Cebu

Institute of Technology University

College of Management, Business & Accountancy
ARC 412 Auditing Theory Review





Jonas B. Abellar, CPA, MBA








November 2015

Name: __________________________________________________________________________________ Score: __________________________________

1.
Which of the following least likely indicates an objective of an assurance engagement?
A. It is intended to enhance the credibility of information about a subject matter.
B. It is intended to prevent the issuance of materially misleading information.
C. It is intended for a professional accountant to express a conclusion that provides the intended users
with a level of assurance about the subject matter.
D. It is intended to provide a level of assurance to be issued by a professional accountant about the
information of being in conformity, in all material respects, with suitable criteria.

2.
An assurance engagement has a subject matter that is the responsibility of
A. An intended user
B. A professional accountant
C. An auditor
D. A responsible party like management

3. Which of the following statements are correct?
I. One of the reasons for setting the criteria of the engagement is to make the user know the basis used to
evaluate the subject matter.
II. A suitable set of criteria should be used in forming conclusion about the subject matter of the assurance
engagement.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

4. It is the measure of the quantity of evidence obtained
A. Sufficiency
B. Appropriateness
C. Reliability
D. Relevance

5. The following should be included in the practitioners report (choose the exception)
A. Identification of the parties to whom the report is restricted.
B. A statement to identify the responsible party and described the practitioners responsibilities.
C. Report date
D. Name of the firm or the practitioner

6.
Which of the following provides a positive form of assurance?
A. Audit engagement
B. Review engagement
C. Agreed-upon procedures engagement
D. Compilation engagement

7.
Which of the following is false?
A. When considering materiality, the practitioner needs to understand and assess what factors might
influence the decisions of the intended users
B. Materiality can be considered in the context of quantitative but not qualitative factors
C. The assessment of materiality and the relative importance and qualitative factors in a particular
engagement are matters for the practitioners judgment
D. The practitioner should consider materiality and engagement risk when planning and conducting an
assurance engagement in order to reduce the risk of expressing an inappropriate conclusion that the
subject matter conforms in all material respects with suitable criteria

8.
External users rely on the independent auditors report because
A. It lends credibility to the financial statements
B. It reports on the effectiveness and efficiency of management
C. It assures the future viability of the entity
D. It measures and communicates the financial information contained in the financial statements

9. Balance sheet and income statement are two of the financial statements usually being audited. The primary
difference between the audit of balance sheet and the audit of income statement is the fact that the former deals
with verification of
A. Balances
B. Transactions
C. Authorizations
D. Costs

10. Test of controls are directed towards the controls
A. Efficiency

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B. Effectiveness
C. Efficiency and effectiveness
D. Cost benefit ratio

11. For an independent auditor to be competent, he must do the following, except
A. Possess the technical qualifications necessary
B. Warrant that the audit performed is infallible
C. Exercise seasoned judgment in the supervision and review of the assistants work
D. Research and consult with others

12. In audit engagements wherein the auditor lacks the expertise of the industry being audited, he should
A. Acquire the services of a financial expert who is familiar with the nature of the business
B. Decline the engagement
C. Obtain sufficient knowledge about the industry
D. Have another auditor who would serve as the principal auditor

13. Which of the following situations would impair the CPAs independence?
A. An auditor maintaining a time deposit in a bank which is an attest client
B. An auditor accepting a token gift from the client
C. A CPA is an honorary member of the Board of Directors of an organization that is an attest client
D. An auditor having a sister who is a minority stockholder of an attest client

14. Auditing standards differ from auditing procedures in that procedures relate to
a) Measure of performance.
b) Audit principles.
c) Acts to be performed.
d) Audit judgments.

15. The first general standard of generally accepted auditing standards which states, in part, that the examination
is to be performed by a person or persons having adequate technical training, requires that an auditor have
a) Education and experience in the field of auditing.
b) Ability in the planning and supervision of the audit work.
c) Proficiency in business and financial matters.
d) Knowledge in the areas of financial accounting.

16. The first standard of field work, which states that the work is to be adequately planned, and assistants, if any,
are to be properly supervised, recognizes that
a) Early appointment of the auditor is advantageous to the auditor and the client.
b) Acceptance of an audit engagement after the close of the client's fiscal year is generally not permissible.
c) Appointment of the auditor subsequent to the physical count of inventories requires a disclaimer of opinion.
d) Performance of substantial parts of the examination is necessary at interim dates.

17. An independent audit aids in the communication of economic data because the audit
a) Assures the reader of financial statements that any fraudulent activity has been corrected.
b) Confirms the accuracy of management's financial representations.
c) Lends credibility to the financial statements.
d) Guarantees that financial data are fairly presented.

18. The first standard of field work recognizes that 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 complete the audit work in less time.
b) The auditor will be able to perform the examination more efficiently.
c) The auditor will be able to better plan for the observation of the physical inventories.
d) The auditor will be able to plan the audit work so that it may be done expeditiously.

