Upper limit on misstatement.
d. Tolerable misstatement.

57. Which of the following is most likely to require special planning considerations related to asset
valuation?
a. Accelerated depreciation methods are used for amortizing the costs of factory equipment.
b. The client has recently purchased an expensive copy machine.
c. Assets costing less than P5,000 are expensed even when the expected life exceeds one
year.
d. Inventory is comprised of diamond rings.

58. To obtain an understanding of a continuing client’s business in planning an audit, an auditor

most likely would
a. Read specialized industry journals.
b. Review prior year working papers and the permanent file for the client.
c. Reevaluate the client’s internal control environment.
d. Perform tests of details of transactions and balances.

59. The responsibility for the detection and prevention of errors, fraud and noncompliance with
laws and regulations rests with:
a. Auditor
b. Client's legal counsel
c. Internal auditor
d. Client management

60. The management responsibility to detect and prevent fraud and error is accomplished by
a. Having an annual audit of financial statements.
b. Implementing adequate quality control system.
c. Implementing adequate accounting and internal control system.
d. Issuing a representation letter to the auditor.

61. Which of the following statements best describes an auditor's responsibility to detect errors
and fraud?
a. An auditor is responsible to detect material errors, but has no responsibility to detect
material fraud that are concealed through employee collusion or management override of
the internal control structure.
b. An auditor has no responsibility to detect errors and fraud because an auditor is not an
insurer and an audit does not constitute a guarantee.
c. An auditor has no responsibility to detect errors and fraud unless analytical procedures or
tests of transactions identify conditions causing a reasonably prudent auditor to suspect
that the financial statements were materially misstated.

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 d. An auditor should assess the risk that errors and fraud may cause the financial statements
to contain material misstatements and should design the audit to provide reasonable
assurance of detecting errors and fraud that are material to the financial statements.

62. The following statements relate to the auditor's responsibility for the detection of errors and
fraud. Which of the statement is correct?
I. Due to the inherent limitations of the audit, there is a possibility that material
misstatements in the financial statements may not be detected.
II. The subsequent discovery of material misstatement of the financial information resulting
from fraud or error does not, in itself, indicate that the auditor failed to follow the basic
principles and essential procedures of an audit.
a. I only
b. II only
c. Both statements are true
d. Both statements are false

63. Which of the following is not an assurance that the auditors give to the parties who rely on the
financial statements?
a. Auditors know how the amounts and disclosures in the financial statements were produced.
b. Auditors gathered enough evidence to provide a reasonable basis for forming an opinion.
c. Auditors give assurance that the financial statements are accurate.
d. If the evidence allows the auditors to do so, auditors give assurance in the form of opinion,
as to whether the financial statements taken as a whole are fairly presented in conformity
with GAAP.

64. Material misstatements in financial statements may arise from all of the following except
a. Fraud
b. Error
c. Limitations of the audit
d. Noncompliance with laws and regulations

65. Which of the following is an example of an error?

a. Defalcation
b. Misapplication of accounting policies.
c. Suppression or omission of the effects of transactions from the records or documents.
d. Recording of transactions without substance.

66. An intentional act by one or more individuals among management, employees, or third parties
which results in misrepresentation of financial statements refers to
a. Illegal acts
b. Error
c. Fraud
d. Noncompliance

67. The primary factor that distinguishes errors from fraud is

a. Whether the misstatement is perpetrated by an employee or by a member of management
b. Whether the underlying cause of misstatement is intentional or unintentional.
c. Whether the misstatement is concealed.
d. Whether the underlying cause of misstatement relates to misapplication of accounting
principles or to clerical processing.

68. The factor that distinguishes an error from fraud is

a. Materiality.
b. Intent.
c. Whether it is peso amount or a process.
d. Whether it is a caused by the auditor or the client.

69. Fraudulent financial reporting is often called

a. Misappropriation or theft of assets
b. Management fraud
c. Defalcation
d. Employee fraud

70. In comparing management fraud with employee fraud, the auditor's risk of failing to discover
the fraud is
a. Greater for employee fraud because of the larger number of employees in the organization.
b. Greater for management fraud because of management's ability to override existing
internal controls.
c. Greater for employee fraud because of the higher crime rate among blue collar workers.

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 d. Greater for management fraud because managers are inherently smarter than employees.

71. Which of the following statements about fraud or error is incorrect?

a. The responsibility for the prevention and detection of fraud and error rests with
management.
b. The auditor should plan and perform the audit with an attitude of professional skepticism,
recognizing that conditions or events may be found that fraud or error may exist.
c. The likelihood of detecting fraud is ordinarily higher than that of detecting error.
d. The auditor is not and can not be held responsible for the prevention of fraud and error.

72. Which of the following is an "error" as distinguished from "fraud"?

a. Lapping
b. Embezzlement of company's fund
c. Clerical mistakes in the processing of transactions
d. Window dressing

73. Which of the following could be an example of fraud?

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

74. Which of the following is an example of fraudulent financial reporting?

a. Misappropriating collections on accounts receivable
b. Using inappropriate assumptions in accounting estimate
c. Stealing inventory
d. Payments to fictitious employees or vendors

75. Which of the following statements is true?

a. It is usually equally difficult for the auditor to uncover errors or fraud.
b. Usually, the auditor does not design procedures to uncover fraud or errors.
c. It is usually easier for the auditor to uncover errors than fraud.
d. It is usually easier for the auditor to uncover fraud than errors.

