Polytechnic University of the Philippines

ACC 3016

COMPREHENSIVE REVIEWER AUDITING THEORY

1)In determining the primary responsibility of the external auditor for an audit of a company?s financial statements, the auditor owes primary allegiance to:

1. 1. the management of the audit client because the auditor is hired and paid by management.
   2. the audit committee of the audit client because that committee is responsible for coordinating and reviewing all audit activities within the company.
   3. stockholders, creditors, and the investing public.
   4. the Auditing and Assurance Standards Council, because it determines auditing standards and auditor?s responsibility.
2. Which of the following would not represent one of the primary problems that would lead the users to demand for independent audits of a company?s financial statements?
   1. Management bias in preparing financial statements.
   2. The downsizing of business and financial markets.
   3. The complexity of transactions affecting financial statements.
   4. The remoteness of the user from the organization and thus the inability of the user to directly obtain financial information from the company.
3. Assurance services involve all the following except:
   1. improving the quality of information for decision purposes.
   2. improving the quality of the decision model used.
   3. improving the relevance of information.
   4. implementing a system that improves the processing of information.
4. Which of the following is the broadest and most inclusive concept?
   1. Audits of financial statements.
   2. Internal control audit.
   3. Assurance services.
   4. Compilation services.
5. Which of the following is a correct statement?
   1. An audit provides limited assurance by attesting to the fairness of the client?s assertions.
   2. A review provides positive assurance by attesting the reliability of the client?s assertions.
   3. Management consulting services provide attestation in all cases.
   4. Accounting services do not provide attestation.
6. Unlike consulting services, assurance services:
   1. make recommendation to management
   2. report on how to use information
   3. report on the quality of information
   4. are two-party contracts.
7. Financial statements audits:
   1. reduce the cost of capital
   2. report on compliance with laws and regulations
   3. assess management„s efficiency
   4. overlook information risk
8. A summary of findings rather than assurance is most likely to be included in a(n):

8. 1. Agreed-upon procedures report
   2. Compilation report
   3. Examination report
   4. Review report
9. The risk associated with a company's survival and profitability is referred to as:
   1. Business Risk
   2. Information Risk
   3. Detection Risk
   4. Control Risk
10. An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is referred to as a(n):
    1. Peer Review Engagement
    2. Quality Control Engagement
    3. Quality Assurance Engagement
    4. Attestation Engagement
11. Attestation risk is limited to a low level in which of the following engagement(s)?
    1. Both examinations and reviews
    2. Examinations, but not reviews
    3. Reviews, but not examinations
    4. Neither examinations nor reviews
12. .An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences?
    1. The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually limited to either the balance sheet or the income statement
    2. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period
    3. Operational audits do not ordinarily result in the preparation of a report
    4. The operational audit deals with pre-tax income
13. The review of a company's financial statements by a CPA firm:
    1. Is substantially less in scope of procedures than an audit
    2. Requires detailed analysis of the major accounts
    3. Is of similar scope as an audit and adds similar credibility to the statements
    4. Culminates in issuance of a report expressing the CPA's opinion as to the fairness of the statements
14. When performing an engagement to review a nonpublic entity's financial statements, an accountant most likely would:
    1. Obtain an understanding of the entity's internal control.
    2. Limit the distribution of the accountant's report.
    3. Confirm a sample of significant accounts receivable balances.
    4. Ask about actions taken at board of directors' meetings.
15. Which of the following professionals has primary responsibility for the performance of an audit?
    1. The managing partner of the firm
    2. The senior assigned to the engagement
    3. The manager assigned to the engagement
    4. The partner in charge of the engagement
16. Assurance services may include which of the following?

