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Accountancy Department
AUDITING THEORY
Audit Planning
___1. The following are the importance and usefulness of audit planning, except
a. It helps ensure that appropriate attention is devoted to important areas of the audit.
b. It assists in the proper assignment and coordination of work.
c. It helps ensure that the audit is conducted effectively, efficiently and expeditiously.
d. It eliminates the risk of issuing an inappropriate opinion in the financial statements.
___2. PSA 315 requires the auditor to obtain understanding of the entity and its environment including its
control. Such understanding involves obtaining knowledge about the entity concerning the following, except
a. Effectiveness and efficiency of the entity’s business processes and internal control.
b. Industry, regulatory, and other external factors, including financial reporting framework.
c. Nature of the entity, including entity’s selection and application of accounting policies.
d. Objective and strategies and the related business risks that may result in a material misstatement of the
financial statements.
___3. Why is it important for the auditor to obtain sufficient level of knowledge of the entity’s business?
a. To eliminate the risk that the auditor will issue an inappropriate opinion in the financial statements.
b. To enable the auditor to increase the audit fee since it involves additional services.
c. To identify and understand the events, transactions and practices that may have a significant effect on the
financial statements.
d. To obtain information regarding possible audit clients from the entity’s rival companies.
___4. The following are sources of information to obtain knowledge of the industry and the entity, except
a. Discussion with people within and outside the entity and tour of client’s facilities.
b. Confirmation of accounts receivable, cash balances and bank loans.
c. Reading books, periodicals, corporate documents, financial reports and publications related to the client’s
industry.
d. Review of prior year’s working papers.
___5. PSA 520 requires or mandates the auditor to use analytical procedures during what stages of audit?
a. Planning, substantive testing and overall review stages only.
b. Planning, testing of control, substantive testing and overall review stages only.
c. Planning, testing of control and overall review stages only.
d. Planning and overall review stages only.
___6. Knowledge of the client’s business is a frame of reference within which the auditor exercise professional
judgment. Understanding the business and using this information appropriately assists the auditor in the
following, except
a. Evaluating audit evidence as well as the reasonableness of client’s representations and estimates.
b. Planning and performing the audit effectively and efficiently.
c. Making immediate conclusion about the audit opinion despite the absence of substantive testing.
___8. Which of the following statements concerning materiality as regards to audit is incorrect?
a. It may be viewed as the largest amount of misstatements that the auditor could tolerate in the financial
statements or the smallest aggregate amount that could misstate the financial statements.
b. In designing an audit plan, the auditor should make a preliminary estimate of materiality for use during the
examination as some matters are important for fair presentation of financial statements while other matters
are not important.
c. It is specifically provided and quantified in the Philippine Standards on Auditing (PSAs) for each industry.
d. It is a matter of professional judgment and necessarily involves quantitative and qualitative factors.
___10. The following can be considered as bases for computing or determining the materiality level, except
a. Annualized interim financial statements.
b. Audit opinions issued in the prior year’s financial statements.
c. Prior year’s audited financial statements.
d. Budgeted financial statements of the current year.
___11. The following statements concerning the planning stage are correct, except
a. The auditor should design the audit to provide reasonable assurance that the financial statements taken as
a whole are free from material misstatements.
b. Reasonable assurance means that the auditor can possibly expect to detect all material misstatements.
c. Reasonable assurance means that the auditor should perform audit procedures to increase the likelihood
of detecting material misstatements.
d. The auditor should use professional judgment to assess audit risk and to design audit procedures to ensure
that it is reduced to an acceptably low level.
___12. Which of the following statements concerning the risks in an audit is incorrect?
a. Audit risk refers to the risk that the auditor gives an inappropriate audit opinion on the financial statements
when in fact the financial statements are fairly stated.
b. Inherent risk is the susceptibility of an account balance or class of transactions to a material misstatement
assuming that there were not related internal controls.
c. Control risk is the risk that a material misstatement that could occur in an account balance or class of
transactions will not be prevented or detected and corrected on a timely basis by the accounting and internal
control systems.
d. Detection risk is the risk that an auditor’s substantive procedure will not detect a material misstatement.
___14. The following are factors which affect inherent risk, except
a. The complexity underlying transactions and other events and complexity of calculations related to account
b. Susceptibility of the account to theft or misappropriation.
c. Aggressive management attitude toward financial reporting and inadequate profitability of the entity
related to its industry.
d. Internal control over billing, shipping and recording of sales and purchases is weak and inadequate.