76. The risk of not detecting material misstatement resulting from fraud is greater than the risk of
not detecting a material misstatement arising from error, because:
a. The auditor designs only procedures to detect material error but no procedures are
designed to detect material fraud.
b. The professional standards do not require the auditor to discover information that is
indicative of fraud.
c. Fraud ordinarily involves acts designed to conceal it, such as collusion, forgery, or
deliberate failure to record transactions.
d. It is the responsibility of the management to detect fraud and the auditor's responsibility is
confined only to the detection of material errors.

77. These refer to events or conditions that may indicate an incentive or pressure to commit fraud
or provide an opportunity to commit fraud.
a. Fraud conditions
b. Fraud risk factors
c. Fraudulent activities
d. Fraud events

78. The following are fraud risk factors except:

a. Incentive or pressure to commit fraud
b. Opportunity to commit fraud
c. Attitude or rationalization to commit fraud
d. All of the above

79. Opportunity often emanates from the following except:

a. Knowledge of specific control weakness
b. Poor corporate culture
c. Where a person feels they can take advantage of the trust placed in him or her
d. Management is under pressure to reduce earnings to minimize taxes or to inflate earnings
to secure bank financing

80. Certain characteristics or circumstances may increase the susceptibility of assets to

misappropriation. Opportunities to misappropriate assets increase due to the following except:
a. Inventory items that are small in size, of high value, or in high demand.
b. Known or anticipated future employee layoffs.

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 c. Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
d. Fixed assets which are small in size, marketable, or lacking observable identification of
ownership.

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

82. Which of the following circumstances would least likely cause an auditor to consider whether a
material misstatement exists?
a. Management places substantial emphasis on meeting earning projections.
b. The turnover of senior accounting personnel is exceptionally low.
c. There are significant unusual transactions near year-end.
d. Operating and financing decisions are dominated by one person.

83. All of the following conditions are indicators of possible pressures on an entity except
a. The industry in which the entity operates is declining.
b. There is inadequate working capital due to declining profits or too rapid expansion.
c. The client is heavily dependent on one or a few products or customers.
d. There is a significant and prolonged understaffing of the accounting department.

84. Which of the following is most likely to be a response to the auditor's assessment that the risk
of material misstatement due to fraud for the existence of inventory is high?
a. Observe test counts of inventory at certain locations on an unannounced basis.
b. Perform analytical procedures rather than taking test counts.
c. Request that inventories be counted prior to year end.
d. Request that inventory counts at the various locations be counted on different dates so as
to allow the same auditor to be present at every count.

85. Which of the following statements about noncompliance is incorrect?

a. An audit in accordance with PSA can not be expected to detect noncompliance with all laws
and regulations.
b. An auditor can not be held responsible for preventing noncompliance.
c. The determination as to whether a particular act constitutes noncompliance is ultimately
based on the judgment of the auditor.
d. It is management's responsibility to ensure that entity's operations are conducted in
accordance with laws and regulations.

86. Which of the following statements is correct concerning the auditor's responsibility with respect
to illegal acts?
a. An auditor must design tests to detect both immaterial and material direct-effect illegal
acts.
b. An auditor must design tests to detect both direct-effect and indirect-effect illegal acts.
c. An auditor must design tests to obtain reasonable assurance of detecting material direct-
effect illegal acts.
d. An auditor must design tests to detect both material direct-effect and material indirect-
effect illegal acts.

87. The term used to refer to acts of omission or commission by the entity being audited, either
intentional or unintentional, which are contrary to the prevailing laws and regulations is
a. Misappropriation.
b. Fraud.
c. Illegal acts.
d. Noncompliance.

88. Noncompliance with laws and regulations are also called

a. Irregularities
b. Illegal acts
c. Misappropriation
d. Defalcation

89. The responsibility for the detection and prevention of noncompliance with laws and regulations
rests with
a. The auditor
b. The client's legal counsel
c. The auditor’s legal counsel

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 d. The client management

90. The term “noncompliance” as used in PSA 250 refers to acts of omission or commission by the
entity being audited, either intentional or unintentional, which are contrary to the prevailing
laws or regulations. Such acts include the following except
a. Transactions entered into by the entity
b. Transactions entered into in the name of the entity
c. Transactions entered into by the entity on its behalf by its management or employees
d. Personal misconduct (unrelated to the business activities of the entity) by the entity’s
management or employees.

91. Which of the following statements best describes why the auditor's examination cannot
reasonably be expected to bring all acts of noncompliance with existing laws and regulations
by the client to the auditor's attention?
a. Noncompliance may be perpetrated by the only person in the client's organization with
access to both assets and the accounting records.
b. Noncompliance may involve conduct designed to conceal it, such as collusion, forgery,
deliberate failure to record transactions, senior management override of controls, or
intentional misrepresentations being made to the auditor.
c. Acts of noncompliance by clients often relates to accounting aspects rather than operating
aspects.
d. The client's internal control may be so strong that the auditor performs only minimal
substantive testing.

92. Presented below are circumstances that may indicate the occurrence of noncompliance with
laws and regulations. Which is the exception?
a. Payment for unspecified services to consultants, related parties, or government employees.
b. Payment of fines or penalties
c. Purchasing at prices significantly above or below market price.
d. Payments for goods or services to the country from which the goods or services originated.

93. Which of the following conditions would most likely indicate a possible noncompliance with
laws and regulations?
a. Purchasing land for a price significantly different from the seller's recorded amount.
b. Payment of commission to sales agent.
c. Media comment
d. Payment for specified services to consultant.

94. As part of audit planning, CPAs should design audit programs for each individual audit and
should include audit steps and procedures to
a. Ensure that only material items are audited.
b. Provide assurance that the objectives of the audit are met.
c. Detect and eliminate fraud.
d. Increase the amount of management information available.

