UNIVERSITY OF THE IMMACULATE CONCEPTION

COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION

AUD001-Auditing and Assurance Principles
Midterm Exam

Multiple Choice. Write the letter of your choice. No erasures allowed.

1. The risk that the assertion contains material misstatements that, when aggregated with misstatements in other assertions, could make the
entire financial statements materially misstated is:
a. Individual audit risk
b. Control risk
c. Detection risk
d. Inherent risk

2. Incremental risk is the increased risk that errors may not be detected at the balance sheet date because:
a. Audit procedures were performed at an interim date
b. Inherent risk was assessed too low.
c. Analytical procedures were not performed.
d. Detection risk was set too high a level.

3. Adequate planning of the audit work helps the auditor of accomplishing the following objectives, except:
a. Gathering of all corroborating audit evidence.
b. Ensuring that appropriate attention is devoted to important areas of the audit.
c. Identifying the areas that need a service of an expert.
d. The audit work is completed efficiently.

4. The extent of planning will vary according to any of the following, except:
a. Size of the audit client.
b. Auditor’s experience with the entity and knowledge of the business.
c. The nature and complexity of the audit engagement
d. The assessed level of control risk.

5. Which of the following is least likely considered by the auditor in developing the overall audit plan?
a. Understanding of the accounting and internal control systems.
b. Relevant risk and materiality.
c. The involvement of other auditors in the audit of major component of financial statements
d. The general level of competence of audit assistants.

6. Which of the following is not considered by the CPA when he makes an overall audit plan?
a. Identification of complex accounting areas including those involving accounting estimates.
b. The information technology used by the client.
c. The content of the representation letters.
d. The nature and timing of reports or other communication with the entity that are expected under the engagement.

7. Which of the following least likely affect the form and content of the overall audit plan?
a. Complexity of the audit engagement.
b. Methodology and technology used by the auditor.
c. The entity’s form of business organization.
d. The size of the entity.

8. The audit program should contain the following, except:

a. Audit objective
b. Time budget for the various audit areas
c. Set of planned audit procedures
d. The combined assessed level of inherent and control risk

9. Which of the following will most likely help the auditor to identify and understand the events, transactions and practices of his audit client?
a. Obtaining a sufficient knowledge of the business of his client.
b. Understanding of accounting and internal control.
c. Testing control policies and procedures.
d. Obtaining a representation letter from the client management.

10. The auditor should have or obtain a knowledge of the client’s business sufficient to:
a. Evaluate whether the financial statements are materially misstated.
b. Document material weaknesses in accounting and internal control systems.
c. Identify and understand events, transactions and practices that may have effect on financial statements.
d. Have an overall evaluation of whether financial assertions are fairly presented in the financial statements.

11. The auditor is not expected to have

a. A particular knowledge of the economy and the industry within which the entity operates.
b. A particular knowledge of how the entity operates.
c. A level of knowledge of business ordinarily less than that possessed by management.
d. A knowledge of business which is used in assessing inherent and control risk.
UNIVERSITY OF THE IMMACULATE CONCEPTION
COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION
AUD001-Auditing and Assurance Principles
Midterm Exam
12. Understanding the business and using this information appropriately assists the auditor in, except
a. Deciding whether to do tests of controls.
b. Evaluating audit evidence.
c. Assessing risks and identifying potential problems.
d. Planning and performing the audit effectively and efficiently.

13. Which of the following is the ultimate concern of the knowledge about the business?
a. Consideration of how it affects the financial statements taken as a whole.
b. Assists the auditor in enforcing quality control procedures.
c. To assure that sufficient audit evidence is obtained.
d. It assists in determining the type of audit report to be issued.

14. A knowledge of the business is a frame of reference within which the auditor exercises professional judgment. This assists the auditor in
carrying out the following objectives, except:
a. Assessing risks and identifying problems.
b. Evaluating audit evidence.
c. Determining the audit opinion to be expressed.
d. Planning and performing the audit effectively and efficiently.

15. Throughout the course of the audit, the auditors make judgment about many matters where knowledge of the business is important. These
procedures do not include:
a. Evaluating accounting estimates and management representations.
b. Identifying related parties and related party transactions.
c. Assessing inherent and control risks.
d. Assessing the appropriateness of using statistical sampling instead of judgmental sampling.

16. If the auditor believes that management should extend its assessment but the latter refuses to do so, the auditor should:
a. Rectify the lack of analysis by management.
b. Extend his audit procedures to obtain sufficiently appropriate evidence regarding the use of the going concern assumption.
c. Emphasize this matter in the audit report.
d. Consider a modification of the report as a result of the limitation in the scope of the auditor’s work.