16. 1. attesting to financial statements
    2. examination of the economy and efficiency of governmental operations
    3. evaluation of a division's performance for management
    4. all of the given choices
17. The auditor of financial statements must make very difficult interpretations regarding authoritative literature. Additionally, the auditor must
    1. proceed beyond PFRS to assess how the economic activity is portrayed in the financial statements.
    2. force management to make certain decisions regarding their financial statements.
    3. disregard independence in order to find the underlying truth of the evidence.
    4. establish new criteria by which financial statements may be compared.
18. Which one of the following is not a part of the attest process?
    1. gathering evidence about assertions
    2. proving the accuracy of the books and records
    3. evaluating evidence against objective criteria
    4. communicating the conclusions reached
19. Which one of the following is not a reason why the users of financial statements desire for an independent assessment of the financial statement presentation?
    1. complexity of transactions affecting the financial statements
    2. lack of criteria on which to base information
    3. remoteness of the user from the organization
    4. all of them are potential reasons
20. Independent professional services that are provided on financial or other information that improve the quality of decision making are known as
    1. internal auditing.
    2. financial auditing.
    3. assurance services.
    4. attestation services.
21. An audit which determines whether organizational policies are being followed and whether external mandates are being met is known as
    1. a financial audit.
    2. a compliance audit.
    3. an operational audit.
    4. none of the above
22. May a CPA hire for the CPA?s public accounting firm a non-CPA systems analyst who specializes in developing computer systems?
    1. Yes, provided the CPA is qualified to perform each of the specialist?s tasks.
    2. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist?s end product.
    3. No, because non-CPA professionals are not permitted to be associated with CPA firms in public practice.
    4. No, because developing computer systems is not recognized as a service performed by public accountants.
23. Which of the following services may a CPA perform in carrying out a consulting service for a client?

1. Analysis of the client?s accounting system

2. Review of the client?s proposed business plan
3. Preparation of information for obtaining financing
   1. I and II only
   2. I and III only
   3. II and III only
   4. I, II, and III

24. Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement?
    1. The primary objective of a review engagement is to test the completeness of the financial statements prepared, but a compilation tests for reasonableness.
    2. The primary objective of a review engagement is to provide positive assurance that the financial statements are fairly presented, but a compilation provides no such assurance.
    3. In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance.
    4. In a review engagement, accountants provide reasonable or positive assurance that the financial statements are fairly presented, but a compilation provides limited assurance.
25. Which of the following factors most likely would cause a CPA to decline a new audit engagement?
    1. The CPA does not understand the entity's operations and industry.
    2. Management acknowledges that the entity has had recurring operating losses.
    3. The CPA is unable to review the predecessor auditor's working papers.
    4. Management is unwilling to permit inquiry of its legal counsel.
26. When a firm or a member of the assurance team holds a direct financial interest or a material indirect financial interest in the assurance client as a trustee, a self-interest threat may be created by the possible influence of the trust over the assurance client. Accordingly, such an interest cannot be held when:
    1. The member of the assurance team, an immediate family member of the member of the assurance team, and the firm are beneficiaries of the trust.
    2. The interest held by the trust in the assurance client is not material to the trust.
    3. The trust is not able to exercise significant influence over the assurance client.
    4. The member of the assurance team or the firm does not have significant influence over any investment decision involving a financial interest in the assurance client.

27. An inadvertent violation of the Independence rules as it relates to a financial interest in an assurance client would not impair the independence of the firm, the network firm or a member of the assurance team when:
    1. The firm, and the network firm, has established policies and procedures that require all professionals to report promptly to the firm any breaches resulting from the purchase, inheritance or other acquisition of a financial interest in the assurance client.
    2. The firm, and the network firm, promptly notifies the professional that the financial interest should be disposed of.
    3. The disposal occurs at the earliest practical date after identification of the issue, or the professional is removed from the assurance team.
    4. All of the given choices.

28. If a firm, or a network firm, has a direct financial interest in a financial statement audit client of the firm, the appropriate safeguard against the self-interest threat created would be:
    1. Dispose the entire financial interest.

