Finale

APPEG TEST BANK UPH FINALS Multiple Choice Identify the choice that best completes the statement or answers the question. ____

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1. The following risks relate to financial statements as a whole, except a. Management override of internal control b. Fraud risks c. Weak control environment, such as management’s lack of competence d. Risk of theft of cash on hand 2. Which of the following relationships best describes the risk of material misstatement at the assertion level?

a. Audit risk plus inherent risk b. Inherent risk plus control risk ____

c. Audit risk times inherent risk d. Inherent risk times control risk

3. Management's assertions in the financial statements are of relevance to the audit process because: a. they are the procedures that will be performed by the audit team. b. they are utilized by auditors in developing proper tests and procedures, i.e., audit objectives follow and are closely related to management assertions.

c. they are direct evidence that management has prepared financial statements in accordance with generally accepted audit standards.

d. they relate more to the audit while the financial statements belong to the auditor. ____

4. Which of the following are assertions about account balances at the balance sheet date (account balances at the period end)?

a. Occurrence, cut-off, classification, completeness and accuracy b. Existence, rights and obligations, completeness and valuation and allocation, c. Occurrence and rights and obligations, completeness, classification and understandability and accuracy and valuation.

d. All of the above ____

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

b. All transactions and events that should have been recorded have been recorded. c. Transactions and events have been recorded in the correct accounting period. d. All assets, liabilities and equity interests that should have been recorded have been recorded.

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

a. b. c. d. ____

7. Accuracy and valuation assertions about presentation and disclosure means a. Disclosed events, transactions, and other matters have occurred and pertain to entity. b. All disclosures that should have been included in the financial statements have been included.

c. Financial information is appropriately presented and described, and disclosures are clearly expressed.

d. Financial and other information are disclosed fairly and at appropriate amounts. ____

8. Which of the following statements is an example of an assertion made by management in an entity's financial statements?

a. The financial statements were prepared in an unbiased manner. 1

b. Reported inventory balances reflect all related transactions for the period. c. Reported accounts receivable does not include any uncollectible accounts. d. The scope of the auditors' investigation was not limited in any way by management. ____

9. Which of the following statements relates to the ownership assertion? a. Inventory listings are accurately included in the inventory accounts. b. Inventory excludes items billed to customers. c. Inventory is properly classified as a current asset. d. Inventory is properly stated at cost. ____ 10. Which of the following statements about the existence (testing is from accounting records to the

supporting evidence) and completeness (testing is from supporting evidence to the accounting records) assertions is not true? a. The existence and completeness assertions emphasize different audit concerns. b. Existence deals with overstatements and completeness deals with understatements. c. Existence deals with understatements and completeness deals with overstatements. d. The completeness assertion deals with unrecorded transactions.

____ 11. This involves establishing the overall audit strategy for the engagement and developing an audit plan, in order to reduce audit risk to an acceptably low level. c. Audit program d. Audit working papers

a. Audit procedures b. Audit planning

____ 12. The nature and extent of planning will vary according the following, except a. Size of the auditing firm b. Complexity of the entity c. Auditor’s experience with the entity d. Changes in circumstances that occur during the audit engagement ____ 13. Which of the following is not one of the three main reasons why the auditor should properly plan engagements? To enable proper on-the-job training of employees. To enable the auditor to obtain sufficient appropriate evidence. To avoid misunderstandings with the client. To help keep audit costs reasonable.

a. b. c. d.

____ 14. The following are the matters to be considered by the auditor in establishing the overall audit strategy, except Defining the scope of the examination Assess risk and materiality Computation of audit fees Ascertaining the reporting objectives of the engagement

a. b. c. d.

____ 15. In developing the overall audit strategy for a new client, factor not be considered is: a. The terms of the engagement and any statutory responsibilities. b. The client’s business, including the structure of the organization and accounting system used.

c. The specific procedures to be performed to gather audit evidence. d. The audit risk, and procedures to be performed to achieve audit objectives. ____ 16. The audit plan includes: a. a description of the nature, timing and extent of planned risk assessment procedures sufficient to assess the risk of material misstatement

b. a description of the nature, timing and extent of planned further audit procedures at the assertion level for each material class of transactions, account balances and disclosures

c. Other planned audit procedures that are required to be carried out so that the engagement complies with our audit approach

d. All of the above

____ 17. A listing of all the things which the auditor will do to gather sufficient, competent evidence is the: 2

a. Audit strategy b. Audit program

c. Audit procedure d. Audit risk model

____ 18. Which item would not be contained in an audit program? a. Staff assigned to the audit. b. List of specific procedures (tasks) to be performed and the objectives to be met that relate primarily to financial statements assertions.

c. Documentation of system being reviewed. d. Estimated time required to perform each task.