95. How can the audit program best be described at the beginning of the audit process?
a. Conclusive
b. Confirmed
c. Optional
d. Temporary

96. Internal auditing can affect the scope of the external auditor's audit of financial statements by
a. Decreasing the external auditor's need to perform detailed tests.
b. Eliminating the need to observe the physical inventory taking.
c. Allowing the external auditor to limit his/her audit to the performance of substantive test
procedures.
d. Limiting direct testing by the external auditor to management assertions not directly tested
by internal
auditing.

97. The external auditor should obtain a sufficient understanding of the internal audit function
because
a. The understanding of the internal audit function is an important substantive test to be
performed by the external auditor.
b. The audit programs, working papers, and reports of internal auditors may often be used as
a substitute for the work of the external auditor's staff.
c. The procedures performed by the internal audit staff may eliminate the external auditor's
need for considering internal control.

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 d. The work performed by internal auditors may be a factor in determining the nature, timing,
and extent of the external auditor's procedures.

98. Which of the following is an incorrect statement concerning the relationship of the internal
auditor and the scope of the external audit of an entity's financial statements?
a. The external auditor is not required to give consideration to the internal audit function
beyond obtaining a sufficient understanding to identify and assess the risks of material
misstatement of the financial statements and to design and perform further audit proce-
dures.
b. The internal auditors may determine the extent to which audit procedures should be
employed by the external auditor.
c. Under certain circumstances, the internal auditors may assist the external auditor in
performing substantive tests and tests of controls.
d. The nature, timing, and extent of the external auditor's substantive tests may be affected
by the work of internal auditors.

99. In determining whether the work of the internal auditors is likely to be adequate for purposes of
the audit, the external auditor shall evaluate the internal auditor's
a. Efficiency and experience
b. Competence and objectivity
c. Independence and review skills
d. Training and supervisory skills

100. In assessing the technical competence of an internal auditor, an external auditor most likely
would obtain information about the
a. Organizational level to which the internal auditor reports.
b. Quality of working paper documentation, reports, and recommendations.
c. Influence of management on the internal auditor's duties.
d. Entity's commitment to integrity and ethical values.

SET 2

1. Which of the following statements concerning audit planning is incorrect?

a. Planning is a continual and iterative process.
b. Planning is a discrete phase of an audit.
c. In a recurring audit, planning often begins shortly after (or in connection with) the
completion of the previous audit and continues until the completion of the current audit
engagement.
d. In planning an audit, the auditor considers the timing of certain planning activities and
audit procedures that are to be completed prior to the performance of further audit
procedures.

2. The early appointment of the independent auditor has many advantages to the auditor and the
client. Which of the following advantages is least likely to occur as a result of early
appointment of the auditor?
a. The auditor will be able to plan the audit work so that it may be done expeditiously.
b. The auditor will be able to complete the audit work in less time.
c. The auditor will be able to better plan for the observation of the physical inventories.
d. The auditor will be able to perform the examination more efficiently and will be finished at
an early date after the year-end.

3. The generally accepted auditing standards of fieldwork pertain most directly to:
a. Improving internal control as a result of the audit.
b. Due professional care in the performance of the audit.
c. The required training and proficiency of the auditors.
d. The planning of the audit.

4. Which of the following is the most likely first step an auditor would perform at the beginning of
an initial audit engagement?
a. Prepare a rough draft of the financial statements and of the auditor's report.
b. Study and evaluate the system of internal administrative control.
c. Tour the client's facilities and review the general records.
d. Consult with and review the work of the predecessor auditor prior to discussing the
engagement with the client management.

5. With respect to the auditor's planning of a year-end examination, which of the following
statements is always true?
a. An engagement should not be accepted after the fiscal year-end.

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 b. It is an acceptable practice to carry out substantial parts of the examination at interim
dates.
c. An inventory count must be observed at the balance sheet date.
d. The client's audit committee should not be told of the specific audit procedures that will be
performed.

6. An initial (first-time) audit requires more audit time to complete than a recurring audit. One of
the reasons for this is that
a. New auditors are usually assigned to an initial audit.
b. A larger proportion of customer accounts receivable need to be confirmed on an initial
audit.
c. The client's business, industry, and internal control are unfamiliar to the auditor and need
to be carefully studied.
d. Predecessor auditors need to be consulted.

7. Of the following procedures, which one is not considered part of "obtaining an understanding of
the client's environment?"
a. Examining trade publications to gain a better understanding of the client's industry
b. Touring the client's manufacturing and warehousing facilities to gain a clearer
understanding of operations
c. Confirming customer accounts receivable for existence and valuation
d. Studying the internal controls over cash receipts and disbursements

8. Which of the following would not be a source of information about risk of a potential new audit
client?
a. The predecessor auditor
b. Management
c. The internet
d. The new auditor's permanent file

9. Which of the following is not a component of audit planning?

a. Making arrangements with the client concerning the timing of audit fieldwork and use of the
client's staff in completing certain phases of the examination
b. Obtaining an understanding of the business
c. Developing audit programs
d. Observing the client's annual physical inventory taking and making test counts of selected
items

10. Which one of the following is not considered a valid source of information about the client's
processes?
a. Review of the client's budget
b. A tour of the client's plant
c. Confirmation of third-parties
d. Management inquiry

11. Which of the following represents a procedure that the auditor may use because plausible
relationships among financial statement balances are expected to exist?
a. Attributes testing
b. Analytical review
c. Enterprise risk assessment
d. Inherent tests of control

12. When must an auditor perform analytical review procedures in a financial statement audit?
a. Testing controls over financial cycles
b. Planning the nature, timing and extent of procedures
c. Performing tests to substantiate balances
d. Performing tests to substantiate transactions

13. Which of the following statements identifies a potential weakness with comparing client data
with industry
a. Industry data may not be representative of the client's business.
b. Other companies in the industry could use different accounting principles than the client.
c. Data bases are comprised of data from thousands of companies of various sizes, which may
limit the effectiveness of the comparisons.
d. All the above are weaknesses.