___15. Which of the following risks is subject to the control of the auditor through more effective substantive
procedures?
a. Inherent and control risks only
b. Detection risk only
c. Control risk only
d. Inherent risk only
___16. Upon touring the client’s facility, the auditor determines that the internal control over the shipping and
billing department is weak. Which of the following is incorrect?
a. The auditor shall perform the substantive test at year-end.
b. The auditor shall use more effective substantive audit procedures.
c. The auditor shall set detection risk at a very low level.
d. The auditor shall use a very small sample size.
___18. Upon risk assessment the auditor determines that the level of combined inherent and control risks is at
low level, which of the following is proper?
a. The acceptable level of detection risk should be decreased by the auditor.
b. The auditor could use less effective substantive procedures such as analytical procedures.
c. The auditor should perform the substantive procedures at year-end.
d. The auditor should set a larger sample size for its audit procedures.
___20. The procedures performed by auditors to obtain an understanding of the entity and its environment
including its internal control and to assess the risks of material misstatements in the financial statements are
called risk assessment procedures which include the following, except
a. Computation of proper depreciation and confirmation of accounts receivables
b. Inquiries of management and others within the entity
c. Analytical procedures
___21. It involves the analysis of significant ratios and trends, including the resulting investigation of fluctuations
and relationships that are inconsistent with other relevant information or deviate from predicted amounts.
a. Test of details
b. Analytical procedures
c. Test of controls
d. Risk assessment procedures
___23. The following are the purposes of the analytical procedures during the planning stage, except
a. To identify unusual fluctuations that were not identified in testing phase and to confirm conclusions reached
with respect to the fairness of the financial statements.
b. To understand the client’s business.
c. To identify areas that may represent specific risks.
d. To enable the auditor to develop certain expectations regarding the client’s financial position and
performance during the period.
___24. Which of the following statements is correct, when obtaining understanding about the client’s business?
a. The level of knowledge required of the auditor is ordinarily more than the level of knowledge possessed by
management.
b. Preliminary knowledge about the entity’s industry must be obtained after accepting the engagement to
determine whether the auditor has the necessary knowledge to perform the audit.
c. Following the acceptance of the engagement, the auditor should obtain detailed knowledge about the
client’s business preferably at the start of the engagement.
d. For continuing engagements, the auditor may no longer obtain knowledge about the client’s business.
___31. Which of the following statements concerning audit risk and its components is incorrect?
a. Regardless of the assessed levels of inherent and control risks, the auditor should always perform some
substantive procedures for material account balances and classes of transactions.
b. The higher the assessment of inherent and control risks, the more evidence the auditor should obtain from
the performance of substantive procedures.
c. The assessed level of inherent risk need not be considered in determining the nature, timing, and extent of
substantive procedures required to reduce audit risk to an acceptably low level.
d. After obtaining an understanding of the accounting and internal control systems, the auditor should make
a preliminary assessment of control risk, at the assertion level, for each material account balance or class of
transactions.
___35. Which of the following statements 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. 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 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 at least
equal to that possessed by management in managing the entity.
___37. The element of the audit planning process most likely to be agreed upon which the client before the
implementation of audit strategy is the determination of the
a. Methods of statistical sampling to be used in confirming accounts receivable.
b. Pending legal matters to be included in the inquiry of the client’s attorney.
c. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
d. Schedules and analyses to be prepared by the client’s staff.
___38. Of the following procedures, which one is not considered part of obtaining an understanding of the
client’s environment?
a. Examining trade publications to gain a better understanding of the client’s industry.
b. Performing analytical procedures on the bonds payable and interest expense to test its reasonableness.
c. Touring the client’s manufacturing and warehousing facilities to gain a clearer understanding of operations.
d. Studying the internal controls over cash receipts and disbursements.
___40. Which of the following is not true regarding planning in an electronic environment?
a. The definition of auditing is not changed.
b. The purposes of auditing are not changed.
c. The procedures used are not changed.
d. Auditing standards are not changed.
41. Which of the following is not a financial statement assertion relating to account balances?
a. Completeness.
b. Existence.
c. Rights and obligations.
d. Valuation and competence.
42. The risk that an auditor will conclude, based on sub-stantive tests, that a material misstatement does not
exist in an account balance when, in fact, such misstatement does exist is referred to as
a. Sampling risk.
b. Detection risk.
c. Nonsampling risk.
d. Inherent risk.