____ 19. Those procedures specifically outlined in an audit program are primarily designed to a. Gather evidence. b. Detect errors or irregularities. c. Test internal systems. d. Protect the auditor in the event of litigation ____ 20. An audit should design the written audit program so that a. all material transactions will be selected for substantive testing. b. substantive tests prior to the balance sheet date will be minimized. c. the audit procedures selected will achieve specific objectives. d. each account balance will be tested under either tests of controls or tests of transactions.

____ 21. To distinguish it from reports that might be issued by others, such as by officers of the entity, the board of directors, or from the reports of other auditors who may not have to abide by the same ethical requirements as the independent auditor, the auditor’s report should have an appropriate a. Addressee c. Signature Title b. d. Opinion

____ 22. An entity’s management is responsible for the preparation and fair presentation of the financial statements. Its responsibility includes the following, except

a. Designing, implementing, and maintaining internal control relevant to the preparation and presentation of financial statements.

b. Making accounting estimates that are reasonable in the circumstances. c. Selecting and applying appropriate accounting policies. d. Assessing the risks of material misstatement of the financial statements. ____ 23. An auditor’s responsibility to express an opinion on the financial statements is a. Implicitly represented in the auditor’s report. b. Explicitly represented in the “Auditor’s Responsibility” paragraph of the auditor’s report. c. Explicitly represented in the “Management’s Responsibility” paragraph of the auditor’s report.

d. Explicitly represented in the opinion paragraph of the auditor’s report. ____ 24. Which paragraphs of an auditor’s report on financial statements should refer to Philippine Financial Reporting Standards? Introductory and opinion Auditor’s Responsibility and Management’s Responsibility Introductory and Auditor’s Responsibility Management’s Responsibility and Opinion

a. b. c. d.

____ 25. When financial statements are audited by an accounting firm, the partner-in-charge of engagement ordinarily signs in the name of the firm because:

a. The partner-in-charge of engagement should be relieved of any responsibility regarding the opinion issued.

b. It is required by reporting standards. c. The firm assumes responsibility for the audit. d. The opinion becomes more credible if signed in name of the firm. 3

____ 26. Which of the following information is(are) required when an auditor’s report is issued on financial statements to be filed with the Securities and Exchange Commission? 1. Audit report is manually signed. 2. Certifying partner to sign his name. 3. Partner’s Tax Identification Number. 4. PRC registration number 5. Accreditation with SEC a. 1, 2, 3, 4, 5 c. 1, 3, 4, 5 b. 2, 4, 5 d. 2, 3, 4, 5

____ 27. The following statements relate to the date of the auditor’s report. Which is false? a. The auditor should date the report as of the completion date of the audit b. The date of the auditor’s report should not be earlier than the date on which the financial statements are signed or approved by management

c. The date of the auditor’s report should not be later than the date on which the financial statements are signed or approved by management.

d. The date of the auditor’s report should always be later than the date of the financial statements (i.e., the balance sheet date).

____ 28. When an auditor issues an adverse opinion, the implication is that the auditor a. Does not know if the financial statements are presented fairly. b. Does not believe the financial statements are fairly presented. c. Is satisfied that the financial statements are presented fairly except for a specific aspect of them.

d. Is satisfied that the financial statements are presented fairly. ____ 29. An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity

being reported on had significant transactions with related parties. The inclusion of this separate paragraph a. Is considered an “except for” qualification of the opinion. b. Violates PSAs if this information is already disclosed in notes to the financial statements. c. Necessitates a revision of the opinion paragraph to include the phrase “with the foregoing explanation”. d. Is appropriate and would not negate the unqualified opinion.

____ 30. When there is a limitation in the scope of the audit that results to a disclaimer of opinion, the following paragraphs are modified, except Introductory paragraph Management’s responsibility paragraph Auditor’s responsibility paragraph Opinion paragraph

a. b. c. d.

____ 31. Which of the following is a tool that is best used by the audit team to determine completeness disclosures? a. Representation letter. c. GAAS. b. Inquiry of the CFO. d. Checklists. ____ 32. The responsibility for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies rests with whom?

a. Management. b. Auditor.

c. Audit committee. d. Client's attorney.

____ 33. When auditing contingent liabilities, which of the following procedures would be least effective? a. Reading the minutes of the board of directors. b. Reviewing the bank confirmation letter. c. Examining invoices for professional services or analyzing legal expense and review invoices and statements from outside legal counsel.

d. Examining customer confirmation replies. ____ 34. When requiring a letter of audit inquiry, which is mailed by the auditor after preparation by the client and review by the auditor, from the client's attorney, which of the following information will be requested?

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a. A statement regarding conflicts of interest that the attorney may have with the client. b. The attorney's expert opinion of proper GAAP treatment related to client contingencies. c. An evaluation of the likelihood of unfavorable outcome of, and estimated losses from contingencies.

d. Possible auditor defenses for third-party litigation related to ordinary negligence claims. ____ 35. Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? "I believe that the possible liability to the company is nominal in amount." "I believe that the action can be settled for less than the damages claimed." "I believe that the plaintiff's case against the company is without merit." "I believe that the company will be able to defend this action successfully."

a. b. c. d.