1. 2. Dispose of a sufficient amount of the financial interest so that the remaining interest is no longer material.
   3. Any of the two is appropriate.
   4. None of the two is appropriate.

29. If a firm, or a network firm, has a material financial interest in an entity that has a controlling interest in a financial statement audit client, the self interest threat created is so significant. The audit firm can only perform the engagement if it:

1. Dispose of the entire financial interest.
2. Dispose of a sufficient amount of the financial interest so that the remaining interest is no longer significant.
   1. Either I or II
   2. Neither I nor II
   3. I only
   4. II only

30. Which of the following safeguards is inappropriate if a firm has a material financial interest in an entity that has a controlling interest in a financial statement audit client?
    1. Discuss the presence of self-interest threat with the client?s board of directors.
    2. Dispose of the financial interest in total.
    3. Dispose of a sufficient amount of the financial interest.
    4. Either dispose of a sufficient amount of the financial interest or the financial interest in total.

31. The retirement benefit plan of a firm, or a network firm, has a financial interest in a financial statement audit client. If the self-interest threat that is created by the financial interest is significant, the firm that intends to continue the engagement should:
    1. Reduce the financial interest so that the remaining interest is no longer material.
    2. Discuss the matter with the audit committee of the financial statement audit client.
    3. Refer the audit of the stockholders? equity of the financial statement audit client to other CPA.
    4. Either dispose of the financial interest in total or a sufficient amount so that the remaining amount is no longer material.

32. The following loans and guarantees would not create a threat to independence, except:
    1. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar institution, to the firm, provided the loan is made under normal lending procedures, terms and requirements and the loan is immaterial to both the firm and the assurance client.
    2. A loan from, or a guarantee thereof by, an assurance client that is a bank or a similar institution, to a member of the assurance team or their immediate family, provided the loan is made under normal lending procedures, terms and requirements.
    3. Deposits made by, or brokerage accounts of, a firm or a member of the assurance team with an assurance client that is a bank, broker or similar institution, provided the deposit or account is held under normal commercial terms.
    4. If the firm, or a member of the assurance team, makes a loan to an assurance client that is not a bank or similar institution, or guarantees such an assurance client's borrowing.

33. Examples of close business relationships that may create self-interest and intimidation threat least likely include:
    1. Having a material financial interest in a joint venture with the assurance client or a controlling owner, director, officer or other individual who performs senior managerial functions for that client.

1. 2. Arrangements to combine one or more services or products of the firm with one or more services or products of the assurance client and to market the package with reference to both parties.
   3. Distribution or marketing arrangements under which the firm acts as a distributor or marketer of the assurance client?s products or services, or the assurance client acts as the distributor or marketer of the products or services of the firm.
   4. The purchase of goods and services from an assurance client by the firm (or from an audit client by a network firm) or a member of the assurance team, provided the transaction is in the normal course of business and on an arm?s length basis.

34. When a firm or a member of the assurance team and the audit client or one of its officers hold interest in a closely-held entity, a threat to independence is not created, except:
    1. The relationship is clearly insignificant to the firm or a member of the assurance team and the audit client.
    2. The relationship is other than insignificant which is acceptable for indirect financial interest.
    3. The interest held is immaterial to the investor or group of investors.
    4. The interest does not give the investor, or group of investors, the ability to control the closely-held entity.

35. When an immediate family member of a member of the assurance team is a director or an officer of the assurance client in a position to exert direct and significant influence over the subject matter information of the engagement, the threat to independence can only be reduced to an acceptable level, aside from withdrawing from the engagement, by:
    1. Removing the individual from the assurance team.
    2. Reduce the participation of the professional.
    3. Discuss the matter with the audit committee of the client entity.
    4. Request the audit client management to require the immediate family member of the professional to go on forced vacation leave.