14. Analytical procedures used in planning an audit should focus on

a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.

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 c. Enhancing the auditor’s understanding of the client’s business.
d. Assessing the adequacy of the available evidential matter.

15. Analytical procedures performed in the planning stage of an audit suggest that several
accounts have unexpected relationships. The results of these procedures most likely would
indicate that:
a. Irregularities exist among the relevant account balances.
b. Additional tests of details are required.
c. Internal control activities are not operating effectively.
d. The communication with the audit committee should be revised.

16. The objective of performing analytical procedures in planning an audit is to identify the
existence of
a. Unusual transactions and events.
b. Illegal acts that went undetected because of internal control weaknesses.
c. Related-party transactions.
d. Recorded transactions that were not properly authorized.

17. Which of the following statements is correct with respect to the auditor's use of analytical
procedures?
a. Analytical procedures are time-saving procedures that auditors may employ at their
discretion.
b. Analytical procedures may be used to identify misstatements in a client's accounts.
c. Analytical procedures are powerful tools that are required to be used during the planning
and testing phases of the audit.
d. Analytical procedures are required to be used during the planning and completion phases of
the audit.

18. When performing analytical procedures, an auditor observes that operating income has
declined significantly between the preceding year and the current year, the auditor should
next
a. Require that the decline be disclosed in the financial statements.
b. Consider the possibility that the financial statements may be materially misstated.
c. Inform management that a qualified opinion on the financial statements will be necessary.
d. Determine management's responsibility for the decline and discuss the issue with the audit
committee.

19. Which of the following is not an information source for developing analytical procedures used in
the audit?
a. Relationships among financial statement elements
b. Relationships between financial and relevant nonfinancial data
c. Comparison of financial data with anticipated results (e.g., budgets and forecasts)
d. Comparison of current year financial data with projections for next year's financial results

20. Which of the following results from analytical procedures might indicate obsolete inventory?
a. A decline in the gross margin ratio
b. A decline in inventory turnover
c. A decline in days' sales in inventory
d. An increase in operating margin

21. The purpose of analytical procedures in the audit planning stage is to

a. Flag individual transactions for further review.
b. Identify unusual circumstances that the auditor may need to investigate further.
c. Aid in planning the observation of physical inventory.
d. Determine whether sales transactions were approved.

22. Auditors try to identify predictable relationships when using analytical procedures.
Relationships involving transactions from which of the following accounts most likely would
yield the highest level of evidence?
a. Advertising expense
b. Accounts payable
c. Accounts receivable
d. Payroll expense

23. Analytical procedures are performed in the following order:

a. Calculate predictions and compare them to the recorded amount; define a significant
difference; develop an expectation; investigate significant differences.
b. Calculate predictions and compare them to the recorded amount; investigate significant
differences; define a significant difference; develop an expectation.

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 c. Develop an expectation; define a significant difference; calculate predictions and compare
them to the recorded amount; investigate significant differences.
d. Develop an expectation; calculate predictions and compare them to the recorded amount;
define a significant difference; investigate significant differences.

24. An auditor compares expenses as a percent of sales to expectations. This is an example of:
a. Trend analysis
b. Ratio analysis
c. Internal control analysis
d. Vertical analysis

25. Which of the following would an auditor most likely use in determining the auditor’s preliminary
judgment about materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity’s annualized interim financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.

26. Which of the following would an auditor most likely use in determining the auditor’s preliminary
judgment about materiality?
a. The results of the initial assessment of control risk.
b. The anticipated sample size for planned substantive tests.
c. The entity’s financial statements of the prior year.
d. The assertions that are embodied in the financial statements.

27. In considering materiality for planning purposes, an auditor believes that misstatements
aggregating P100,000 would have a material effect on an entity’s income statement, but that
misstatements would have to aggregate P200,000 to materially affect the balance sheet.
Ordinarily, it would be appropriate to design auditing procedures that would be expected to
detect misstatements that aggregate
a. P100,000
b. P150,000
c. P200,000
d. P300,000

28. Holding other planning considerations equal, a decrease in the amount of misstatement in a
class of transactions that an auditor could tolerate most likely would cause the auditor to
a. Apply the planned substantive tests prior to the balance sheet date.
b. Perform the planned auditing procedures closer to the balance sheet date.
c. Increase the assessed level of control risk for relevant financial statement assertions.
d. Decrease the extent of auditing procedures to be applied to the class of transactions.

29. If the auditor sets the preliminary judgment about materiality at a relatively low peso amount,
a. More evidence will be required than for a high amount.
b. Less evidence will be required than for a high amount.
c. The same amount of evidence will be required as for a high peso amount.
d. The amount of evidence required will not be affected.

30. Which of the following underlies the application of generally accepted auditing standards,
particularly the standards of fieldwork and reporting?
a. The element of internal control
b. The elements of materiality and relative risk
c. The element of corroborating evidence
d. The element of reasonable assurance

31. Which of the following statements best describes materiality?

a. Materiality is typically measured as a fixed percentage of assets.
b. Materiality is typically measured as a fixed percentage of net income.
c. Materiality is the amount at which judgment based on the financial statements may be
altered.
d. Materiality does not depend on the company being audited, but is solely dependent on the
auditor's discretion.