____ 36. Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances. The auditor should first a. Request the permission of the client to undertake the confirmation of accounts receivable. b. Perform alternative procedures to provide a satisfactory basis for the unqualified opinion. c. Assess the importance of the omitted procedures to the auditor's ability to support the previously expressed opinion. d. Inquire whether there are persons currently relying, or likely to rely, on the unqualified opinion.

____ 37. An auditor completed fieldwork on February 10, 2005 for a December 31, 2004 year-end client.

A significant subsequent event occurred on February 22, 2005. In this case, which of the following report dates would not be appropriate? a. February 10, 2005. b. February 10, except Note 1, February 22, 2005. c. February 22, 2005. d. December 31, 2004.

____ 38. Examples of events or conditions which individually or collectively, may cast significant doubt about the going concern assumption include the following except: Net liability or net current liability position. Change from credit to cash-on-delivery transactions with suppliers. Labor difficulties or shortages of important supplies. Compliance with capital or other statutory requirements.

a. b. c. d.

____ 39. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern? Cash flows from operating activities are negative. Research and development projects are postponed. Significant related party transactions are pervasive. Stock dividends replace annual cash dividends.

a. b. c. d.

____ 40. After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on: a. generally accepted auditing standards. b. the Code of Professional Ethics. c. generally accepted accounting principles. d. the auditor’s professional judgment.

____ 41. Evidential matters supporting the financial statements consist of accounting records and other information available to the auditor. Other information can be found in:

a. The subsidiary ledgers b. Worksheet supporting cost allocation

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c. Minutes of directors’ meetings d. Adjusting entries ____ 42. Generally, what source of audit evidence would most persuasively support audit conclusions? a. External c. Oral b. Inquiry d. Informal ____ 43. Which statement is incorrect regarding the audit evidence? a. The greater the risk, the more audit evidence is likely to be required. b. The higher the quality, the more may be required c. Merely obtaining more audit evidence may not compensate for its poor quality. d. Obtaining audit evidence relating to a particular assertion is not a substitute for obtaining audit evidence regarding another assertion.

____ 44. Which of the following is correct? a. The evidence that the auditor accumulates remains the same from audit to audit, but the general objectives vary, depending on the circumstances.

b. The general audit objectives remain the same from audit to audit, but the evidence varies, depending on the circumstances.

c. The circumstances may vary from audit to audit, but the evidence accumulated remains the same.

d. The general audit objectives may vary from audit to audit, but the circumstances remain the same.

____ 45. Each of the following might by itself, form a valid basis for an auditor to decide to omit a test, except for the

a. b. c. d.

Relative risk involved. Degree of reliance on the relevant internal controls. Difficulty and expense involved in testing a particular item. Relationship between the cost of obtaining evidence and its usefulness.

____ 46. Which of the following types of audit evidence is the least persuasive? a. Prenumbered purchase order forms. b. Bank statements obtained from the client. c. Test counts of inventory performed by the auditor. d. Correspondence from the client’s attorney about litigation. ____ 47. Theoretically, which of the following would not have an effect on the amount of audit evidence gathered by the auditor? The type of opinion to be issued. The auditor’s evaluation of internal control. The types of audit evidence available to the auditor. Whether or not the client reports to the Securities and Exchange Commission.

a. b. c. d.

____ 48. Example of other information a. Books of original entry c. Cost allocation work sheet Reconciliation statement b. d. Minutes of meetings ____ 49. Which of the following statements concerning audit evidence is correct? a. To be competent, audit evidence should be either persuasive or relevant, but need not be both

b. The measure of the validity of audit evidence lies in the auditor’s judgment c. The difficulty and expense of obtaining audit evidence concerning an account balance is valid basis for omitting the test

d. A client’s accounting data can be sufficient audit evidence to support the financial statements

____ 50. Which of the following elements ultimately determines the specific auditing procedures necessary under circumstances to afford reasonable basis for an opinion? c. Relative risk

a. Auditor judgment

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b. Materiality

d. Reasonable assurance

____ 51. What is the primary determinate in the difference between fraud and errors? a. The materiality of the misstatement. c. The level of management involved. b. The intent to deceive. d. The type of transaction effected. ____ 52. The following are examples of error, except a. A mistake in gathering or processing data from which financial statements are prepared.

b. An incorrect accounting estimate arising from oversight or misinterpretation of facts c. A mistake in the application of accounting principles relating to measurement, recognition, classification, presentation, or disclosure

d. Misrepresentation in the financial statements of events, transaction or other significant information

____ 53. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement resulting from error because

a. The effect of fraudulent act is likely omitted in the accounting records b. Fraud is ordinarily accompanied by acts specifically designed to conceal its existence and auditors do not make legal determinations of whether fraud has actually occurred

c. Fraud is always a result of connivance between or among employees d. The auditor is responsible to detect errors but not fraud ____ 54. 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 or incorrect postings of recorded transactions. d. Related-party receivables. ____ 55. Sources of information gathered to assess fraud risks usually do not include: a. Analytical procedures. b. Inquiries of management and others within the entity. c. Communication among audit team members. d. Review of corporate charter and bylaws. ____ 56. 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 engagement. d. Place increased emphasis on the audit of objective transactions rather than subjective transactions.