36. Which of the following relationships is most likely to impair a CPA?s independence with respect to a particular audit client on which the CPA works as a member of the engagement team?
    1. A close relative has a material investment in that client of which the CPA is not aware.
    2. A cousin has an immaterial investment in that client of which the CPA is not aware.
    3. The CPA?s father is the president of the audit client.
    4. The CPA?s spouse participates in a savings plan sponsored by the client.
37. An inadvertent violation of the rules on family and personal relationships would not impair the independence of a firm or a member of the assurance team when:
    1. The firm has established policies and procedures that require all professionals to report promptly to the firm any breaches resulting from changes in the employment status of their immediate or close family members or other personal relationships that create threats to independence.
    2. Either the responsibilities of the assurance team are re-structured so that the professional does not deal with matters that are within the responsibility of the person with whom he or she is related or has a personal relationship, or, if this is not possible, the firm promptly removes the professional from the assurance engagement.
    3. Additional care is given to reviewing the work of the professional.
    4. All of the given choices.

38. If a member of the assurance team, partner or former partner of the firm has joined the assurance client, the significance of the self-interest, familiarity or intimidation threats created is least likely affected by
    1. The position the individual has taken at the assurance client.
    2. The amount of any involvement the individual will have with the assurance team.
    3. The length of time that the individual was a member of the assurance team or firm.
    4. The former position of the individual within the assurance team or firm.

39. Using the same senior personnel on an assurance engagement over a long period of time may create a familiarity threat. The significance of the threat will least likely depend upon
    1. The length of time that the individual has been a member of the assurance team.
    2. The role of the individual on the assurance team.
    3. The structure of the client.
    4. The nature of the assurance engagement.

40. A small CPA firm provides audit services to a large local company. Almost 80 percent of the CPA firm?s revenues come from this client. Which statement is most likely to be true?
    1. Appearance of independence may be lacking.
    2. The small CPA firm does not have proficiency to perform a larger audit.
    3. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the audit.
    4. The auditor should provide an “emphasis of a matter paragraph? to his audit report adequately disclosing this information and then it may issue an unqualified opinion.

41. A professional accountant has been the partner-in-charge of a particular audit client for the past eight years. This situation could result to the following threat to professional independence:
    1. Self-review
    2. Advocacy
    3. Intimidation
    4. Familiarity

42. Which statement is incorrect regarding long association of senior personnel with audit clients that are listed entities?
    1. Using the same lead engagement partner on an audit over a prolonged period may create a familiarity threat.
    2. The lead engagement partner should be rotated after a pre-defined period, normally no more than six years.
    3. A partner rotating after a pre-defined period should not participate in the audit until a further period of time, normally two years, has elapsed.
    4. When audit client becomes a listed entity the length of time the lead engagement partner has served the audit client in that capacity should be considered in determining when the partner should be rotated.

43. The professional accountant who has been the lead engagement partner for an audit engagement for a prolonged period of time may continue to serve as the lead engagement partner before rotating off the engagement for how many years after the audit client becomes a listed entity?
    1. One year
    2. Three years
    3. Two years
    4. Four years

44. While the lead engagement partner should be rotated after such a pre-defined period, some degree of flexibility over timing of rotation may be necessary in certain circumstances. Examples of such circumstances include:
    1. Situations when the lead engagement partner?s continuity is especially important to the audit client, for example, when there will be major changes to the audit client?s structure that would otherwise coincide with the rotation of the lead engagement partner.
    2. Situations when, due to the size of the firm, rotation is not possible or does not constitute an appropriate safeguard.
    3. Both choices are correct.
    4. Both choices are incorrect.