32. Which of the following statements concerning materiality thresholds is incorrect?

a. Aggregate materiality thresholds are a function of the auditor's preliminary judgments
concerning audit risk.
b. In general, the more misstatements the auditor expects, the higher should be the
aggregate materiality threshold.
c. The smallest aggregate level of errors or fraud that could be considered material to any one

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 of the financial statements is referred to as a "materiality threshold."
d. Materiality thresholds may change between the planning and review stages of the audit.
These changes may be due to quantitative and/or qualitative factors.

33. Incentives or pressures to commit fraud include the following except:

a. Meeting analyst’s or bank’s expectations for profit.
b. Meeting the threshold for a performance bonus.
c. Having significant personal debts or poor credit.
d. Failing to correct known material weaknesses in internal control on a timely basis.

34. An auditor judged an item to be immaterial when planning an audit. However, the auditor may
still include the item if it is subsequently determined that
a. Sufficient staff is available.
b. Adverse effects related to the item are likely to occur.
c. Related evidence is reliable.
d. Miscellaneous income is affected.

35. The existence of a related party transaction may be indicated when another entity
a. Sells real estate to the corporation at a price that is comparable to its appraised value.
b. Absorbs expenses of the corporation.
c. Borrows from the corporation at a rate of interest which equals the current market rate.
d. Lends to the corporation at a rate of interest, which equals the current market rate.

36. With respect to errors and fraud, which of the following should be part of an auditor's planning
of the audit engagement?
a. Planning to search for errors or fraud that would have a material or immaterial effect on
the financial statements
b. Planning to discover errors or fraud that are either material or immaterial
c. Planning to discover errors or fraud that are material
d. Planning to consider factors affecting the risk of material misstatement both at the financial
statement and the account balance level

37. The auditor's evaluation of the likelihood of material employee fraud is normally done initially
as a part of
a. The assessment of whether to accept the audit engagement.
b. Understanding the entity's internal control structure.
c. The tests of controls.
d. The tests of transactions.

38. Which of the following is not a component of audit risk?

a. Detection risk
b. Control risk
c. Business risk
d. Inherent risk

39. The risk that the auditor may unknowingly fail to appropriately modify the unqualified opinion
on financial statements that are materially misstated is referred to as
a. Detection risk.
b. Audit risk.
c. Information risk.
d. Business risk.

40. The risk that financial statements are likely to be misstated materially without regard to the
effectiveness of internal control is which type of risk?
a. Audit risk
b. Inherent risk
c. Client risk
d. Control risk

41. The risk that a material misstatement in an assertion will not be prevented or detected on a
timely basis by internal control is
a. Detection risk.
b. Control risk.
c. Inherent risk.
d. Audit risk.

42. Which of the following is the best definition of detection risk?

a. The auditor will compute audit materiality incorrectly.
b. The auditor will apply more audit procedures than are required in the circumstances.

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 c. The auditor will fail to detect material misstatements that occur.
d. The auditor will fail to modify the audit opinion on financial statements that are materially
misstated.

43. Inherent risk and control risk differ from detection risk in that they
a. Can be changed at the auditor’s discretion.
b. Arise from the misapplication of auditing procedures.
c. May be assessed in either quantitative or non-quantitative terms.
d. Exist independently of the financial statement audit.

44. As the acceptable level of detection risk decreases, an auditor may

a. Reduce substantive testing by relying on the assessments of inherent risk and control risk.
b. Postpone the planned timing of substantive tests from interim dates to the year-end.
c. Eliminate the assessed level of inherent risk from consideration as a planning factor.
d. Lower the assessed level of control risk from the maximum level to below the maximum.

45. As the acceptable level of detection risk decreases, the assurance directly provided from
a. Tests of controls should decrease.
b. Tests of controls should increase.
c. Substantive tests should increase.
d. Substantive tests should decrease.

46. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk from that originally planned. To achieve an overall audit risk level
that is substantially the same as the planned audit risk level, the auditor would
a. Decrease substantive testing.
b. Decrease detection risk.
c. Increase inherent risk.
d. Increase materiality levels.

47. Relationship between control risk and detection risk is ordinarily

a. Parallel.
b. Direct.
c. Inverse.
d. Equal.

48. In comparing management fraud with employee fraud, the auditor's risk of failing to discover
the fraud is
a. Greater for employee fraud because of the larger number of employees in the organization.
b. Greater for employee fraud because of the higher crime rate among blue collar workers.
c. Greater for management fraud because of management's ability to override existing
internal controls.
d. Greater for management fraud because managers are inherently smarter than employees.

49. Which of the following characteristics most likely would heighten an auditor's concern about
the risk of intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low.
b. Management places substantial emphasis on meeting earnings projections.
c. Insiders recently purchased additional shares of the entity's stock.
d. The rate of change in the entity's industry is slow.

50. Which of the following descriptions best describes inherent risk?

a. Auditors fail to discover a material misstatement in the course of their audit and do not
modify their audit opinion.
b. A company's internal control fails to identify a material misstatement in a timely fashion.
c. Auditing procedures fail to find a. material misstatement.
d. The possibility that a material misstatement will occur in any given account before
considering internal control.