____ 57. PSAs require auditors to document which of the following matters related to the auditor’s consideration of material misstatements due to fraud?

a. Reasons supporting a conclusion that there is not a significant risk of material improper expense recognition.

b. Procedures performed to obtain information necessary to identify and assess the risks of material fraud.

c. Results of the internal auditor’s procedures performed to address the risk of management override of controls.

d. Discussions with management regarding separation of duties. ____ 58. According to PSA 250 (Consideration of Laws and Regulations in an Audit of Financial Statements), the following are indications that noncompliance may have occurred, except Investigation by government departments or payment of fines or penalties Adverse media comment Authorized transactions or properly recorded transactions Purchasing at prices significantly above or below market price

a. b. c. d.

____ 59. Examples of the type of information that may come to the auditor's attention that may indicate that noncompliance with laws or regulations has occurred least likely include

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a. Payments for unspecified services or loans to consultants, related parties, employees or government employees.

b. Purchasing at prices significantly above or below market price. c. Unauthorized transactions or improperly recorded transactions. d. Payments with proper exchange control documentation. ____ 60. When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an understanding of the nature of the act to

a. Increase the assessed level of control risk. b. Recommend remedial actions to the audit committee. c. Evaluate the effect on the financial statements and may consider seeking legal advice d.

especially when involving members of senior management, including members of the board of directors. Determine the reliability of management’s representations.

____ 61. Which of the following is the most valid reason why auditors need to design and implement responses to assessed risks of material misstatement?

a. to gain reasonable assurance that all fraud and errors will be detected. b. to obtain sufficient appropriate audit evidence about the assessed risks as a basis for the auditor’s opinion.

c. to afford management with a relief of its responsibility over the financial statements. d. to provide management with resolutions to the assessed risks. ____ 62. 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. ____ 63. The auditor identified weaknesses in the entity’s control environment during the conduct of audit. The auditor’s most likely response in this circumstance will include, except: Conducting more audit procedures as of the period end rather than at an interim date. Obtaining more extensive audit evidence from substantive procedures. Increasing the number of locations to be included in the audit scope. An approach that utilizes more testing of controls than substantive procedures.

a. b. c. d.

____ 64. The auditor’s responses at assertion level least likely include? a. Auditor’s general approach as to substantive procedures, or combined approach of tests of controls and substantive procedures.

b. Test of controls c. Test of details d. Substantive analytical procedures ____ 65. Which statement is incorrect regarding the nature, which is the most important consideration than the extent and timing, of further audit procedures?

a. The nature of further audit procedures refers to their purpose and their type b. Certain audit procedures may be more appropriate for some assertions than others. c. The higher the auditor’s assessment of risk, the less reliable and relevant is the audit evidence sought by the auditor from substantive procedures.

d. All of the above ____ 66. Which statement is incorrect regarding the timing of further audit procedures? a. The timing refers to when audit procedures are performed or the period or date to which the audit evidence applies.

b. The auditor may perform tests of controls or substantive procedures at an interim date or at period end.

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c. If the auditor performs tests of controls or substantive procedures prior to period end, the auditor considers the additional evidence required for the remaining period.

d. All audit procedures can be performed prior to period end. ____ 67. Which statement is incorrect regarding the extent of further audit procedures? a. Extent includes the quantity of a specific audit procedure to be performed. b. The extent of an audit procedure is determined by the judgment of the auditor after c. d.

considering the materiality, the assessed risk, and the degree of assurance the auditor plans to obtain. The auditor ordinarily decreases the extent of audit procedures as the risk of material misstatement increases. All of the above

____ 68. The main purpose of tests of controls is to a. Obtain an understanding of the entity and its environment, including its internal control, b. c. d.

to assess the risks of material misstatement at the financial statement and assertion levels. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatement at the assertion level. Detect material misstatements at the assertion level. All of the above

____ 69. If the auditor of financial statements understands internal control and assesses control risk as low, it is assumed that internal control: will be tested to support the assessment. is not required to be tested as it is considered strong. is considered relatively weak and will not be tested. has been assessed erroneously by the auditor.

a. b. c. d.

____ 70. In assessing control risk, an auditor ordinarily selects from a variety of techniques, including: a. Inquiry and analytical procedures. c. Comparison and confirmation. b. Reperformance and observation. d. Inspection and verification. ____ 71. The process designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations. a. Internal Control c. Administrative control Accounting control b. d. Control environment

____ 72. Which of the following is not true of internal control as defined by Committee of Sponsoring Organizations of the Treadway Commission (COSO) – Integrated Framework? it is a process that includes all elements of internal control working together. it includes all the people in the organization. it starts at the top of the organization in setting a tone. it is narrower than internal control over financial reporting.

a. b. c. d.

