Far Eastern University

IABF ADV

FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

MULTIPLE CHOICE.

1)The nature and extent of planning will vary according the following, except

1. 1. Size of the auditing firm
   2. Complexity of the entity
   3. Auditor’s experience with the entity
   4. Changes in circumstances that occur during the audit engagement

2. The following are the matters to be considered by the auditor in establishing the overall audit strategy, except
   1. Defining the scope of the examination
   2. Assess risk and materiality
   3. Computation of audit fees
   4. Ascertaining the reporting objectives of the engagement

3. The overall audit plan includes:
   1. A description of the nature, timing and extent of planned risk assessment procedures sufficient to assess the risk of material misstatement
   2. A description of the nature, timing and extent of planned further audit procedures at the assertion leveled for each material class of transactions account balances and disclosures
   3. Both a and b
   4. Neither a nor b

4. Which item would not be contained in an audit program?
   1. Staff assigned to the audit.
   2. List of specific tasks to be performed.
   3. Documentation of system being reviewed.
   4. Estimated time required to perform each task.

5. The overall audit strategy should be updated and changed as necessary during the course of the audit.

The overall audit plan should be updated and changed as necessary during the course of the audit.

1. 1. True, True
   2. False, True
   3. False, False
   4. True, False

6. In developing the overall audit strategy for a new client, factor not be considered is:
   1. The terms of the engagement of any statutory responsibilities.
   2. The client’s business, including the structure of the organization and accounting system used.
   3. The amount of estimated audit fee.
   4. The audit risk, and procedures to be performed to achieve audit objectives.

7. An audit program provides proof that
   1. Sufficient competent evidential matter was obtained.
   2. The work was adequately planned.
   3. There was compliance with PSAs.
   4. There was a proper study and evaluation of internal control.

8. An audit should design the written audit program so that
   1. All material transactions will be selected for substantive testing.
   2. Substantive tests prior to the balance sheet date will be minimized.
   3. The audit procedures selected will achieve specific objectives.
   4. Each account balance will be tested under either tests of controls or tests of transactions.

9. The audit program usually cannot be finalized until the
   1. Consideration of the entity’s internal control structure has been completed.
   2. Engagement letter has been signed by the auditor and the client.
   3. Reportable conditions have been communicated to the audit committee of the board of directors.
   4. Search for unrecorded liabilities has been performed and documente

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10. Those procedures specifically outlined in an audit program are primarily designed to
    1. Gather evidence.
    2. Detect errors or irregularities.
    3. Test internal systems.
    4. Protect the auditor in the event of litigation.

11. In planning an examination, the auditor would consider all of the following matters, except
    1. Anticipated reliance on internal controls.
    2. Preliminary judgment about materiality levels for audit purposes.
    3. Financial statement items likely to require adjustment.
    4. The kind of opinion (unqualified, qualified, disclaimer, or adverse), likely to be given.

12. When planning an examination, an auditor should
    1. Consider whether the extent of substantive tests may be reduced based on the results of the internal control questionnaire.
    2. Make preliminary judgments about materiality levels for audit purposes.
    3. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them.
    4. Prepare a preliminary draft of the management representation letter.

13. Evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. It also encompasses the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.
    1. Audit planning
    2. Audit evidence
    3. Analytical procedures
    4. Inspection

14. A basic premise underlying the application of analytical procedures is that
    1. Plausible relationship among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.
    2. Statistical tests of financial information may lead to the discovery of material errors in financial statements.
    3. These procedures cannot replace tests of balances and transactions.
    4. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations.

15. Analytical procedures are used for the following purposes:
    1. To assist the auditor in assessing the risk of material misstatements of the FS.
    2. As a substantive test to obtain evidential matter about particular assertion related to account balances or classes of transaction.
    3. As an overall review of financial information in the final review stage of the audit.
    4. All of the above.

16. For all audits of financial statements made in accordance with PSA’s, the use of analytical procedures is required to some extent

17. The audit risk against which the auditor and those who rely on his/her opinion require reasonable protection is a combination of three separate risks at the account balance or class of transactions level. The first risk is inherent risk. The second risk is that material misstatements will not be prevented or detected by internal control. The third risk is that
    1. The auditor will reject a correct account balance as incorrect.
    2. Material misstatements that occur will not be detected by the audit.
    3. The auditor will apply an inappropriate audit procedure.
    4. The auditor will apply an inappropriate measure of audit immediately.