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

52. Which of the following types of risk is significantly affected by the nature, amount and timing of
substantive auditing procedures?
a. Inherent risk

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 b. Control risk
c. Detection risk
d. Sufficiency risk

53. Which type of risk does the management of a company have the most control over in the short
term?
a. Inherent risk
b. Control risk
c. Detection risk
d. Sufficiency risk

54. Which of the following is most likely to be presumed to represent a fraud risk on an audit?
a. Capitalization of repairs and maintenance expense into the property, plant and equipment
asset account
b. Improper revenue recognition
c. Improper interest expense accrual
d. Introduction of significant new products

55. Which of the following is least likely to be included in an auditor's inquiry of management while
obtaining information to identify the risks of material misstatement due to fraud?
a. Does it have knowledge of fraud or suspect fraud?
b. Are financial reporting operations controlled by and limited to one location?
c. Has it reported to the audit committee the nature of the company's internal control?
d. Does it have programs to mitigate fraud risks?

56. Which of the following conditions justifies an auditor's decision of raising the materiality level?
a. Application of analytical procedures reveals a significant increase in sales revenue in
December, the last month of the fiscal year.
b. Internal control over shipping, billing, and-recording of sales revenue is weak.
c. Internal control over revenue and receipts cycle is excellent.
d. Study of the business reveals that the client recently acquired a new company in an
unrelated industry.

57. Which of the following is not required by PSA No. 315, "Consideration of Fraud in a Financial
Statement Audit"?
a. Conduct a continuing assessment of the risks of material misstatement due to fraud
throughout the audit.
b. Conduct a discussion by the audit team of the risks of material misstatement due to fraud.
c. Conduct inquiries of the audit committee as to their views about the risks of fraud and their
knowledge of any fraud or suspected fraud.
d. Conduct the audit with professional skepticism, which includes an attitude that assumes
balances are incorrect until verified by the auditor.

58. Inherent risk is defined as the susceptibility of an account balance or class of transactions to
error that could be material assuming that there were no related internal controls. Of the
following conditions, which one does not increase inherent risk?
a. The board of directors approved a substantial bonus for the president and chief executive
officer, and also approved an attractive stock option plan for themselves.
b. The client has entered into numerous related party transactions during the year under
audit.
c. Internal control over shipping, billing, and recording of sales revenue is weak.
d. The client has lost a major customer accounting for approximately 30% of annual revenue.

59. 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 override of controls.
d. All of the above are true

60. Which of the following is an example of fraudulent financial reporting?

a. The treasurer diverts customer payments to his personal due, concealing his actions by
debiting an expense account, thus overstating expenses.
b. Company management changes inventory count tags and overstates ending inventory,
while understating cost of goods sold.
c. An employee steals inventory and the “shrinkage” is recorded in cost of goods sold.
d. An employee steals small tools from the company and neglects to return them; the cost is
reported as a miscellaneous operating expense.

61. The type of transactions that ordinarily have a high inherent risk because they involve

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 management judgments or assumptions are referred to as
a. Estimation transactions.
b. Nonroutine transactions.
c. Related-party transactions.
d. Routine transactions.

62. If results from the auditor's tests of controls induce the auditor to change the assessed level of
control risk for inventory from 0.2 to 0.4 and audit risk and inherent risk remain constant, what
is the effect on the acceptable level of detection risk?
a. A change in detection risk cannot be calculated because audit risk and inherent risk values
are not given.
b. Detection risk would decrease from 0.4 to 0.2.
c. Detection risk would increase from 0.3 to 0.6.
d. Detection risk would not change since audit risk and inherent risk do not change.

63. Professional skepticism

a. Assumes that management is either dishonest or assumes unquestioned honesty.
b. Either assumes that management is honest or dishonest.
c. Neither assumes that management is dishonest nor assumes unquestioned honesty.
d. None of the above is a correct statement

64. Which of the following conditions identified during fieldwork of an audit is most likely to affect
the auditor’s assessment of the risk of misstatement due to fraud?
a. Year-end adjusting journal entries.
b. Checks for significant amounts outstanding at year-end.
c. Missing documents.
d. Computer generated documents.

65. Which of the following best describes what is meant by the term “fraud risk factor?”
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presence requires modification of planned audit procedures.
c. Factors whose presence often have been observed in circumstances where frauds have
occurred.
d. Reportable conditions identified during an audit.

66. Auditors would perform the following steps in which order?

a. Determine audit risk; assess control risk; determine detection risk; set materiality.
b. Determine audit risk; set materiality; assess control risk; determine detection risk.
c. Set materiality; determine audit risk; assess control risk; determine detection risk.
d. Set materiality; assess control risk; determine detection risk; determine audit risk.

67. Which of the following may cause management to intentionally understate profits?
a. Management wants to create "cookie jar" reserves for a rainy day.
b. The company is under scrutiny by tax authorities.
c. The company is suffering a large loss and wants to take a "big bath."
d. All of the above

68. Which of the following characteristics most likely would heighten an auditor’s concern about
the risk of intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low.
b. Insiders recently purchased additional shares of the entity’s stock.
c. Management places substantial emphasis on meeting earnings projections.
d. The rate of change in the entity’s industry is slow.

69. Which of the following statements 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 design the audit to provide reasonable assurance of detecting
misstatements due to errors and fraud that are material to the financial statements.
c. An auditor should plan the audit to detect misstatements due to errors and fraud that are
caused by departures from GAAP.
d. An auditor is not responsible for detecting misstatements due to errors and fraud unless the
application of GAAS would result in such detection.

70. An auditor is required to obtain a basic understanding of the client's internal control to plan the
audit. The auditor may then decide to perform tests of controls on all internal control
procedures
a. That would aid in preventing fraud.