____ 73. The primary responsibility for designing, implementing and maintaining internal control, and the tone of internal control typically originates, rests with Internal auditors The CFO The external auditor The management/TCWG

a. b. c. d.

____ 74. What is management’s primary purpose of effective internal control in an organization? a. Obtaining high-quality data for making good business decisions providing reasonable assurance that the entity’s objectives are achieved.

b. Completion of a successful audit for the entity. c. Shareholder involvement in the company’s success. d. Obtaining profitability and financial strength. 9

____ 75. Control environment component of internal control a. Consists of the policies and procedures that help ensure that management directives are carried out.

b. Includes the governance and management functions and the attitudes, awareness, and c. d.

actions of those charged with governance and management concerning the entity’s internal control and its importance in the entity. Is the entity’s process for identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks, and the results thereof. Consists of the procedures and records established to initiate, record, process, and report entity transactions (as well as events and conditions) and to maintain accountability for the related assets, liabilities, and equity.

____ 76. Management philosophy and operating style most likely would have a significant influence on an entity's control environment when The internal auditor reports directly to management. Management is dominated by one individual. Accurate management job descriptions delineate specific duties. The audit committee actively oversees the financial reporting process.

a. b. c. d.

____ 77. An auditor should consider the competence of a client's employees because their competence bears directly and importantly on the Cost benefit relationship of internal control. Achievement of the objectives of internal control. Comparison of recorded accountability with assets on hand. Timing of the tests to be performed.

a. b. c. d.

____ 78. Control activities constitute one of the five components of internal control. Control activities do not encompass Performance reviews. Information processing. Physical controls and authorization procedures. An internal audit function.

a. b. c. d.

____ 79. Proper segregation of functional responsibilities calls for separation of the functions of a. Authorization, execution, and recording. b. Authorization, execution, and payment. c. Custody, execution, and reporting. d. Authorization, payment, and recording. ____ 80. A component of COSO’s internal control system concerns the process that provides feedback on the effectiveness of the other components of internal control. This component is called: c. Monitoring d. Risk assessment

a. Information & communication b. Control activities

____ 81. In audit of financial statements, it is considered in terms of the smallest aggregate level of misstatements

that could be considered material to any one of the statements that comprise the financial statements, while in financial reporting, it provides a threshold or cutoff point rather than being a primary qualitative characteristic which information must have if it is to be useful a. Materiality c. Relevance Reliability b. d. Misstatement

____ 82. The preliminary judgment about materiality is the

_________ amount by which the auditor believes the statements could be misstated and still not affect the decisions of reasonable users. a. Minimum c. Mean average b. Maximum d. Median average

____ 83. Auditors are _____ to decide on the combined amount of misstatements in the financial statements that they would consider material early in the audit.

a. Permitted b. Required

c. Not allowed d. Strongly encouraged 10

____ 84. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality? The anticipated sample size of the planned substantive tests The entity’s annual financial statements The results of the internal control questionnaire The contents of the management representation letter

a. b. c. d.

____ 85. Which of the following is least likely to be appropriate as the basis for determining the preliminary judgment about materiality in the audit of financial statements? Net income before taxes Current assets Owners’ equity Inventory

a. b. c. d.

____ 86. Why do auditors establish a preliminary judgment about materiality? a. To determine the appropriate level of audit experience required for the work. b. So that the client can know what records to make available to the auditor. c. To plan the appropriate audit evidence to accumulate and develop an overall audit strategy.

d. To finalize the assessment of control risk. ____ 87. Materiality should be considered by the auditor when a. Determining the nature, timing and extent of auditor’s further procedures b. Identifying and assessing the risks of material misstatements c. Both a and b d. Neither a nor b ____ 88. When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to as: c. Tolerable materiality d. Tolerable misstatement

a. The materiality range b. The error range

____ 89. Auditors commonly allocate materiality to balance sheet accounts rather than income statement accounts because most income statement misstatements have a(n) _____ effect on the balance sheet. c. Undetermined d. Increased

a. Reduced b. Equal

____ 90. 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 (adjusted either downward or upward) as a result of the following a. a change in circumstances that occurred during the audit b. new information c. a change in the auditor’s understanding of the entity and its operations as a result of performing further audit procedures. d. all of the above

____ 91. Which of the following would an auditor least likely perform as part of the auditor’s preliminary engagement activities or pre-planning or pre-engagement phase?

a. Perform procedures regarding the continuance of the client relationship and specific engagement.

b. Evaluate compliance with ethical requirements, including independence. c. Establish an understanding of the terms of the engagement. d. Obtain understanding of the legal and regulatory framework applicable to the entity. ____ 92. The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted. a. Terms of audit engagement c. Scope of the audit b. Preconditions for the audit d. FS Audit

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____ 93. Preliminary arrangements agreed to by the auditor and the audit client should be reduced to writing by the auditor. The best place to set forth these arrangements is in A memorandum to be placed in the permanent section of the auditing working papers. An audit engagement letter. A client representation letter. A confirmation letter attached to the constructive services letter.

a. b. c. d.