45. A CPA can continue to be an engagement partner on the audit of financial statements of listed entities over a prolonged period of engagement. In order to avoid a creation of familiarity threat, subject to transitional provisions, how many years are prescribed by the as maximum for the CPA to continue serving as engagement partner for a listed entity?
    1. Five years
    2. Three years
    3. Seven years
    4. Ten years

46. An engagement partner who is rotated in the audit of financial statements of listed entity can only participate in the audit engagement for the same client after a period of:
    1. Twelve months
    2. Two years
    3. Three years
    4. Five years

47. The following activities would generally create self-interest or self-review threats that are so significant and that only avoidance of the activity or refusal to perform the assurance engagement would reduce the threats to an acceptable level, except
    1. Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf of the assurance client, or having the authority to do so.
    2. Determining which recommendation of the firm should be implemented.
    3. Reporting, in a management role, to those charged with governance.
    4. Providing technical assistance and advice on accounting principles for audit clients.
48. Which of the following may not create a self-review threat?
    1. Supervising assurance client employees in the performance of their normal recurring duties.
    2. Preparing source documents in electronic or other form evidencing a business transaction.
    3. Prolonged period of assignment as member of engagement team in one particular audit engagement.
    4. Performing corporate financial services for the audit client.

49. If firm, or network firm, personnel providing such assistance make management decisions, the self-review threat created could not be reduced to an acceptable level by any safeguards. Examples of such managerial decisions include the following, except
    1. Determining or changing journal entries, or the classifications for accounts or transactions or other accounting records without obtaining the approval of the audit clients
    2. Authorizing or approving transactions.

1. 3. Preparing source documents or originating data (including decisions on evaluation assumptions), or making changes to such documents or data.
   4. Assisting an audit client in resolving account reconciliation problems.

50. The following services are considered to be a normal part of the audit process and do not, under circumstances, threaten independence, except
    1. Analyzing and accumulating information for regulatory reporting.
    2. Assisting in the preparation of consolidated financial statements.
    3. Drafting disclosure items.
    4. Having custody of an assurance client?s assets.

51. Which of the following will an auditor least likely discuss with the former auditors of a potential client prior to acceptance of an audit engagement?
    1. Integrity of the management
    2. Fees charged for the services
    3. Disagreements between the predecessor auditor and the management regarding accounting principles
    4. Reasons for changing audit firms

52. What is the most likely course of action to be taken by an auditor in assessing management integrity?
    1. Tour the plant
    2. Review the minutes of the board of directors
    3. Research the background and histories of officers
    4. Review the bank reconciliation statements

53. An engagement letter should be written before the start of an audit because
    1. it may limit the auditor?s legal liability by specifying the auditor?s responsibilities.
    2. it specifies the client?s responsibility for preparing schedules and making the records available to the auditor.
    3. it specifies the basis for billing the audit for the upcoming year.
    4. All of the choices given are correct

54. When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining whether:
    1. the predecessor's work should be utilized.
    2. the company follows the policy of rotating its auditors.
    3. in the predecessor's opinion, internal control of the company is satisfactory.
    4. the engagement should be accepted.

55. A written understanding between the auditor and the client concerning the auditor's responsibility for the discovery of noncompliance to laws is usually set forth in a(an)
    1. client representation letter.
    2. letter of audit inquiry.
    3. management letter.
    4. engagement letter.

56. Prior to acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the CPA should
    1. contact the predecessor auditor without advising the prospective client and request a complete report of the circumstances leading to the termination of the engagement with an understanding that all information disclosed will be kept confidential.
    2. accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures to verify the reason given by the client for the termination of the engagement.
    3. not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the confidential relationship between an auditor and the client.
    4. advise the client of the intention to contact the predecessor auditor and request a permission for the contact.

57. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor?s

1. 1. opinion of any subsequent events occurring since the predecessor?s audit report was issued.
   2. understanding as to the reasons for the change of auditors.
   3. awareness of the consistency in the application of PFRS between periods.
   4. evaluation of all matters of continuing accounting significance.

58. A successor auditor would most likely make specific inquiries of the predecessor auditor regarding
    1. specialized accounting principles being used by the client?s industry.
    2. the competency of the client?s internal audit staff.
    3. the uncertainty inherent in applying sampling procedures.
    4. disagreements with management as to auditing procedures.