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 b. Documented in the flowchart.
c. Considered to be weaknesses that might allow errors to enter the accounting system.
d. Considered to be strengths for which the auditor desires further reduction in the assessed
level of control risk.

71. When considering fraud risk factors relating to management’s characteristics, which of the
following is least likely to indicate a risk of possible misstatement due to fraud?
a. Failure to correct known reportable conditions on a timely basis.
b. Use of unusually conservative accounting practices.
c. Nonfinancial management’s preoccupation with the selection of accounting principles.
d. Significant portion of management’s compensation represented by bonuses based upon
achieving unduly aggressive operating results.

72. Given that an audit in accordance with generally accepted auditing standards is influenced by
the possibility of material errors and fraud, the auditor should conduct the audit with an
attitude of
a. Professional responsiveness.
b. Conservative advocacy.
c. Professional skepticism.
d. Objective judgment.

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

74. Which of the following statements is correct relating to the auditor’s consideration of fraud?
a. The auditor’s interest in fraud consideration relates to fraudulent acts that cause a material
misstatement of financial statements.
b. A primary factor that distinguishes fraud from error is that fraud is always intentional, while
errors are generally, but not always, intentional.
c. While an auditor should be aware of the possibility of fraud, management, and not the
auditor, is responsible for detecting fraud.
d. Fraud always involves a pressure or incentive to commit fraud, and a misappropriation of
assets.

75. Which of the following factors or conditions is an auditor least likely to plan an audit to
discover?
a. High turnover of senior management.
b. Inadequate monitoring of significant controls.
c. Inability to generate positive cash flows from operations.
d. Financial pressures affecting employees.

76. With respect to errors and fraud, the auditor should plan to
a. Search for errors or fraud that would have a material effect on the financial statements.
b. Discover errors or fraud that would have a material effect on the financial statements.
c. Search for errors that would have a material effect and for fraud that would have either
material or immaterial effects on the financial statements.
d. Search for fraud that would have a material effect and for errors that would have either
material or immaterial effects on the financial statements.

77. Auditor responsibility for identifying "direct effect" illegal acts differs from their responsibility
for detecting
a. Errors.
b. Indirect-effect illegal acts.
c. Fraud.
d. Management fraud.

78. Management’s attitude toward aggressive financial reporting and its emphasis on meeting
projected profit goals most likely would significantly influence an entity’s control environment
when
a. External policies established by parties outside the entity affect its accounting practices.
b. Management is dominated by one individual who is also a shareholder.
c. Internal auditors have direct access to the board of directors and the entity’s management.
d. The audit committee is active in overseeing the entity’s financial reporting policies.

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79. Which of the following is least likely to be required on an audit?
a. Review accounting estimates for biases.
b. Test appropriateness of journal entries and adjustment.
c. Make a legal determination of whether fraud has occurred.
d. Evaluate the business rationale for significant unusual transactions.

80. Which of the following is most likely to be an overall response to fraud risks identified in an
audit?
a. Supervise members of the audit team less closely and rely more upon judgment.
b. Only use certified public accountants on the engagement.
c. Place increased emphasis on the audit of objective transactions rather than subjective
transactions.
d. Use less predictable audit procedures.

81. The most likely explanation why the auditor’s examination cannot reasonably be expected to
bring all illegal acts by the client to the auditor’s attention is that
a. Illegal acts are perpetrated by management override of internal control.
b. Illegal acts by clients often relate to operating aspects rather than accounting aspects.
c. The client’s internal control may be so strong that the auditor performs only minimal
substantive testing.
d. Illegal acts may be perpetrated by the only person in the client’s organization with access
to both assets and the accounting records.

82. Which of the following relatively small misstatements most likely could have a material effect
on an entity’s financial statements?
a. A piece of obsolete office equipment that was not retired.
b. An illegal payment to a foreign official that was not recorded.
c. A petty cash fund disbursement that was not properly authorized.
d. An uncollectible account receivable that was not written off.

83. Which of the following might be considered a "red flag" indicating possible fraud in a large
manufacturing company with several subsidiaries?
a. A consistent record of above average return on investment for all subsidiaries
b. The existence of a financial subsidiary
c. Use of separate bank accounts for payrolls by each subsidiary
d. Complex sales-transactions and transfers of funds between affiliated companies

84. Warning signs that cause the auditor to question management integrity must be taken
seriously and pursued vigorously. Which of the following may lead the auditor to suspect
management dishonesty?
a. The client has been named as a defendant in a product liability suit.
b. The client has experienced a decrease in revenue from increased import competition.
c. A new statutory regulation making customer licenses more difficult to obtain may adversely
affect the client's operations.
d. The president and chief executive officer of the client corporation has held numerous
meetings with the controller for the purpose of discussing accounting practices that will
maximize reported profits.

85. Which of the following methods may be used to commit fraudulent financial reporting?
a. Understate liabilities
b. Fail to provide adequate disclosure
c. Overstate revenues
d. Each of the above can be used to commit fraudulent financial reporting

86. The absence of which of the following internal controls increases the opportunity for fraud?
a. Appropriate segregation of duties or independent checks
b. Job applicant screening for employees with access to assets
c. Mandatory vacations for employees with access to assets
d. The absence of any of the above increases the opportunity for fraud

87. Whom should auditors contact when they suspect a fraud?

a. Senior management
b. Expected perpetrators of the fraud
c. Audit committee of the board of directors
d. A and C

88. Auditors would normally interview all but which of the following individuals as part of their
assessment of fraud risk?
a. Senior management

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 b. Audit committee
c. Various employees whose duties do not include normal financial reporting responsibilities
d. All of the above

89. After studying and evaluating a client's existing internal control, an auditor has concluded that
the policies and procedures are well-designed and functioning as intended. Under these
circumstances, the auditor would most likely
a. Perform further control tests to the extent outlined in the audit program.
b. Determine the control policies and procedures that should prevent or detect errors and
fraud.
c. Set detection risk at a higher level than would be set under conditions of weak internal
control.
d. Set detection risk at a lower level than would be set under conditions of weak internal
control.