18. Audit risk consists of inherent risk, control risk and detection risk. Which of the following statements is true?
    1. Cash is more susceptible to theft than an inventory of coal because it has greater inherent risk.

1. 2. The risk that the material misstatement will not be prevented or detected on a timely basis by internal control can be reduced to zero by effective controls.
   3. Detection risk is a function of the efficiency of an auditing procedure.
   4. The existence levels of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor.

19. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are
    1. Elements of audit risk while detection risk is not
    2. Changed at the auditor’s discretion while detection risk is not
    3. Considered at the individual account-balance while detection risk is not
    4. Functions of the client and its environment while detection risk is not

20. Principal auditor is
    1. The auditor who audited and reported on the prior period’s financial statements and continues as the auditor for the

current period.

1. 2. A current period’s auditor who did not audit the prior period’s financial statements.
   3. The auditor who was previously the auditor of an entity and who has been replaced by an incoming auditor.
   4. The auditor with responsibility for reporting on the financial statements of an entity when those financial statements include financial information of one or more components audited by another auditor.

21. The independent auditor should acquire an understanding of a client’s internal audit function to determine whether the work of internal auditors will be a factor in determining the nature, timing and extent of the independent auditor’s procedures.

The work performed by internal auditors might be such a factor when the internal auditor’s work includes

1. 1. Verification of the mathematical accuracy of invoices
   2. Review of administrative practices to improve efficiency and achieve management objectives
   3. Study and evaluation of internal accounting control
   4. Preparation of internal financial reports for management purposes

22. The work of internal auditors may affect the independent auditor’s

1. Procedures performed in obtaining an understanding of internal control
2. Procedures performed in assessing the risk of material misstatement
3. Substantive procedures performed in gathering direct evidence

1. I and III only
2. I and II only
3. II and III only
4. I, II and III

23. 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?

24. An expert may be
    1. Employed by the auditor
    2. Employed by the entity
    3. Engaged by the auditor
    4. All of the above

25. Which statement is incorrect regarding the auditor’s use of the work of an expert?
    1. When using the work performed by an expert, the auditor should obtain sufficient appropriate audit evidence that such work is adequate for the purposes of the audit.
    2. “Expert” means a person or firm possessing special skill, knowledge and experience in a particular field other than

accounting and auditing.

1. 3. The auditor’s education and experience enable the auditor to be knowledgeable about business matters in general, but the auditor is not expected to have the expertise of a person trained for or qualified to engage in the practice of another profession or occupation.
   4. When the auditor uses the work of an expert employed by the auditor, that work is used in the employee’s capacity as

an assistant on the audit.

26. Which of the following least likely requires the services of an expert?
    1. Valuations of certain types of assets like land and buildings.
    2. Legal opinions concerning interpretations of engagements, statues and regulations.

1. 3. Determination of amounts using specialized techniques.
   4. Application of accounting methods in computing inventory balances.

27. Only the amount of misstatements needs to be considered in assessing materiality.

Both the amount and nature of misstatements need to be considered in assessing materiality.

1. 1. True, True
   2. False, True
   3. False, False
   4. True, False

28. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
    1. The anticipated sample size of the planned substantive tests
    2. The entity’s annual financial statements
    3. The results of the internal control questionnaire
    4. The contents of the management representation letter

29. Determining a materiality level for the financial statements as a whole requires the exercise of professional judgment. A percentage is often applied to a chosen benchmark as a starting point in that determination. Factors that may affect the identification of an appropriate benchmark include the following:
    1. The elements of the financial statements (e.g., assets, liabilities, equity, income, expenses)
    2. Whether there are items on which the attention of the users of the particular entity’s financial statements tends to be focused (e.g., for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets)
    3. The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in which the entity operates
    4. All of the above