59. Which of the following statements concerning materiality thresholds is incorrect?
    1. Aggregate materiality thresholds are a function of the auditor's preliminary judgment concerning audit risk.
    2. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality threshold.
    3. The smallest aggregate level of errors or fraud that could be considered material to any of the financial statements is referred to as a "materiality threshold."
    4. Materiality thresholds may change between the planning and review stages of the audit. These changes may be due to quantitative and/or qualitative factors.

60. Which of the following concepts about materiality is incorrect?
    1. Materiality is directly related to the acceptable level of detection risk.
    2. Materiality does not apply if internal control is highly effective.
    3. Materiality is a matter of professional audit judgment.
    4. Materiality is more closely related to fieldwork and reporting standards than to general standards.

61. Which of the following would not be a source of information about the risk of a potential new audit client?
    1. The predecessor auditor
    2. Management
    3. The internet
    4. The new auditor?s permanent file

62. In comparing management fraud with employee fraud, the auditor?s risk of failing to discover the fraud is greater for:
    1. employee fraud because of the larger number of employees in the organization.
    2. employee fraud because of the higher crime rate among blue collar workers.
    3. management fraud because of management?s ability to override existing internal controls.
    4. management fraud because managers are inherently smarter than employees.

63. Management?s integrity affects all of the following risks except:
    1. enterprise risk
    2. financial reporting risk
    3. engagement risk
    4. all of the above risks are affected

64. The auditor is most likely to presume that a high risk of irregularities exists if
    1. the client is a multinational company that does business in numerous foreign countries.
    2. the client does business with several related parties.
    3. inadequate segregation of duties places an employee in a position to perpetrate and conceal thefts.
    4. inadequate employee training results in lengthy EDP exception reports each month.

65. Which of the following audit risk components may be assessed in non-quantitative terms? Inherent Risk                                           Control Risk                 Detection Risk
    1. Yes                                   Yes                                    No
    2. Yes                                    No                                    Yes
    3. No                                   Yes                                    Yes
    4. Yes                                   Yes                                    Yes
66. Which of the following combinations of engagement risk, audit risk, and materiality would lead the auditor to most audit work?

67. Which of the following conditions justifies an auditor?s decision of raising the materiality level?
    1. Internal control over revenue and receipts cycle is excellent.

1. 2. Application of analytical procedures reveals a significant increase in sales revenue in December, the last month of the fiscal year.
   3. Internal control over shipping, billing, and recording of sales revenue is weak.
   4. Study of the business reveals that the client recently acquired a new company in an unrelated industry.

68. Which of the following does an auditor least likely perform in assessing audit risk?
    1. Gather audit evidence in support of recorded transactions.
    2. Obtain an understanding of the client's system of internal control.
    3. Understand the economic substance of significant transactions completed by the client.
    4. Understand the entity and the industry in which it operates.

69. Which type of risk does the management of a company have the most control over in the short term?
    1. Inherent risk
    2. Control risk
    3. Detection risk
    4. Sufficiency risk

70. In which of the following order would the auditors perform the following steps?
    1. Determine audit risk; assess control risk; determine detection risk; set materiality.
    2. Set materiality; determine audit risk; assess control risk; determine detection risk.
    3. Set materiality; assess control risk; determine detection risk; determine audit risk.
    4. Determine audit risk; set materiality; assess control risk; determine detection risk.

71. If the results of 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?
    1. A change in detection risk cannot be calculated because audit risk and inherent risk values are not given.
    2. Detection risk would increase from 0.3 to 0.6.
    3. Detection risk would decrease from 0.4 to 0.2.
    4. Detection risk would not change since audit risk and inherent risk do not change.