____ 94. Engagement letters are widely used in practice for professional engagements for all types. The primary purpose of the engagement letters is to

a. Remind management that the primary responsibility for the financial statements rests with management

b. Provide a written record of the agreement with the client as to the services to be provided

c. Satisfy the requirements of the CPA’s liability for insurance policy d. Provide a starting point for the auditor’s preparation of the preliminary audit program ____ 95. When should an auditor obtain an engagement letter? a. Whenever a prospective client offers to hire the audit firm b. During the interim audit period, after the auditor has evaluated the client’s internal control and estimated the amount of time required for the audit

c. When a new client is accepted by the auditor d. At the conclusion of the field work, just prior to signing the audit report ____ 96. It is in the interest of both client and auditor that the auditor sends an audit engagement letter, preferably before The performance of substantive testing. The commencement of the engagement. The completion of audit. Before the issuance of audit report.

a. b. c. d.

____ 97. Which of the following normally signs the engagement letter for an audit of a public company? a. Corporate treasurer. c. Chairman of the board of directors. b. Chief financial officer. d. Audit committee. ____ 98. The form and content of audit engagement letters may vary for each client, but they would generally include reference to the following, except The objective of the audit of financial statements. Auditor’s responsibility for the financial statements. The form of any reports or other communication of results of the engagement. Unrestricted access to whatever records, documentation and other information requested in connection with the audit.

a. b. c. d.

____ 99. Which of the following is not included in an engagement letter? a. Restriction on cash balances, lines of credit by similar arrangements b. Accessibility to all financial records c. Client imposed limitation in the scope d. Limitation in the scope of examination as imposed by circumstances ____ 100. In determining audit fees, an auditor may take into account each of the following except a. Volume and intricacy of work involved. b. Degree of responsibility assumed. c. Number and cost of manhours needed. d. Size and amount of capital of client. ____ 101. A basic objective of a CPA firm is to provide professional services to conform to professional standards. Reasonable assurance of achieving this basic objective is provided through:

a. continuing professional education. b. compliance with generally accepted reporting standards. c. a system of quality control. 12

d. a system of peer review. ____ 102. The objective of the auditor is to implement quality control procedures at the engagement level that provides the auditor with reasonable assurance that the audit complies with professional standards and regulatory and legal requirements the auditor’s report issued is appropriate in the circumstances both a and b neither a nor b

a. b. c. d.

____ 103. Control policies and procedures designed to ensure that all audits are conducted in accordance with PSA’s or relevant national standards or practices. These policies and procedures should be implemented. At the audit firm level only. On individual audits only. Either at the audit firm level or on individual audits. Both at the audit firm level and on individual audits.

a. b. c. d.

____ 104. Which of the following is not an element of quality control? a. Acceptance and continuance of client relationships and specific engagements b. Human resources c. Internal control d. Monitoring ____ 105. Which of the following is not an essential component of quality control? a. Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies.

b. Policies and procedures to ensure that the work performed by firm personnel meet applicable professional standards.

c. Policies to ensure that personnel maintain their independence in fact and in appearance. d. Policies that ensure that monitoring activities are effectively applied. ____ 106. The firm should establish policies and procedures designed to promote an internal culture based on the

recognition that quality is essential in performing engagements. Such policies and procedures should require the firm’s chief executive officer (or equivalent) or, if appropriate, the firm’s managing board of partners (or equivalent), to assume ultimate responsibility for the firm’s system of quality control. a. Ethical requirements b. Monitoring c. Human resources d. Leadership responsibilities for quality within the firm

____ 107. Who should take responsibility for the overall quality on each audit engagement? a. Engagement quality control review c. Engagement team Engagement partner b. d. CPA firm ____ 108. The implementation of quality control procedures that are applicable to the individual audit engagement is the responsibility of the CPA firm Engagement quality control review Engagement team Expert contracted by the firm in connection with the audit engagement

a. b. c. d.

____ 109. In pursuing a CPA firm’s quality objectives, a CPA firm should adopt policies and procedures to enable it to

identify and evaluate circumstances and relationships that create threats to independence, and to take appropriate action to eliminate those threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the engagement. Which quality control element would this be most likely to satisfy? a. Ethical requirements b. Monitoring c. Human resources d. Leadership responsibilities for quality within the firm

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____ 110. Quality control policies for the acceptance and continuance of clients are established to: a. Enable the auditor to report on management’s integrity b. Comply with standards established by regulatory bodies c. Minimize the likelihood of associating with management that lack integrity d. Reduce exposure to litigation from failing to detect fraud ____ 111. Audit sampling, which involves the application of audit procedures to less than 100 percent of items within

a population of audit relevance such that all sampling units have a chance of selection, identifies two general approaches to audit sampling. They are a. Random and nonrandom c. Precision and reliability b. Statistical and nonstatistical d. Risk and nonrisk

____ 112. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to Minimize the failure to detect errors and irregularities. Eliminate the risk of nonsampling errors. Reduce the level of audit risk and materiality to a relatively low amount. Mathematically measures sampling risk.

a. b. c. d.

