Auditing Theory

Prof. Francis H. Villamin

CPA Review
Quizzer 5

AT

PSA 230, PSA 240 Redrafted, PSA 250 Redrafted and PSA 260 Revised and
Redrafted
1. Fraud include all the following except:
a. Recording of transactions without substance
b. Suppression or omission of the effects of transactions from records of documents
c. Mathematical or clerical mistakes in the underlying records and accounting data
d. Misappropriation of assets
2. Error include all of the following except:
a. Misappropriation of accounting policies
b. Manipulation, falsification of alteration of records and documents
c. Mathematical or clerical mistakes in underlying records and accounting data
d. Oversight of accounting policies
3. According to PSA 250 Redrafted, the term noncompliance as used in the standard
refers to acts of omission or commission by the entity being audited either intentional
or unintentional, which are contrary to the prevailing laws and regulations. Such acts
do not include:
a. Transactions entered into by the entity
b. Transactions entered into in the name of the entity
c. Transactions entered into on the entitys behalf by its management or employees
d. Personal misconduct (unrelated to the entitys business activities) by the entity
management or employees
4. PSA 250 Redrafted states that in order to plan the audit, the auditor should obtain a
general understanding of the legal and regulatory framework applicable to the entity
and the industry and how the entity is complying with that framework. To obtain this
understanding, the following procedures would ordinarily be considered by the
auditor, except:
a. Use the existing understanding of the entitys industry, regulatory, and other
external factors
b. Inquire of management concerning the entitys policies and procedures regarding
compliance with laws and regulations
c. Inquire of management as to the laws and regulations that may be expected to
have a fundamental effect on the operations of the entity
d. Inspecting correspondence with relevant licensing or regulatory activities
5. 1st statement The responsibility for the prevention and detection of fraud and error
rests with the auditor through implementation of accounting and internal control
systems.
2nd statement The accounting and internal control systems eliminate the possibility
of fraud and error.
a. 1st statement is True ; 2nd statement is False
b. 1st statement is False ; 2nd statement is True
c. Both statements are True
d. Both statements are False
6. 1st statement The auditor is not and cannot be held responsible for the prevention
of fraud and error.
2nd statement Annual audits may be carried out which may not, however, act as
deterrent.
a. 1st statement is True ; 2nd statement is False
b. 1st statement is False ; 2nd statement is True
c. Both statements are True
d. Both statements are False
7. Under PSA 240 Redrafted, which of the following would be classified as an error?
a. Misappropriation of assets for the benefit of management
b. Misinterpretation by management of facts that existed when the financial
statements were prepared
c. Preparation of records by employees to cover a fraudulent scheme
d. Intentional omission of the recoding of a transaction to benefit a third party

I.
II.

8. The types of intentional misstatements that are relevant

consideration of fraud include
Misstatements resulting from fraudulent financial reporting.
Misstatements resulting from misappropriation of assets.

to the

auditors

a.
b.
c.
d.

I and II
I only
II only
Neither I nor II

9. The primary responsibility for the prevention and diction of fraud and error rests with
a. The auditor
b. Those charged with governance
c. The management of the entity
d. Both b and c
10. According to PSA 250 Redrafted, Consideration of Laws and Regulations in an Audit
of Financial Statements, the following are indications that noncompliance may have
occurred, except
a. Investigation by government departments or payment of fines or penalties.
b. Management is dominated by one person or a small group and there is no
effective oversight board or committee.
c. Unauthorized transactions or improperly recorded transactions.
d. Purchasing at prices significantly above or below market price.
11. This refers to acts of omission or commission by the entity being audited, either
intentional or unintentional which are contrary to the prevailing laws and regulations
a. Error
b. Fraud
c. Noncompliance
d. Defalcation
12. Under PSA 260 (Revised and Redrafted), this term is used to describe the role of
persons entrusted with the supervision, control and direction of an entity.
a. Oversight
b. Governance
c. Direction
d. Control
13. Which of the following statements relating to communication of audit matters of
governance interest is incorrect?
a. Audit matters of governance interest include only those matters that have come
to the attention of the auditor as a result of the performance of the audit.
b. In an audit in accordance with PSAs, the auditor should design audit procedures
for the specific purpose of identifying matters of governance interest.
c. The auditor should identify relevant persons who are charged with governance
interest are to be communicated.
d. The auditors communications with those charged with governance may be made
orally or in writing.
14. Under PSA 260 Revised and Redrafted, Communications with Those Charged with
Governance, the effectiveness of communications is enhanced by developing a
constructive working relationship between the auditor and those charged with
governance. This relationship is developed while maintaining an attitude of
a. Professional independence and objectivity
b. Loyalty and objectivity
c. Professional independence and confidentiality
d. Objectivity and confidentiality
15. In comparing management fraud with employee fraud, the auditors risk of failing to
discover the fraud is
a. Greater for employee fraud because of the higher crime rate among blue collar
workers.
b. Greater for management fraud because of managements ability to override
existing internal controls.
c. Greater for employee fraud because of the larger number of employees in the
organization.
d. Greater for management fraud because managers are inherently smarter than
employees.
16. Whether the auditor has performed an audit in accordance with PSA is determined by
a. The adequacy of the audit procedures performed in the circumstances and the
suitability of the auditors report based on the result of these procedures.
b. The absence of material misstatements.
c. The absence of material errors.
d. The Securities and Exchange Commission
17. 1st statement The auditor should communicate audit matters of governance interest
arising from the audit of financial statements with those charged with governance of
an entity.
2nd statement The auditor should determine the relevant persons who are charged
with governance and with whom audit matters of governance interest are not
communicated.
a. 1st statement is True ; 2nd statement is False