90. An audit plan is a

a. Detailed plan of analytical procedures and all substantive tests to be performed in the
course of the audit.
b. Generic document that auditing firms have developed to lead the process of the audit
through a systematic and logical process.
c. Budget of the time that should be necessary to complete each phase of the audit
procedures.
d. Document that provides an overview of the company and a general plan for the audit work
to be accomplished, timing of the work, and other matters of concern to the audit.

91. For which of the following judgments may an independent auditor share responsibility with an
entity's internal auditor who is assessed to be both competent and objective?
Assessment of Assessment of
Inherent Risk Control Risk
a. Yes Yes
b. No No
c. No Yes
d. No No

92. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the:
a. Methods of statistical sampling to be used in confirming accounts receivable.
b. Schedules and analyses to be prepared by the client's staff.
c. Pending legal matters to be included in the inquiry of the client's attorney.
d. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.

93. An audit program is

a. A generic document that auditing firms have developed to lead the process of the audit
through a systematic and logical process.
b. An overview of the company and a general plan for the audit work to be accomplished.
c. The detailed plan of audit procedures to be performed in the course of the audit.
d. A budget of the time that should be necessary to complete each phase of the audit
procedures.

94. Which of the following concepts is most useful in assessing the scope of an auditor's program
relating to various accounts?
a. Attribute sampling
b. Management fraud
c. Materiality
d. The reliability of information

95. One of the primary roles of an audit program is to

a. Provide for a standardized approach to the audit engagement.
b. Serve as a tool for planning, directing, and controlling audit work.
c. Document an auditor's understanding of the internal control.
d. Delineate the audit risk accepted by the auditor.

96. The principal reason for developing a written audit program is to help assure that the
a. Audit work is properly supervised.
b. Audit report contains only significant findings.
c. Audit work is properly planned and documented.
d. Work of different auditors is properly coordinated.

97. An auditor should design the written audit program so that

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 a. All material transactions will be selected for substantive testing.
b. Substantive tests prior to the balance sheet date will be minimized.
c. Each account balance will be tested under either tests of controls or tests of transactions.
d. The audit procedures selected will achieve specific audit objectives.

98. In the preparation of an audit program, which of the following items is not essential?
a. Assessment of inherent risk
b. The preparation of a budget identifying the costs of resources needed
c. A review of material from prior audits
d. An understanding of controls established by management

99. Which of the following is not a consideration in the development of audit programs?
a. Internal control over the recording of plant asset additions and repairs and maintenance
expenditures is found to be weak.
b. The members of the board of directors are elected by the stockholders during the annual
meeting.
c. The client is a private university located in Southern Philippines.
d. The client constructed a major addition to its central manufacturing facility during the year
under audit.

100. The element of the audit planning process most likely to be agreed upon with the client
before implementation of the audit strategy is the determination of the
a. Procedures to be undertaken to discover litigation, claims, and assessments.
b. Timing of inventory observation procedures to be performed.
c. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
d. Pending legal matters to be included in the inquiry of the client's attorney.

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SET 1
1 D 21 C 41 C 61 D 81 C
2 C 22 A 42 C 62 C 82 B
3 D 23 B 43 B 63 C 83 D
4 C 24 C 44 C 64 C 84 A
5 C 25 B 45 C 65 B 85 C
6 C 26 D 46 B 66 C 86 C
7 D 27 B 47 B 67 B 87 D
8 C 28 B 48 D 68 B 88 B
9 B 29 B 49 C 69 B 89 D
10 B 30 B 50 B 70 B 90 D
11 B 31 D 51 C 71 C 91 B
12 C 32 B 52 C 72 C 92 D
13 D 33 D 53 D 73 A 93 C
14 D 34 B 54 B 74 B 94 B
15 B 35 A 55 A 75 C 95 D
16 B 36 A 56 D 76 C 96 A
17 B 37 C 57 D 77 B 97 D
18 D 38 C 58 B 78 D 98 B
19 B 39 D 59 D 79 D 99 B
20 B 40 B 60 C 80 B 100 B

SET 2
1 B 21 B 41 B 61 A 81 B
2 B 22 D 42 C 62 B 82 B
3 D 23 D 43 D 63 C 83 D
4 C 24 D 44 B 64 C 84 D
5 B 25 B 45 C 65 C 85 D
6 C 26 C 46 B 66 C 86 D
7 C 27 A 47 C 67 D 87 D
8 D 28 B 48 C 68 C 88 D
9 D 29 A 49 B 69 B 89 C
10 C 30 B 50 D 70 D 90 D
11 B 31 C 51 C 71 B 91 D
12 B 32 B 52 C 72 C 92 B
13 D 33 D 53 B 73 C 93 C
14 C 34 B 54 B 74 A 94 C
15 B 35 B 55 B 75 D 95 B
16 A 36 D 56 C 76 B 96 C
17 D 37 B 57 D 77 B 97 D
18 B 38 C 58 C 78 B 98 B
19 D 39 B 59 C 79 C 99 B
20 B 40 B 60 B 80 D 100 B

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