43. As the acceptable level of detection risk decreases, the assurance directly provided from
a. Substantive tests should increase.
b. Substantive tests should decrease.
c. Tests of controls should increase.
d. Tests of controls should decrease.
44. Which of the following audit risk components may be assessed in nonquantitative terms?
Detection Inherent
Control risk risk risk
a. Yes Yes No
b. Yes No Yes
c. Yes Yes Yes
d. No Yes Yes
45. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing proce-dures.
b. May be assessed in either quantitative or non-quantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.
46. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the assessed
level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the
same as the planned audit risk level, the auditor would
a. Decrease substantive testing.
b. Decrease detection risk.
c. Increase inherent risk.
49. In considering materiality for planning purposes, an auditor believes that misstatements aggregating P10,000
would have a material effect on an entity’s income state-ment, but that misstatements would have to
aggregate P20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design
auditing procedures that would be expected to detect misstatements that aggregate
a. P10,000
b. P15,000
c. P20,000
d. P30,000
52. Which of the following best describes what is meant by the term “fraud risk factor?”
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presence often have been observed in circumstances where frauds have occurred.
c. Factors whose presence requires modification of planned audit procedures.
d. Material weaknesses identified during an audit.
53. The most difficult type of misstatement to detect is fraud based on
a. The overrecording of transactions.
b. The nonrecording of transactions.
c. Recorded transactions in subsidiaries.
d. Related-party receivables.
54. When considering fraud risk factors relating to man-agement’s characteristics, which of the following is
least likely to indicate a risk of possible misstatement due to fraud?
a. Failure to correct known reportable conditions on a timely basis.
b. Nonfinancial management’s preoccupation with the selection of accounting principles.
c. Significant portion of management’s compensation represented by bonuses based upon achieving
unduly aggressive operating results.
d. Use of unusually conservative accounting practices.
55. Which of the following is most likely to be a response to the auditor’s assessment that the risk of material
misstatement due to fraud for the existence of inventory is high?
a. Observe test counts of inventory at certain locations on an unannounced basis.
b. Perform analytical procedures rather than taking test counts.
c. Request that inventories be counted prior to year-end.
d. Request that inventory counts at the various locations be counted on different dates so as to allow the
same auditor to be present at every count.
56. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of
intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low.
57. Which of the following most accurately summarizes what is meant by the term “material misstatement?”
a. Fraud and direct-effect illegal acts.
b. Fraud involving senior management and material fraud.
c. Material error, material fraud, and certain illegal acts.
d. Material error and material illegal acts.
58. Which of the following factors or conditions is an auditor least likely to plan an audit to discover?
a. Financial pressures affecting employees.
b. High turnover of senior management.
c. Inadequate monitoring of significant controls.
d. Inability to generate positive cash flows from operations.
59. At which stage(s) of the audit may fraud risk factors be identified?
Obtaining Conducting
Planning Understanding fieldwork
a. Yes Yes Yes
b. Yes Yes No
c. Yes No No
d. No Yes Yes
60. Which of the following is most likely to be an overall response to fraud risks identified in an audit?
a. Supervise members of the audit team less closely and rely more upon judgment.
b. Use less predictable audit procedures.
c. Only use certified public accountants on the en-gagement.
d. Place increased emphasis on the audit of objective transactions rather than subjective transactions.
61. Individuals who commit fraud are ordinarily able to rationalize the act and also have an
Incentive Opportunity
a. Yes Yes
b. Yes No
c. No Yes
d. No No
62. Which of the following illegal acts should an audit be designed to obtain reasonable assurance of
detecting?
a. Securities purchased by relatives of management based on knowledge of inside information.
b. Accrual and billing of an improper amount of revenue under government contracts.
c. Violations of antitrust laws.
d. Price fixing.
64. In designing written audit programs, an auditor should establish specific audit objectives that relate primarily
to the
a. Timing of audit procedures.
b. Cost-benefit of gathering evidence.
c. Selected audit techniques.
d. Financial statement assertions.
65. With respect to planning an audit, which of the following statements is always true?
a. It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.
70. Which of the following is least likely to be considered a risk assessment procedure?
a. Analytical procedures.
b. Confirmation of ending accounts receivable.
c. Inspection of documents.
d. Observation of the performance of certain accounting procedures.
71. In an audit of a nonissuer (nonpublic) company, the auditors identify significant risks. These risks often
a. Involve routine, high-volume transactions.
b. Do not require special audit attention.
c. Involve items with lower levels of inherent risk.
d. Involve judgmental matters.