17. The management denied the auditor’s request that the management has to extend its assessment of its going concern ability. However,
the auditor’s other procedures are sufficient to assess the appropriateness of management use of the going concern assumption in the
preparation of the financial statements. he auditor should issue:
a. Unqualified opinion
b. Unqualified opinion with explanatory paragraph
c. Adverse opinion
d. Disclaimer of opinion

18. Which of the following is correct statement?

a. The auditor should use professional judgment to assess audit risk and to design audit procedures to ensure it is eliminated.
b. The auditor is an insurer, and his or her report constitutes a guarantee.
c. The subsequent discovery that a material misstatement exists in the financial statements is evidence of inadequate planning,
performance, or judgment on the part of the auditor.
d. The auditor should obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an
effective audit approach.

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

20. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are
a. Elements of audit risk while detection risk is not.
b. Changed at the auditor’s discretion while detection risk is not.
c. Considered at the individual account-balance level while detection risk is not.
d. Functions of the client and its environment while detection risk is not.

21. Which of the following is an incorrect statement?

a. Detection risk cannot be changed at the auditor’s discretion.
b. If individual audit risk remains the same, detection risk bears an inverse relationship to inherent and control risks.
c. The greater the inherent and control risks the auditor believes exists, the less detection risk that can be accepted.
d. The auditor might make separate or combined assessments of inherent risk and control risk.

22. Why would the auditor assess control risk?

a. Because it indicates where inherent risk may be the greatest.
b. Because it determines whether sampling risk is sufficiently low.
c. Because it affects the level of detection risk the auditor may accept.
UNIVERSITY OF THE IMMACULATE CONCEPTION
COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION
AUD001-Auditing and Assurance Principles
Midterm Exam
d. Because it includes the aspects of nonsampling risk that are controllable.

23. Which of the following is not a distinguishing feature of risk-based auditing?

a. Identifying areas posing the highest risk of financial statement errors.
b. Analysis of internal control.
c. Collecting and evaluating evidence.
d. Concentrating audit resources in those areas presenting the highest risk of financial statement errors.

24. Which statement is incorrect regarding obtaining an understanding of the entity and its environment?
a. Obtaining an understanding of the entity and its environment is an essential aspect of performing an audit in accordance with PSAs.
b. 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.
c. 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.
d. 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.

25. The main purpose of risk assessment procedures is to

a. 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.
b. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.
c. Detect material misstatements at the assertion level.
d. All of the above.

26. The auditor should perform the following risk assessment procedures to obtain an understanding of the entity and its environment,
including its internal control, except:
a. Inquiries of management and others within the entity.
b. Inquiries of the entity’s external legal counsel or of valuation experts that the entity has used.
c. Analytical procedures.
d. Observation and inspection.

27. Which statement is incorrect regarding analytical procedures?

a. 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.
b. In performing analytical procedures as risk assessment procedures, the auditor develops expectations about plausible relationships that
are reasonably expected to exist.
c. 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.
d. 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.

28. Nature of an entity refers to

a. 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.
b. The overall plans for the entity.
c. The operational approaches by which management intends to achieve its objectives.
d. The result of significant conditions, events, circumstances, actions or inactions that could adversely affect the entity’s ability to achieve
its objectives and execute its strategies, or the setting of inappropriate objectives and strategies.
29. Which statement is correct regarding business risks?
a. The risk of material misstatement of the financial statements is broader than business risk, though it includes the latter.
b. The auditor should identify or assess all business risks.
c. All business risks give rise to risks of material misstatement.
d. 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.

30. Which of the following conditions and events may most likely indicate the existence of risks of material misstatement?
a. Having personnel with appropriate accounting and financial reporting skills.
b. Accounting measurements that involve simple processes.
c. Significant amount of routine or systematic transactions.
d. Constraints on the availability of capital and credit.

31. The auditor should determine overall responses to address the risks of material misstatement at the financial statement level. Such
responses least likely include
a. Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence.
b. Assigning more experienced staff or those with special skills or using experts.
c. Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed.
d. Performing substantive procedures at an interim date instead of at period end.

32. Which statement is incorrect regarding evaluation of the sufficiency and appropriateness of audit evidence obtained?
UNIVERSITY OF THE IMMACULATE CONCEPTION
COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION
AUD001-Auditing and Assurance Principles
Midterm Exam
a. Based on the audit procedures performed and the audit evidence obtained, the auditor should evaluate whether the assessments of the
risks of material misstatement at the assertion level remain appropriate.
b. As the auditor performs planned audit procedures, the audit evidence obtained may cause the auditor to modify the nature, timing, or
extent of other planned audit procedures.
c. In developing an opinion, the auditor considers only the audit evidence which corroborate the assertions in the financial statements.
d. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor should express a qualified opinion or a disclaimer of
opinion.