19. What is the general character of the three generally accepted auditing standard classified as general standards?
a) Criteria for content of the F/S and the auditor's report.
b) Criteria of audit planning and supervision and evidence gathering.
c) The need to maintain an independence in mental attitude in all matters relating to the assignments.
d) Criteria for competence, independence and professional care of individuals performing the audit.

20. A CPA, while performing an audit, strives to achieve independence in appearance in order to
a) Reduce risk and liability.
b) Comply with the generally accepted standards of field work.
c) Become independent in fact.
d) Maintain public confidence in the profession.

21. The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company
rests with the
a) Partner assigned to the engagement.
b) Auditor in charge of field work.
c) Management of the company.
d) Securities & Exchange Commission.

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Due professional care requires

a) A critical review of the work done at every level of supervision.
b) The examination of all corroborating evidence available.
c) The exercise of error free judgment.
d) A study and review of the I/C's that include tests of controls

Which of the following best describes the reason why an independent auditor reports on financial statements?
a) A management fraud may exist and is more likely to be detected by independent auditors.
b) Different interests may exist between the company preparing the statements and the persons using the
statements.
c) A misstatement of account balances may exist and is generally corrected as the result of the independent
auditor's work.
d) Poorly designed internal control may exist.

Independent auditing can best be described as
a) A branch of accounting.
b) A discipline that attests to the results of accounting and other functional operations and data.
c) A professional activity that measures and communicates financial and business data.
d) A regulatory function that prevents the issuance of improper financial information.

Operational auditing is primarily oriented toward
a) Future improvements to accomplish the goals of management.
b) The accuracy of data reflected in management's financial records.
c) The verification that a company's financial statements are fairly presented.
d) Past protection provided by existing internal control.

CPA firms should establish quality control policies and procedures for personnel management in order to
provide reasonable assurance that
a) Employees promoted possess the appropriate characteristics to perform competently.
b) Personnel will have the knowledge required to fulfill responsibilities assigned.
c) The extent of supervision and review in a given instance will be appropriate.
d) All of the above are reasons.

In pursuing a CPA firms' quality control objectives, a CPA firm may maintain records indicating which partners
or employees of the CPA firm were previously employed by the CPA firm's clients. Which quality control
objective would this be most likely to satisfy?
a) Acceptance of client.
b) Supervision.
c) Independence.
d) Monitoring.

PSA 120, Framework of Philippine Standards on Auditing describes on the framework within which Philippine
Standards (PSAs) are issued in relation to the services which may be performed by auditors. It requires that
financial statements need to be prepared in accordance with one, or a combination of the following, except:

A. International Accounting Standards
B. Accounting standards generally accepted in the Philippines
C. Other authoritative and comprehensive financial reporting framework designed for use in financial
reporting framework designed for use in financial reporting and identified in the financial statements.
D. Procedures recommended by industry association of accountants.

Which of the following is not among the ethical principles governing the auditors professional responsibilities?
A. independence
B. integrity
C. objectivity
D. size and profile of clientele

An auditor is engaged to audit the financial statements of an entity for the year ended February 2015. If he was
able to observe the inventory count at February 2015 but discovered that there was no physical count made at
February 2015 and was not satisfied as to the value of the beginning inventory, he should
A. disclaim an opinion on the income statement, retained earnings statement and statement of cash flows, but
issue an unqualified opinion on the balance sheet
B. issue on unqualified opinion on the financial statements but disclose the absence of such procedure as a
scope limitation
C. disclaim an opinion on the statements of income and retained earnings but issue an unqualified opinion on
the balance sheet and statement of cash flows.
D. issue an unqualified opinion on the financial statements without mentioning the scope limitation

The term that describes the role of persons entrusted with the supervision, control and direction of an entity is
A. management
B. administration
C. governance
D. government

In which situation can the auditor sill issue a standard report on the financial statements?

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A. clients legal counsel refuses to confirm a list of pending litigations concerning the firm under audit
B. client refuses to write down the salvage value of an obsolete equipment
C. client refuses the auditor access to tax returns of prior years
D. client refuses to change its basis of accounting for inventories from FIFO to weighted average

A special purpose auditors report is issued in connection with the independent audit of the following financial
information except
A. financial statements prepared in accordance with a comprehensive basis of accounting
B. specified accounts, elements of accounts or items in a financial statements.
C. compliance with contractual agreements
D. financial statements prepared in accordance with IFRS.

The reason auditors accumulate evidence is to
A. defend themselves in the event of a lawsuit
B. justify the conclusions they have otherwise reached.
C. satisfy the requirements of the Securities Act.
D. enable them to reach conclusions about the fairness of the financial statements and issue an appropriate
audit report.