b. 1st statement is False ; 2nd statement is True

c. Both statements are True
d. Both statements are False

18. The auditors communication with those charged with governance may be made
orally or in writing. The auditors decision whether communicate orally or in writing is
affected by factors except:
a. The nature, sensitivity and significance of the audit matters of governance
interest to be communicated.
b. The arrangements made with respect to periodic meetings or reporting of audit
matters of governance interest.
c. The size, operating structure, legal structure and communications processes of
the entity being audited.
d. The amount of past contact and dialogue the auditor has with those charged with
governance.
19. Which of the following best describes what is meant by the terms fraud risk factor?
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presence often has been observed in circumstances where frauds
have occurred.
c. Factors whose presence requires modifications of planned audit procedures.
d. Reportable conditions identified during audit.
20. When conducting an audit, errors that arouse suspicion of fraud should be greater
attention that other errors. This is an example of applying the criterion of
a. Reliability of evidence
b. Materiality
c. Risk
d. Dual-purpose testing
21. When the auditor becomes aware of information concerning a possible instance of
noncompliance, the auditor should obtain an understanding of
a
b
c
D
The nature of the act.
No
Yes
Yes
No
The circumstance in which it has occurred.
No
Yes
No
Yes
Sufficient other information to evaluate
Yes
Yes
No
No
effect on F/S
22. Which of the following statements concerning the auditors responsibility to detect
conditions relating to financial stress of employees or adverse relationships between
a company and its employees is correct?
a. The auditor is required to plan the audit to detect these conditions whenever they
may result in misstatements.
b. The auditor is required to plan the audit to detect these conditions on all audits.
c. These conditions relate to fraudulent financial reporting, and an auditor is
required to plan the audit to detect these conditions when the client is exposed to
a risk of misappropriation of assets.
d. The auditor is not required to plan the audit to discover these conditions but
should consider them if he/she becomes aware of them during the audit.
23. When the auditor identifies a misstatement in the financial statements, the auditor
should consider whether such a misstatement may be indicative of fraud, and if there
is such an indication, the auditor should
a. Consider the implications of the misstatement in relation to other aspects of
audit.
b. Withdraw from the engagement.
c. Communicate the information to regulatory and enforcement authorities.
d. Report the matter to the person or persons who made the audit appointment.
24. When the auditors regular examination leading to an opinion on the financial
statement discloses specific circumstances that make him suspect that fraud may
exist and he concludes that the results of such fraud, if any, could not be so material
as to affect his opinion, he should
a. Make a note in his working papers of the possibility of a fraud of immaterial
amount so as to pursue the matter next year.
b. Reach an understanding with the client as to whether the auditor or the client,
subject to auditors review, is to make the investigation necessary to determine
whether fraud has occurred and, if so, the amount thereof.
c. Refer the matter to the appropriate representatives of the clients with the
recommendations that is to be pursued to a conclusion.
d. Immediately extend his audit procedures to determine if fraud has occurred and,
if so, the amount thereof.

25. Which of the following statements describes why a properly designed and executed
audit may not defect material fraud?
a. Audit procedures that are effective for detecting an unintentional misstatements
may be ineffective for an intentional misstatement that is concealed through
collusion.
b. An audit is designed to provide reasonable assurance of detecting material errors,
but there is no similar responsibility concerning material fraud.
c. The factors considered in assessing control risk indicated an increased risk of
intentional misstatements, but only a low risk of unintentional errors in the
financial statements.
d. The auditor did not consider factors influencing audit risk for account balances
that have pervasive effects on the financial statements taken as a whole.
26. Which of the following statements best describes an auditors responsibility to detect
errors and irregularities?
a. The auditor should study and evaluate the clients internal control system, and
design the audit to provide reasonable assurance of detecting all errors and
irregularities.
b. The auditor should assess the risk that errors and irregularities may cause the
financial statements to contain material misstatements, and determine whether
the necessary internal control procedures have been prescribed and are being
followed satisfactory.
c. The auditor should consider the types of errors and irregularities that could occur,
and determine whether the necessary internal control procedures have been
prescribed and are being followed.
d. The auditor should assess the risk that errors and irregularities may cause the
financial statements to contain material misstatements, and design the audit to
provide reasonable assurance of detecting material errors and irregularities.
27. Which of the following conditions are generally present when misstatements due to
fraud occur?
I. Incentive or pressure
II. Perceived opportunity
III. Rationalization
a. I and II only
b. II and II only
c. I and III only
d. I, II, and III

28. Fraudulent financial reporting involves intentional