____ 113. A nonstatistical sampling plan can: a. Overstate the estimate of sampling risk b. Misdirect an auditor to unreliable sampling units c. Replicate the results of a statistical sampling plan d. Understate the degree of audit assurance desired ____ 114. The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure Sampling risk Confidence levels Statistical sampling Tolerable rate and the expected rate of deviation

a. b. c. d.

____ 115. Which of the following best illustrates the concept of sampling risk? a. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.

b. An auditor may select audit procedures that are not appropriate to achieve the specific objective.

c. An auditor may fail to recognize errors in the documents examined for the chosen sample.

d. The documents related to the chosen sample may not be available for inspection. ____ 116. At times a sample may indicate in the case of a test of controls, that controls are more effective than they actually are. This situation illustrates the risk of

a. Over-reliance. b. Under-reliance.

c. Incorrect precision. d. Incorrect rejection.

____ 117. At times a sample may indicate in the case of a test of details that a material misstatement does not exist when in fact it does. This situation illustrates the risk of c. Over reliance d. Under reliance

a. Incorrect rejection b. Incorrect acceptance

____ 118. The risk likelihood of assessing control risk too low (risk of over reliance) and risk of incorrect acceptance relate to the Efficiency of the audit Effectiveness of the audit Preliminary estimates of materiality levels Allowable risk of tolerable misstatements

a. b. c. d.

____ 119. The risk that the auditor does not recognize misstatements or deviations included in the sample for what they are

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a. Sampling risk b. Confidence levels

c. Statistical sampling d. Nonsampling risk

____ 120. Which of the following is not an element of nonsampling risk? a. The auditor uses inappropriate procedures in auditing accounts receivable b. The use of unreasonable small sample size c. Misinterpretations of audit evidence d. Auditor fails to recognize the error in the sample ____ 121. The main purpose of risk assessment procedures is to a. Obtain an understanding of the entity and its environment, including its internal control, b. c. d.

to assess the risks of material misstatement at the financial statement and assertion levels. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatement at the assertion level. Detect material misstatements at the assertion level. All of the above

____ 122. 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. ____ 123. Which of the following procedures would an auditor least likely perform while obtaining an understanding of a client in a financial statement audit?

a. Coordinating the assistance of entity personnel in data preparation. b. Discussing matters that may affect the audit with firm personnel responsible for nonaudit services to the entity.

c. Selecting a sample of vendors' invoices for comparison to receiving reports. d. Reading the current year's interim financial statements. ____ 124. Which one of the following is a valid source of information about the client's processes? a. Management inquiry c. Tour of client’s plant and operations b. Review of the client's budget d. All are valid sources. ____ 125. Each of the following may be relevant to an auditor when obtaining knowledge about the client’s business and industry, except Performing a walkthrough tests Publications related to the industry Visits the entity’s premises Discussion with people within or outside the entity

a. b. c. d.

____ 126. An understanding of a client’s business and industry and knowledge about operations are essential for performing an adequate audit. For a new client, most of this information is obtained: from the predecessor auditor. from the Securities and Exchange Commission. from the permanent file. at the client’s premises.

a. b. c. d.

____ 127. To obtain an understanding of a continuing client's business, an auditor most likely would a. Perform tests of details of transactions and balances. b. Review prior year working papers and the permanent file for the client. c. Read current issues of specialized industry journals. d. Reevaluate the client's internal control environment. ____ 128. The auditor’s understanding of the entity and its environment assists the auditor in a. Assessing the risks and identifying potential problems. b. Planning and performing the audit effectively and efficiently. 15

c. Evaluating the audit evidence, determining materiality and in developing expectations for use when performing analytical procedures.

d. All of the above. ____ 129. 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. a. Audit planning c. Analytical procedures b. Audit evidence d. Inspection

____ 130. Analytical procedures are used in an audit because it is assumed of financial statements that a. management fraud can be discovered using such procedures. b. it is plausible that no relationship among data exists. c. analytical procedures are used as tests of controls. d. plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

____ 131. To gather audit evidence about the proper credit approval of sales (valuation assertion), the auditor would select a sample of documents from the population represented by the Subsidiary customers' accounts ledger. Sales invoice file. Customer order file. Bill of lading file.

a. b. c. d.