Which of the following is not one of the seven broad categories of financial statement assertions, as classified in
Glossary of terms?
A. general or specific transaction objectives
B. existence
C. valuation
D. presentation and disclosure

Which of the following is the purpose why an auditors opinion is expressed?
A. the preparation of the financial statements is the specialty of the auditor.
B. the auditor will assure the accuracy of the financial statements
C. an opinion of an independent party is needed to lend credibility to the financial statements
D. all stockholders must receive a copy of the auditors report

If a bank engaged an auditor to audit one of its client firms who applied for a loan, the audit report for a loan,
the audit report should be addressed
A. to the board of directors of the entity audited
B. to the shareholders of the entity audited
C. to whom it may concern
D. to the bank

The audit report should contain either an expression of opinion or an assertion to the effect that such cannot be
expressed to
A. prevent the auditor from expressing an opinion on one basic financial statement only
B. prevent misinterpretations as to the degree of responsibility the auditor is taking
C. prevent the auditor from expressing different opinions on each basic financial statements
D. prevent client or circumstance imposed restrictions

Which statement is false regarding the signature in the audit report?
A. The report may be signed in the name of the auditing firm
B. The report may be signed in the personal name of the auditor
C. The report should be signed manually
D. All copies of the printed annual report should be signed manually.

A CPA is engaged to audit a corporation for the year ended December 2014. He completed his fieldwork,
February 2015 but dated his report March 2015. In May of the same year, he reissued his report upon clients
request. The auditors responsibility extends up to
A. February 2015, date of completion of fieldwork
B. December 2014, balance sheet date
C. March 2015, date of report
D. May 2015, date of reissuance

An auditor issued his audit report on March 31, 2015 covering the year ended 2014. What must be
appropriately done if the client asked him to reissue it in October 2015 and he discovered that the client
suffered substantial losses resulting from conditions after he issued his original report?
A. ask the client to properly disclose the event in the notes to financial statements and reissue the report
bearing the original date.
B. reissue the report bearing the original date without asking for disclosure
C. request the client to restate the financial statements and dual date the original report
D. issue another report with a subject to qualified opinion disclosing the event.

An adverse opinion is issued when the auditor believes that
A. some parts of the financial statements are materially misstated or misleading
B. the financial statements will be found to be misleading or misstated, if an adequate investigation is
performed.
C. the overall financial statements are so material misstated or misleading as a whole that they do not present
fairly the financial position or results of operations and cash flows in conformity with PFRS

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D. the financial statements

A departure from GAAP with material effect in the financial statements requires the auditor to
A. disclaim an opinion and discuss the departure in the opinion paragraph
B. qualify an opinion and discuss its effect in the explanatory paragraph
C. disclaim an opinion and discuss the effect in the explanatory paragraph
D. qualify an opinion and discuss the departure in the opinion paragraph

The issuance of adverse opinion means that the financial statements
A. are based on prospective financial information
B. contain a material uncertainty
C. are misleading
D. are inconsistent

In the case of comparative financial statements, taken as whole covers the
A. financial statements of the current period only
B. financial statements of the current period and those of the immediately preceding period
C. financial statements of all periods presented plus those of one preceding period
D. financial statements of the current period and those of other periods presented

Which of the following would result to scope limitation?
A. the subsidiarys financial statements are audited by another auditor
B. the auditor is engaged only after year end
C. the unavailability of sufficient appropriate audit evidence
D. the auditor is engaged to audit only one basic financial statements

Three of the following situations suggest a scope limitation. Which one is not and would not preclude an
unqualified opinion?
A. management refuses to furnish a management representation letter
B. management does not make the minutes of the meeting
C. management refuses to permit its lawyers to respond to the letter of inquiry
D. management refuses to sign an engagement letter

If an auditor issues a qualified opinion due to lack of sufficient appropriate audit evidence, he should describe
the limitation in an explanatory paragraph and refer to it in the
A. managements responsibility paragraph and notes to financial statements
B. notes to financial statements
C. auditors responsibility and opinion paragraphs
D. auditors responsibility paragraphs

A scope limitation caused the auditor to disclaim an opinion on the financial statements taken as a whole.
However, the report includes a statement that the current assets are fairly stated. This is considered
A. inappropriate because it may overshadow the disclaimer of opinion
B. appropriate as long as the statement is in a separate paragraph after the scope paragraph
C. inappropriate because the auditor is not allowed to report on one basic financial statement only
D. appropriate as long as the scope limitation is properly disclosed

Which footnote regarding related party transactions would require the auditor to modify an unqualified
opinion on the financial statements?
A. that loans to related parties are at interest rates below prevailing market rates
B. that there had been nonmonetary exchange of real estate for similar properties between related parties
C. disclosure of the peso amount of related party transactions and the effects of the changes in the method of
establishing the terms
D. that a particular related party transaction occurred on terms equivalent to that of an arms length
transaction

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