30. The materiality level for the financial statements as a whole (or the materiality level for a particular class of transactions, account balance or disclosure, if applicable) may need to be revised as a result of the following
    1. A change in circumstances that occurred during the audit
    2. New information
    3. A change in the auditors’ understanding of the entity and its operations as a result of performing further audit procedures.
    4. All of the above

31. Materiality should be considered by the auditor when
    1. Determining the nature, timing and extent of auditor’s further procedures
    2. Identifying and assessing the risks of material misstatements
    3. Both a and b
    4. Neither a nor b

32. Which of the following statements is correct concerning the concept of materiality?
    1. Materiality is determined by reference to PICPA guidelines
    2. Materiality depends only on the peso amounts of an item relative to other items in the financial statements
    3. Materiality depends on the nature of an item rather than the peso amount
    4. Materiality is a matter of professional judgment

33. ABC Corporation has a few large accounts receivable that total P1,000,000. DEF Corporation has a greater number of small accounts receivable that also total P1,000,000. The importance of an error in any one account is, therefore, greater for ABC than DEF. This is an example of the auditor’s concept of
    1. Materiality
    2. Comparative analysis
    3. Relative risk
    4. Reasonable assurance

34. PSA 315 requires
    1. The auditor to obtain an understanding of the entity and its environment, including its internal control.
    2. Discussion among the  engagement team  about the susceptibility of the  entity’s financial  statements to material

misstatement.

1. 3. The auditor to identify and assess the risks of material misstatement at the financial statement and assertion levels.
   4. All of the above.

35. Which statement is incorrect regarding obtaining an understanding of the entity and its environment?
    1. Obtaining an understanding of the entity and its environment is an essential aspect of performing an audit in accordance with PSAs.
    2. That understanding establishes a frame of reference within which the auditor plans the audit and exercises professional judgment about assessing risks of material misstatement of the financial statements and responding to those risks throughout the audit.
    3. The auditor’s primary consideration is whether the understanding that has been obtained is sufficient to assess the risks

of material misstatement of the financial statements and to design and perform further audit procedures.

1. 4. The depth of the overall understanding that is required by the auditor in performing the audit is equal to that possessed by management in managing the entity.

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

37. The auditor should perform the following risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control, except:
    1. Inquiries management and others within the entity
    2. Confirmation
    3. Analytical procedures
    4. Observation and inspection

38. Inquiries directed towards those charged with governance may most likely
    1. Relate to their activities concerning the design and effectiveness of the entity’s internal control and whether management has satisfactorily responded to any findings from those activities
    2. Help the auditor in understanding the environment in which the financial statements are prepared
    3. Relate to changes in the entity’s marketing strategies, sales trends or contractual arrangements with its customers
    4. Help the auditor in evaluating the appropriateness of the selection and application of certain accounting policies

39. The auditors’ understanding of the entity and the environment consists of the following aspects

1. Industry, regulatory, and other external factors, including the applicable financial reporting framework
2. Nature of the entity, including the entity’s selection and application of accounting policies
3. Objectives and strategies and the related business risks that may result in a material misstatement of the financial statements
4. Measurement and review of the entity’s financial performance
5. Internal control
   1. All of the above
   2. I, II and III only
   3. I, II, III and IV only
   4. I and III only

40. Nature of the entity refers to
    1. The entity’s operations, its ownership and governance, the types of investments that it is making and plans to make, the

way that the entity is structured and how it is financed

1. 2. The overall plans for the entity
   3. The operational approaches by which management intends to achieve its objectives
   4. The result of significant conditions, actions or inactions that could adversely affects the entity’s ability to achieve its

objectives and execute the strategies or the setting of inappropriate objectives and strategies.

41. Which statement is correct regarding business risk?
    1. The risk of material misstatement of the financial statements is broader than business risk, though it includes the latter
    2. The auditor should identify or assess all business risks
    3. All business risks give rise to risks of material misstatements
    4. A business risk may have an immediate consequence for the risk of misstatement for classes of transactions, account balances, and disclosures in the assertion level or the financial statements as a whole

42. Assertions about classes of transactions and events for the period under audit least likely include
    1. Transactions and events that have been recorded have occurred and pertain to the entity.