33. Which of the following is correct about internal control?

a. Accounting and internal control systems provide management with conclusive evidence that objectives are reached.
b. One of the inherent limitations of accounting and internal control systems is the possibility that the procedures may become inadequate
due to changes in conditions, and compliance with procedures may deteriorate.
c. Most internal controls tend to be directed at non-routine transactions.
d. Management does not consider costs of the accounting and internal control systems.

34. Corporate directors, management, external auditors, and internal auditors all play important roles in creating a proper control environment.
Top management is primarily responsible for
a. Establishing a proper environment and specifying overall internal control.
b. Reviewing the reliability and integrity of financial information and the means used to collect and report such information.
c. Ensuring that external and internal auditors adequately monitor the control environment.
d. Implementing and monitoring controls designed by the board of directors.

35. Which of the following best describe the interrelated components of internal control?
a. Organizational structure, management philosophy, and planning.
b. Control environment, risk assessment, control activities, information and communication systems, and monitoring.
c. Risk assessment, backup facilities, responsibility accounting and natural laws.
d. Legal environment of the firm, management philosophy, and organizational structure.

36. In an audit of financial statements, an auditor’s primary consideration regarding a control is whether it
a. Reflects management’s philosophy and operating style.
b. Affects management’s financial statement assertions.
c. Provides adequate safeguards over access to assets.
d. Enhances management’s decision-making processes.

37. Effective internal control

a. Eliminates risk and potential loss to the organization.
b. Cannot be circumvented by management.
c. Is unaffected by changing circumstances and conditions encountered by the organization.
d. Reduces the need for management to review exception reports on a day-to-day basis.

38. Which of the following statements about internal control is correct?

a. Properly maintained internal controls reasonably assure that collusion among employees cannot occur.
b. Establishing and maintaining internal control is the internal auditor’s responsibility.
c. Exceptionally strong control allows the auditor to eliminate substantive tests.
d. The cost-benefit relationship should be considered in designing internal control.

39. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that
a. Tests of controls may fail to identify controls relevant to assertions.
b. Material misstatements may exist in the financial statements.
c. Specified controls requiring segregation of duties may be circumvented by collusion.
d. Entity policies may be overridden by senior management.

40. A proper understanding of the client’s internal control is an integral part of the audit planning process. The results of the understanding
a. Must be reported to the shareholders and the SEC.
b. Bear no relationship to the extent of substantive testing to be performed.
c. Are not reported to client management.
d. May be used as the basis for withdrawing from an audit engagement.
41. Audit evidence concerning segregation of duties ordinarily is best obtained by
a. Performing tests of transactions that corroborate management’s financial statement assertions
b. Observing the employees as they apply specific controls.
c. Obtaining a flowchart of activities performed by available personnel.
d. Developing audit objectives that reduce control risk.

42. Based on a consideration of internal control completed at an interim date, the auditor assessed control risk at a low level and performed
interim substantive tests. The records and procedures would most likely be tested again at year-end if
a. Tests of controls were not performed by the internal auditor during the remaining period.
b. Internal control provides a basis for limiting the extent of substantive testing.
c. The auditor used nonstatistical sampling during the interim period testing of controls.
d. Inquiries and observations lead the auditor to believe that conditions have changed.
UNIVERSITY OF THE IMMACULATE CONCEPTION
COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION
AUD001-Auditing and Assurance Principles
Midterm Exam
43. The objective of tests of details of transactions performed as tests of controls is to
a. Monitor the design and use of entity documents such as prenumbered shipping
b. Determine whether controls have been placed in operation.
c. Detect material misstatements in the account balances of the financial statements.
d. Evaluate whether controls operated effectively.

44. An auditor wishes to perform tests of controls on a client’s cash disbursements procedures. If the controls leave no audit trail of
documentary evidence, the auditor most likely will test the procedures by
a. Confirmation and observation.
b. Observation and inquiry.
c. Analytical procedures and confirmation.
d. Inquiry and analytical procedures

45. Which of the following would not be a method used to conduct tests of controls?
a. Inquiry
b. Walkthrough
c. Confirmation
d. Observation

46. Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed?
a. Confirmations of receivables verifying account balances.
b. Letters of representations corroborating inventory pricing.
c. Attorneys’ responses to the auditor’s inquiries.
d. Client records documenting the use of computer programs.

47. An auditor is least likely to test controls that provide for

a. Classification of revenue and expense transactions by product line
b. Approval of the purchase and sale of trading securities
c. Segregation of the functions of recording disbursements and reconciling the bank account
d. Comparison of receiving reports and vendors’ invoices with purchase orders

48. In a small company that doesn't employ an adequate number of employees to permit proper division of responsibilities, effective internal
control can be strengthened by
a. Direct participation by the owner of the business in the record keeping activities of the business.
b. Employment of temporary personnel to aid in the separation of duties.
c. Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.
d. Engaging a CPA to perform monthly "write up" work.

