Audit Theory 3 Accounting

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Audit Theory 3 - Accounting
Accountancy (STI College)
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1. Opportunities to misappropriate assets increase when there are

A. Known or anticipated future employee layoffs.
B. Promotions, compensation, or other rewards inconsistent with expectations.
C. Recent or anticipated changes to employee compensation or benefit plans.
D. Inventory items that are small in size, of high value, or in high
demand.
2. The following are benefits of using IT-based controls, except

A. Ability to process large volume of transactions.
B. Over-reliance on computer-generated reports.
C. Ability to replace manual controls with computer-based controls.
D. Reduction in misstatements due to consistent processing of transactions.
3. Which of the following is a false statement about audit objectives?

A. There should be a one-to-one relationship between audit objectives
and procedures.
B. Audit objectives should be developed in light of management assertions
about the financial statement components.
C. Selection of tests to meet audit objectives should depend upon the
understanding of internal control.
D. The auditor should resolve any substantial doubt about any of management’s
material financial statement assertions.
4. According to Section 240 of the Code of Ethics, fees charged for assurance
engagements should be a fair reflection of the value of the work involved. In
determining professional fees, the following should be taken into account,
except
A. The time necessarily occupied by each person engaged on the work.
B. The outcome or result of a transaction or the result of the work
performed.
C. The skill and knowledge required for the type of work involved.
D. The level of training and experience of the persons necessarily engaged on
the work.
5. Financial interests may be held through an intermediary (for example, a

collective investment vehicle, estate or trust). When control over the
investment vehicle or the ability to influence investment decisions exists, the
code defines that financial interest to be
A. Direct financial interest.
B. Material direct financial interest.
C. Indirect financial interest.
D. Material indirect financial interest.
6. Which of the following best describes the reason why independent auditors
report on financial statements?
A. A management fraud may exist and it 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.

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C. A misstatement of account balances may exist and is generally corrected as

the result of the independent auditors’ work.
D. Poorly designed internal control may be in existence.
6. Which of the following professionals has primary responsibility for the

performance of an audit?
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.
7. What is the proper organizational role of internal auditing?

A. To serve as an independent, objective assurance and consulting
activity that adds value to operations.
B. To assist the external auditor in order to reduce external audit fees.
C. To perform studies to assist in the attainment of more efficient operations.
D. To serve as the investigative arm of the audit committee of the board of
directors.
8. If the results of the auditor’s expert’s work do not provide sufficient appropriate
audit evidence or are not consistent with other audit evidence, the auditor
should
A. Report the matter to the appropriate regulatory agency of the government.
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unqualified opinion with reference to the work of the expert.
9. 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 unmodified opinion
has been issued is the
A. Inherent risk.
B. Acceptable audit risk.
C. Control risk.
D. Detection risk.
10. An auditor should obtain sufficient knowledge of an entity’s information

system, including the related business processes relevant to financial
reporting, to understand the
A. Policies used to detect the concealment of fraud.
B. Process used to prepare significant accounting estimates.
C. Safeguards used to limit access to computer facilities.
D. Procedures used to assure proper authorization of transactions.
11. Which of the following is an example of engagement-specific safeguards in the

work environment?
A. Advising partners and professional staff of those assurance clients and related
entities from which they must be independent.
B. Disclosing to those charged with governance of the client the nature
of service provided and extent of fees charged.

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C. A disciplinary mechanism to promote compliance with the firm’s policies and

procedures.
D. Published policies and procedures to encourage and empower staff to
communicate to senior levels within the firm any issue relating to compliance
with the fundamental principles that concerns them.
12. The concept of materiality is least important to an auditor when considering

the
A. Effects of a direct financial interest in the client upon the auditor’s
independence.
B. Decision whether to use positive or negative confirmations of accounts
receivable.
C. Adequacy of disclosure of a client’s illegal act.
D. Discovery of weaknesses in a client’s internal control.
13. The following statements relate to the provision of taxation, internal audit or IT
Systems services to audit clients. Which is false?
A. Preparing calculations of current and deferred tax liabilities (or
assets) for an audit client for the purpose of preparing accounting
entries that will be subsequently audited by the firm creates a self-
interest threat.
B. A self-review threat may be created when a firm, or network firm, provides
internal audit services to an audit client.
C. The provision of services by a firm or network firm to an audit client that
involve the design and implementation of financial information technology
systems that are used to generate information forming part of a client’s
financial statements may create a self-review threat.
D. The provision of services in connection with the assessment, design, and
implementation of internal accounting controls and risk management controls
does not create a threat to independence provided that firm or network firm
personnel do not perform management functions.
14. hat threat to independence is created when the litigation support services
provided to an audit client include the estimation of the possible outcome and
thereby affects the amounts or disclosures to be reflected in the financial
statements?
A. Self-review threat
B. Advocacy threat
C. Intimidation threat
D. Familiarity threat
15. After determining that a related party transaction has, in fact, occurred, an
auditor should
A. Obtain an understanding of the business purpose of the transaction.
B. Substantiate that the transaction was consummated on terms equivalent to
an arm’s-length transaction.
C. Add a separate paragraph to the auditor’s report to explain the transaction.
D. Perform analytical procedures to verify whether similar transactions occurred,
but were not recorded.