1. 2. All transactions and events that should have been recorded have been recorded.
   3. Transactions and events have been recorded in the correct accounting period.
   4. All assets, liabilities and equity interests that should have been recorded have been recorde

43. Assertion about account balances at period end which means assets, liabilities and equity interests are included in the financial statements at appropriate amounts is
    1. Existence
    2. Rights and obligations
    3. Completeness
    4. Valuation and allocation

44. Accuracy and valuation assertions about presentation and disclosure means
    1. Disclosed events, transactions, and other matters have occurred and pertain to entity.
    2. All disclosures that should have been included in the financial statements have been included.
    3. Financial information is appropriately presented and described, and disclosures are clearly expressed.
    4. Financial and other information are discloses fairly and at appropriate amounts.

45. Assertions are representations of management that are embodied in financial statement components. They can be either explicit or implicit. Which of these assertions is not about valuation or allocation?
    1. Property is recorded at historical cost.
    2. Trade accounts receivable in the balance sheet are stated at net realizable value.
    3. Notes payable in the balance sheet include all such obligations of the entity.
    4. Property cost is systematically allocated to appropriate accounting perio

46. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving

inventory to support management’s financial statement assertion of

1. 1. Valuation
   2. Rights
   3. Existence
   4. Presentation

47. In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment.

This procedure is designed to obtain evidence concerning management’s assertions of Existence of occurrence                                                                Presentation and disclosure

1. 1. Yes                                                                         Yes
   2. Yes                                                                         No
   3. No                                                                          Yes
   4. No                                                                          No

48. Which of the following statements is an example of an assertion made by management in an entity’s financial statements?
    1. The financial statements were prepared in an unbiased manner.
    2. Reported inventory balances reflect all related transactions for the period.
    3. Reported accounts receivable does not include any uncollectible accounts.
    4. The scope of the auditor’s investigation was not limited in any way by management.
49. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional

manipulation of financial statements?

1. 1. Turnover of senior accounting personnel is low.
   2. Insiders recently purchased additional shares of the entity’s stock.
   3. Management places substantial emphasis on meeting earnings projections.
   4. The rate of change in the entity’s industry is slow.

50. When planning the audit, if the auditor has no reason to believe that noncompliance to laws and regulations exist, he should
    1. make inquiries of management regarding their policies and their knowledge of violations, and then rely on normal audit procedures to detect errors, irregularities, and illegalities.
    2. still include some audit procedures designed specifically to uncover illegal acts.
    3. ignore the possibility of illegal acts to occur.
    4. include audit procedures which have a strong probability of detecting illegal acts.

51. An audit plan is a
    1. detailed plan of analytical procedures and all substantive tests to be performed in the course of the audit.

1. 2. 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.
   3. generic document that auditing firms have developed to lead the process of the audit through a systematic and logical process.
   4. budget of the time that should be necessary to complete each phase of the audit procedures.

52. Philippine Standards on Auditing require auditors to assess the risk of material misstatements due to fraud
    1. for every audit.
    2. for first-time audits.
    3. sufficient to find any frauds which may exist.
    4. whenever it would be appropriate.

53. Which of the following is not one of the three main reasons why the auditor should properly plan engagements?
    1. To enable proper on-the-job training of employees.
    2. To enable the auditor to obtain sufficient appropriate evidence.
    3. To avoid misunderstandings with the client.
    4. To help keep audit costs reasonable.

54. If, 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

5. require that the decline be disclosed in the financial statements.
6. consider the possibility that the financial statements may be materially misstated.
7. inform management that a qualified opinion on the financial statements will be necessary.
8. determine management's responsibility for the decline and discuss the issue with the audit committee.

55. A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the:
    1. inherent risk.
    2. acceptable audit risk.
    3. statistical risk.
    4. financial risk.