49. Transaction authorization within an organization may be either specific or general. An example of specific transaction authorization is the
a. Approval of a construction budget for a new warehouse
b. Setting of automatic reorder points
c. Establishment of a customer’s credit limits
d. Establishment of sales prices

50. Which of the following statements is an example of an inherent limitation of internal control.
a. Errors may arise from mistakes in judgments.
b. The effectiveness of control procedures depends on segregation of duties.
c. Procedures are designed to assure that transactions are executed as management authorities.
d. Computers process large numbers of transactions.

51. Ordinarily, the audit may use schedules, analyses and other documentation prepared by entity personnel in order to:
a. Lessen auditor’s responsibility.
b. Eliminate the need to apply any audit procedures on verifying their correctness.
c. Emphasize that the responsibility on financial statements rests with the client management.
d. Improve audit efficiency.

52. Observation
a. Consists of looking at a process or procedure being performed by others.
b. Consists of seeking information of knowledgeable persons, both financial and non-financial, throughout the entity or outside the entity.
c. Is the process of obtaining a representation of information or of an existing condition directly from a third party.
d. Is the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control.

53. This consists of checking the mathematical accuracy of documents or records.

a. Reperformance
b. Recalculation
c. Confirmation
d. Inspection

54. Which of the following is a false statement about audit objectives?

a. Audit objectives should be developed in light of management assertions about the financial statement components.
UNIVERSITY OF THE IMMACULATE CONCEPTION
COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION
AUD001-Auditing and Assurance Principles
Midterm Exam
b. Selection of tests to meet audit objectives should depend upon the understanding of internal control.
c. The auditor should resolve any substantial doubt about any of management’s material financial statement assertions
d. There should be a one-to-one relationship between audit objectives and procedures.

55. Which of the following is the best explanation of the difference, if any, between audit objectives and audit procedures?
a. Audit procedures establish broad general goals, audit objectives specify the detailed work to be performed.
b. Audit objectives are tailor-made for each assignment, audit procedures are generic in application.
c. Audit objectives define specific desired accomplishments; audit procedures provide the means of achieving audit objectives.
d. Audit procedures and audit objectives are essentially the same.

56. The competence of evidence available to an auditor is least likely to be affected by

a. The relevance of such evidence to the financial statement assertion being investigated.
b. The relationship of the preparer of such evidence to the entity being audited.
c. The timeliness of such audit evidence.
d. The sampling method employed by the auditor to obtain a sample of such evidence.

57. Which of the following procedures would provide the most reliable audit evidence?
a. Inquiries of the client’s internal audit staff held in private.
b. Inspection of prenumbered client purchase orders filed in the vouchers payable department.
c. Analytical procedures performed by the auditor on the entity’s trial balance.
d. Inspection of bank statements obtained directly form the client’s financial institution

58. Assuming a low assessed level of control risk, which of the following audit procedures is least likely to be performed?
a. Physical inspection of a sample of inventory.
b. Search for unrecorded cash receipts.
c. Obtaining of a client representation letter.
d. Confirmation of accounts receivable.

59. Which of the following auditing procedures is ordinarily performed last?

a. Reading of the minutes of the directors’ meetings.
b. Confirming accounts payable.
c. Obtaining a management representation letter.
d. Testing of the purchasing function.

60. Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess
a. Control risk at below the maximum level.
b. Inherent risk at the maximum level.
c. The difficulty in controlling the incremental audit risk.
d. Materiality for the accounts tested as insignificant.

61. If an auditor conducts an audit of financial statements in accordance with generally accepted auditing standards, which of the following will
the auditor most likely detect?
a. Misposting of recorded transactions
b. Unrecorded transactions
c. Forgery
d. Collusive fraud

62. Which of the following is not a purpose of working papers?

a. Assist in the planning and performance of the audit.
b. Assist in the supervision and review of the audit work.
c. Record the audit evidence resulting from the audit work performed to support the auditor’s opinion.
d. Support the client’s financial statements
.
63. Why does an auditor document audit evidence?
a. To comply with the requirements of gathering all available evidence.
b. To provide client reference for all account balances and correcting entries.
c. To support audit opinion and to provide evidence that the audit was carried out in accordance with PSA.
d. To document all records of misstatements noted in the financial statements.

64. An auditor’s working papers will ordinarily be least likely to include documentation showing how the
a. Client’s schedules were prepared.
b. Engagement was planned.
c. Understanding of the client’s internal control was obtained and control risk was assessed.
d. Unusual matters were resolved.

65. All the information used by the auditor in arriving at the conclusions on which the audit opinion is based called
a. Audit information
b. Audit evidence
c. Accounting records
d. Corroborating information
UNIVERSITY OF THE IMMACULATE CONCEPTION
COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION
AUD001-Auditing and Assurance Principles
Midterm Exam

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