____ 132. To determine whether internal control operates effectively to minimize errors of failure to bill a customer for a shipment (completeness assertion), the auditor would select a sample of transactions from the population represented by the a. Shipping records or bill of lading file b. Customer order file c. Sales invoice d. Subsidiary customer accounts ledger

____ 133. Tracing bills of lading to sales invoices will provide evidence that a. Recorded sales were shipped. b. Invoiced sales were shipped. c. Shipments to customers were invoiced. d. Shipments to customers were recorded as sales. ____ 134. Tracing copies of sales invoices to shipping documents will provide evidence that all a. Shipments to customers were recorded as receivables. b. Billed sales were shipped. c. Debits to the subsidiary accounts receivable ledger are for sales shipped. d. Shipments to customers were billed. ____ 135. To determine whether refunds granted to customers were properly approved, the auditor should trace accounts receivable entries to:

a. Sales invoices. b. Remittance advices.

c. Shipping documents. d. Credit memos.

____ 136. Cash receipts should be deposited on the day of receipt or the following business day. Select the most appropriate audit procedure to determine that cash is promptly deposited.

a. Review the functions of cash receiving and disbursing for proper separation of duties. b. Review cash register tapes prepared for each sale. c. Review the functions of cash handling and maintaining accounting records for proper segregation of duties.

d. Compare the daily cash receipts totals with the bank deposits ____ 137. Which of the following would be the best procedure to determine whether purchases were properly authorized?

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a. Discuss authorization procedures with personnel in the controller's and purchasing functions.

b. Review and evaluate a flowchart of purchasing procedures. c. Determine whether a sample of entries in the purchase journal is supported by properly executed purchase orders.

d. Vouch payments for selected purchases to supporting receiving reports. ____ 138. How can an auditor test to determine whether Receiving Department procedures are applied properly? a. Test a sample of receiving documents. b. Observe receiving procedures on a surprise basis. c. Review procedures manuals. d. Interview receiving personnel. ____ 139. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support? c. Valuation or allocation. d. Rights and obligations.

a. Completeness. b. Existence or occurrence.

____ 140. To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all c. Purchase requisitions. d. Vendor’s invoices.

a. Payment vouchers. b. Receiving reports.

____ 141. Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

a. Employees responsible for authorizing sales and bad debt write-offs denied access to cash.

b. Employees involved in the credit-granting function are separated from the sales function.

c. Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts.

d. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

____ 142. Which of the following control procedures could prevent or detect errors or frauds arising from shipments made to unauthorized parties? Document policies and procedures for scheduling shipments. Establish procedures for reviewing and approving prices and sales terms before sale. Prenumber bills of lading and assure that related billings are made on a periodic basis. Prepare and periodically update lists of authorized customers.

a. b. c. d.

____ 143. To achieve good internal accounting control which department should perform the activities of matching shipping documents with sales orders and preparing daily sales summaries? c. Shipping d. Sales order

a. Billing b. Credit

____ 144. To achieve control when there is no billing department, the billing function should be performed by the a. Accounting department c. Shipping department b. Sales department d. Credit and collection department ____ 145. The person who opens the mail commonly prepares a remittance advice when a customer fails to return one with a payment. Consequently, mail should be opened by the c. Sales manager. d. Accounts receivable clerk.

a. Credit manager. b. Receptionist.

____ 146. Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the

a. Internal auditor to investigate the listing for unusual transactions. b. Treasurer to compare the listing with the monthly bank statement. c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records. 17

d. Entity's bank to compare the listing with the cashier's deposit slip. ____ 147. Which of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? The cashier makes the daily deposit at a local bank. The cashier prepares the daily deposit. The cashier endorses the checks. The cashier posts the receipts to the accounts receivable subsidiary ledger.

a. b. c. d.

____ 148. The cash receipts function should be separated from the related record keeping in an organization to a. Physically safeguard the cash receipts. b. Establish accountability when the cash is first received. c. Minimize undetected misappropriations of cash receipts. d. Prevent paying cash disbursements from cash receipts. ____ 149. Which of the following is not a universal rule for achieving control over cash? a. Separate the cash-handling and record-keeping functions. b. Deposit each day’s cash receipts by the end of the day and all cash payments should be made by means of a check (imprest system).

c. Have bank reconciliation’s performed by employees who do not handle cash. d. Decentralize the receiving of cash as much as possible. ____ 150. The least crucial element of control over cash is a. Separation of cash record keeping from custody of cash. b. Preparation of the monthly bank reconciliation. c. Separation of cash receipts from cash disbursements. d. Batch processing of checks.

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APPEG TEST BANK UPH FINALS Answer Section MULTIPLE CHOICE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS:

D D B B D D D B B C B A A C C D B C A C B D B D C A C B D B D A D C B C D D A D 19

41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85.

ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS:

C A B B C A D D B A B D B B D B B C D C B D D A C D C B A B A D D A B B B D A C A B B B D 20

86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130.

ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS:

C C D B D D B B B C B D B A D C C D C A D B C A C B D C A A A B B D B A B C D A D B D C D 21

131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.

ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS:

C A C B D D C B B B B D A A B C D C D D

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