56. Which of the following statements best describes materiality?
    1. Materiality is typically measured as a fixed percentage of assets.
    2. Materiality is typically measured as a fixed percentage of net income.
    3. Materiality does not depend on the company being audited, but is solely dependent on the auditor’s discretion.
    4. Materiality provides a cutoff point at which judgment, based on the financial statements, may be altere

57. If the auditor sets the preliminary judgment about materiality level at a relatively low peso amount,
    1. more evidence will be required than for a high level.
    2. less evidence will be required than for a high level.
    3. the same amount of evidence will be required as for a high level.
    4. the amount of evidence required will not be affecte

58. Which of the following statements is true with regard to the relationship among audit risk, audit evidence, and materiality?
    1. The lower the inherent risk and control risk, the lower the aggregate materiality threshold.
    2. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining external evidence and should reduce reliance on internal evidence.
    3. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.
    4. Aggregate materiality thresholds should not change under conditions of changing risk levels.

59. Which of the following is most likely to be an overall response to fraud risks identified in an audit?
    1. Supervise members of the audit team less closely and rely more upon judgment.
    2. Use less predictable audit procedures.
    3. Use only certified public accountants on the engagement.
    4. Place increased emphasis on the audit of objective transactions rather than subjective transactions.

60. When must an auditor perform analytical review procedures in a financial statement audit?
    1. Testing controls over financial cycles
    2. Performing tests to substantiate balances
    3. Planning the nature, timing and extent of procedures

1. 4. Performing tests to substantiate transactions

61. The main purpose of risk assessment procedures is to
    1. Obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels.
    2. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.
    3. Detect material misstatements at the assertion level.
    4. All of the given choices are main purposes of risk assessment procedures.

62. Which of the following statements is incorrect regarding obtaining an understanding of the entity and its environment?
    1. Obtaining an understanding of the entity and its environment is an essential aspect of performing an audit in accordance with PSAs.
    2. Understanding of the entity and its environment establishes a frame of reference within which the auditor plans the audit and exercises professional judgment about assessing risks of material misstatement in the financial statements and responding to those risks throughout the audit.
    3. The auditor’s primary consideration is whether the understanding that has been obtained is sufficient to assess the risks

of material misstatement in the financial statements and to design and perform further audit procedures.

1. 4. The depth of the overall understanding that is required by the auditor in performing the audit is at least equal to that possessed by management in managing the entity.

63. Which statement is incorrect regarding analytical procedures?
    1. Analytical procedures may be helpful in identifying the existence of unusual transactions or events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit implications.
    2. In performing analytical procedures as risk assessment procedures, the auditor develops expectations about plausible relationships that are reasonably expected to exist.
    3. When comparison of those expectations with recorded amounts or ratios developed from recorded amounts yields unusual or unexpected relationships, the auditor considers those results in identifying risks of material misstatement.
    4. When such analytical procedures use data aggregated at a high level (which is often the situation), the results of those analytical procedures provide a clear-cut indication about whether a material misstatement may exist.

64. Which of the following is not typically included in initial audit planning?
    1. Client acceptance/continuation decisions.
    2. Determination of the purpose of the audit.
    3. Obtain an understanding with the client.
    4. Perform analytical procedures as substantive tests.

65. Which statement is correct regarding business risks?
    1. The risk of material misstatements in the financial statements is broader than business risk, though it includes the latter.
    2. The auditor should identify or assess all business risks.
    3. All business risks give rise to risks of material misstatement.
    4. A business risk may have an immediate consequence for the risk of misstatement for classes of transactions, account balances, and disclosures at the assertion level or the financial statements as a whole.

66. Which of the following is not a potential effect of an auditor’s decision that a lower acceptable audit risk is appropriate?
    1. More evidence is accumulated.
    2. Less evidence is accumulated.
    3. Special care is required in assigning experienced staff.
    4. Review of audit documentation is performed by personnel not assigned to the engagement.

67. Which statement is incorrect regarding significant risks that require special audit consideration?
    1. The auditor should determine which of  the  identified risks are, in the auditor’s judgment, require special  audit

consideration.

1. 2. The auditor excludes the effect of identified controls related to the risk to determine whether the nature of the risk, the likely magnitude of the potential misstatement including the possibility that the risk may give rise to multiple misstatements, and the likelihood of the risk occurring are such that they require special audit consideration.
   3. Routine, non-complex transactions that are subject to systematic processing are more likely to give rise to significant risks because they have higher inherent risks.
   4. Significant risks are often derived from business risks that may result in a material misstatement.

68. The assessment of the risks of material misstatement at the financial statement level is affected by the auditor’s

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