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16. Which of the following audit procedures would most likely assist an auditor in
identifying conditions and events that may indicate there could be substantial
doubt about an entity’s ability to continue as a going concern?
A. Confirmation of bank balances.
B. Confirmation of accounts receivable from major customers.
C. Reconciliation of interest expense with debt outstanding.
D. Review of compliance with terms of debt agreements.
17. Who should take responsibility for the overall quality on each audit
engagement?
A. Engagement quality control reviewer
B. Engagement partner
C. Engagement team
D. CPA firm
17. The engagement partner should take responsibility for the direction,
supervision, and performance of the audit engagement in compliance with
professional standards and regulatory and legal requirements, and for the
auditor’s report that is issued to be appropriate in the circumstances.
Supervision includes the following, except
A. Tracking the progress of the audit engagement.
B. Addressing significant issues arising during the audit engagement,
considering their significance, and modifying the planned approach
appropriately.
C. Informing the members of the engagement team of their
responsibilities.
D. Identifying matters for consultation or consideration by more experienced
engagement team members during the audit engagement.
18. Analytical procedures performed in the overall review stage of an audit

suggest that several accounts have unexpected relationships. The results of
these procedures most likely indicate that
A. The communication with the audit committee should be revised.
B. Irregularities exist among the relevant account balances.
C. Additional substantive tests of details are required.
D. Internal control activities are not operating effectively.
19. When an auditor concludes that there is substantial doubt about a continuing
audit client’s ability to continue as a going concern for a reasonable period of
time, the auditor’s responsibility is to
A. Consider the adequacy of disclosure about the client’s possible
inability to continue as a going concern.
B. Issue a qualified or adverse opinion, depending upon materiality, due to the
possible effects on the financial statements.
C. Report to the client’s audit committee that management’s accounting
estimates may need to be adjusted.
D. Reissue the prior year’s auditor’s report and add an emphasis of matter
paragraph that specifically refers to “substantial doubt” and “going concern.”

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20. The following statements relate to the provision of legal services to an audit
client. Which is incorrect?
A. The provision of legal services to an audit client involving matters
that would not be expected to have a material effect on the financial
statements may create a self-review threat.
B. Legal services to support an audit client in the execution of a transaction
(e.g., contract support) may create a self-review threat.
C. Acting for an audit client in the resolution of a dispute or litigation in such
circumstances when the amounts involved are material in relation to the
financial statements of the audit client would create advocacy and self-review
threats so significant no safeguards could reduce the threats to an acceptable
level.
D. The appointment of a partner or an employee of the firm or network firm as
General Counsel for legal affairs to an audit client would create self-review and
advocacy threats that are so significant no safeguards could reduce the threats
to an acceptable level.

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lOMoARcPSD|35846740

Audit Theory 3 - Accounting

Accountancy (STI College)

Scan to open on Studocu

Studocu is not sponsored or endorsed by any college or university

1. Opportunities to misappropriate assets increase when there are

2. The following are benefits of using IT-based controls, except

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

5. Financial interests may be held through an intermediary (for example, a

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C. A misstatement of account balances may exist and is generally corrected as

6. Which of the following professionals has primary responsibility for the

7. What is the proper organizational role of internal auditing?

10. An auditor should obtain sufficient knowledge of an entity’s information

11. Which of the following is an example of engagement-specific safeguards in the

Downloaded by random (randomlungs121223@gmail.com)

C. A disciplinary mechanism to promote compliance with the firm’s policies and

12. The concept of materiality is least important to an auditor when considering

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18. Analytical procedures performed in the overall review stage of an audit

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Downloaded by random (randomlungs121223@gmail.com)

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