72. Which of the following may cause the management to intentionally understate profits?
    1. Management wants to create "cookie jar" reserves for a rainy day.
    2. The company is under scrutiny by tax authorities.
    3. The company is suffering a large loss and wants to take a "big bath."
    4. All of the given choices

73. Which of the following is true?
    1. Auditors are responsible for detecting all fraudulent financial reporting.
    2. Auditors must specifically consider fraud risk from overstating liabilities.
    3. Auditors must specifically consider fraud risk from management override of controls.
    4. All of them are true

74. Why should the auditor plan more work on individual accounts as lower acceptable levels of both audit risk and materiality are established?
    1. To find smaller errors
    2. To find larger errors
    3. To increase the tolerable error in the accounts
    4. To decrease the risk of overreliance

75. With respect to errors and fraud, the auditor should plan to
    1. search for errors or fraud that would have a material effect on the financial statements.
    2. discover errors or fraud that would have a material effect on the financial statements.
    3. search for errors that would have a material effect and for fraud that would have either material or immaterial effects on the financial statements.
    4. search for fraud that would have a material effect and for errors that would have either material or immaterial effects on the financial statements.

76. The auditor?s responsibility for identifying "direct-effect" non-compliance to laws and regulations differs from their responsibility for detecting
    1. errors.
    2. indirect-effect non-compliance to laws and regulations.
    3. fraud.
    4. management fraud.

77. The element of the audit planning process most likely to be agreed upon with the client before the implementation of the audit strategy is the determination of the
    1. timing of inventory observation procedures to be performed.
    2. evidence to be gathered to provide a sufficient basis for the auditor's opinion.
    3. procedures to be undertaken to discover litigation, claims, and assessments.
    4. pending legal matters to be included in the inquiry of the client's attorney.

78. Which of the following concepts is most useful in assessing the scope of an auditor's program relating to various accounts?
    1. Attribute sampling
    2. Materiality
    3. The reliability of information
    4. Management fraud

79. With respect to the auditor's planning of a year-end examination, which of the following statements is always true?
    1. An engagement proposed after the fiscal year ends should not be accepted.
    2. An inventory count must be observed at the balance sheet date.
    3. The client's audit committee should not be told of the specific audit procedures that will be performed.
    4. It is an acceptable practice to carry out substantial parts of the examination at interim dates.

80. Which of the following is not a consideration in the development of audit programs?

1. 1. Internal control over the recording of plant asset additions and repairs and maintenance expenditures is found to be weak.
   2. The client constructed a major addition to its central manufacturing facility during the year under audit.
   3. The client is a private university located in Southern Philippines.
   4. The members of the board of directors are elected by the stockholders during the annual meeting.

81. An audit program provides a proof that
    1. sufficient competent evidential matter is obtained.
    2. the work is adequately planned.
    3. there is compliance with generally accepted standards of reporting.
    4. there is a proper study and evaluation of internal control.

82. The principal reason for developing a written audit program is to help assure that the
    1. audit work is properly supervised.
    2. audit work is properly planned and documented.
    3. audit report contains only significant findings.
    4. work of different auditors is properly coordinated.

83. One of the primary uses of an audit program is to
    1. serve as a tool for planning, directing, and controlling the audit work.
    2. document an auditor's understanding of the internal control.
    3. provide for a standardized approach to the audit engagement.
    4. delineate the audit risk accepted by the auditor .
84. Which of the following questions would an auditor most likely include in an internal control questionnaire for notes payable?
    1. Are assets that collateralize notes payable critically needed for the entity?s continued existence?
    2. Are two or more authorized signatures required on checks that repay notes payable?
    3. Are the proceeds from notes payable used for the purchase of noncurrent assets?
    4. Are direct borrowings on notes payable authorized by the board of directors?

85. In an auditor?s consideration of internal control, the completion of a questionnaire is most closely associated with which of the following?
    1. Separation of duties
    2. Flowchart accuracy
    3. Understanding the system
    4. Tests of controls

86. During the review of the client?s system of internal control, the auditor observes the client employees as they apply the operating controls in order to
    1. prepare a flowchart.
    2. update information contained in the organization and procedure manuals.
    3. corroborate the information obtained during the initial review of the system.
    4. determine the extent of compliance with quality control standards.

87. An auditor?s flowchart of a client?s internal controls is a diagram depicting the auditor?s
    1. understanding of the internal controls.
    2. program for tests of controls.
    3. documentation of consideration of internal controls.
    4. understanding of the types of irregularities that are probable.

88. Which of the following statements regarding the auditor?s documentation of the client?s internal control structure is correct?
    1. Documentation must include flow charts.
    2. Documentation must include procedural write-ups.
    3. No documentation is necessary although it is desirable.
    4. No one particular form of documentation is necessary, and the extent of documentation may vary.

89. Which of the following is the auditor?s purpose of further testing the internal control procedures?
    1. Provide a basis for reducing the assessed level of control risk.
    2. Reduce the risk that error or fraud that has not been prevented or detected by the internal control system is not detected by the independent audit.
    3. Provide assurance that transactions are executed in accordance with management's authorization and access to assets is limited by a segregation of functions.
    4. Provide assurance that transactions are recorded as necessary to permit the preparation of the financial statements in conformity with PFRS.

90. Tests of controls are concerned primarily with each of the following questions except:
    1. How were the controls applied?
    2. Why were the controls applied?
    3. Were the necessary controls consistently performed?
    4. By whom were the controls applied?

91. The objective of tests of details of transactions that are being performed as tests of controls procedures is to
    1. monitor the design and use of entity documents such as pre-numbered shipping form.
    2. determine whether controls have been placed in operation.
    3. detect material misstatements in the account balances in the financial statements.
    4. evaluate whether controls operate effectively.

92. Which of the following is ordinarily considered a test of internal control procedures?
    1. Send confirmation letters to banks.
    2. Count and list cash on hand.
    3. Examine signatures on checks.
    4. Obtain or prepare reconciliation of bank accounts as of the balance sheet date.
93. Auditors can use several types of audit procedures to test controls. Which of the following type of audit procedures is least likely to be used during tests of controls?
    1. Physical examination of assets

1. 2. Inquiries of client personnel
   3. Examination of documents, records, and reports
   4. Observation of control-related activities.

94. The objective of dual-purpose tests is to:
    1. Evaluate whether internal controls are operating effectively.
    2. Detect material misstatements in the financial statements.
    3. Identify unusual trends or patterns in comparative financial statements.
    4. Test internal controls as well as transactions and balances using the same test procedures.

95. Which of the following types of evidence will be gathered in order to test internal controls?
    1. Confirmations of accounts receivable with customers.
    2. Observation of client personnel receiving inventory shipments.
    3. Observation of inventory counts.
    4. Inquiry of management regarding significant litigation.

96. Tests of controls least likely include:
    1. Inquiries of appropriate client vendors.
    2. Reperformance of a control.
    3. Observation of the application of an accounting procedure.
    4. Inspection of documents.

97. A procedure that would most likely be used by an auditor in performing tests of control regarding segregation of functions on which no audit trail is available:
    1. inspection.
    2. observation.
    3. reprocessing.
    4. reconciliation.
98. The primary purpose of performing further control tests is to provide
    1. a basis for reducing the assessed level of control risk below the maximum level.
    2. a basis for understanding the flow of transactions through the accounting system.
    3. assurance that transactions are properly recorded.
    4. all accounting control procedures leave visible evidence.

99. Which of the following procedures most likely would be included as part of an auditor's tests of control procedures?
    1. Inspection
    2. Reconciliation
    3. Confirmation
    4. Analytical procedures

100. Which of the following audit tests would be a test of controls?
     1. Tests of the specific items making up the balance in a financial statement account.
     2. Comparing inventory prices to vendors? invoices.
     3. Tracing signatures on canceled checks to board of directors? authorizations.