Auditing Theory Long Test Part 2
1. Assurance services are best described as
A. Independent professional services that
improve the quality of information, or its
context, for decision makers.
B. The assembly of financial statements based
on assumptions of a reasonable party.
C. Services designed to express an opinion on
historical financial statements based on the
results of an audit.
D. Services designed for the improvement of
operations, resulting in better outcomes.
2. Which of the following statements is (are)
incorrect regarding assurance services?
A. Assurance services can be provided either on
information or processes.
B. The third party who receives the assurance
generally does not pay for the assurance
received.
C. Assurance services always involve a report
by one person to a third party on which an
independent organization provides
assurance.
D. All of the above.
3. Which of the following activities best describe the
term operational audit?
A. Seeks out aspects of company operations in
which introduction of proper controls would
reduce waste.
B. The job of implementing financial and
accounting controls in a newly organized
company.
C. Constant review of the administrative
controls as they relate to the operations of the
company.
D. Verification of the fair presentation of a
company's results of operations.
4. The independent auditors responsibility in a
regular audit is to express an opinion on the
financial statements. The auditors opinion:
A. Helps the company adopt sound accounting
policies.
B. Assists the company in maintaining an
adequate and effective system of accounts.
C. Helps management safeguard the company
assets.
D. Helps establish the credibility of the financial
statements.
5. A study, appraisal, or review by the BOA or its
duly authorized representatives, of the quality of
audit of financial statements through a review of
the quality control measures instituted by an
Individual CPA, Firm or Partnership of CPAs
engaged in the practice of public accountancy.
A. Peer review
B. Quality review
C. Analytical review
D. Administrative review
6. Emong, CPA is applying for renewal of his
professional license. He is temporarily exempted
from the CPE requirements
A. If he is at least 65 years old.
B. If he is working abroad and he has been out
of the country for at least two years
immediately prior to the date of renewal.
C. Either a or b.
D. Under no circumstances.
7. One of the advantages of the fixed fee (or flat
sum) basis of billing a client is that the
A. Fixed fee method is particularly effective for
measuring charges for routine engagements.
B. CPAs compensation is more directly related
to the quality of his service rather than to time
spent.
C. CPA is assured of avoiding a loss on the
engagement even if he underestimates his
costs.
D. Client pays for exactly what he gets in terms
of work performed.
8. A CPA purchased a stock in a client corporation
and placed it in a trust as an educational fund for
the CPA's minor child. The trust securities were
not material to the CPA but were material to the
child's personal net worth. Would the
independence of the CPA be considered to be
impaired with respect to the client?
A. No, because the CPA would not be
considered to have a direct financial interest
in the client.
B. No, because the CPA would not be
considered to have a material indirect
financial interest in the client.
C. Yes, because the stock would be considered
a direct financial interest and consequently,
materiality is not a factor.
D. Yes, because the stock would be considered
an indirect financial interest that is material
to the CPA's child
9. Which of the following is required if the
professional accountant uses experts who are not
professional accountants?
A. Experts who are not professional accountants
need not be informed of ethical requirements
because they are not members of the
Accountancy profession.
B. The ultimate responsibility for the
professional service is assumed by the expert
who is not a professional accountant.
C. The professional accountant is discouraged to
engage the services of experts who are not a
professional accountant.
D. The professional accountant must take steps
to see that such experts are aware of ethical
requirements.
10. A CPA firm's quality control procedures
pertaining to the acceptance of a prospective audit
client would most likely include
A. Inquiry of management as to whether
disagreements between the predecessor
auditor and the prospective client were
resolved satisfactorily.
B. Inquiry of third parties, such as the
prospective client's bankers and attorneys,
about information regarding the prospective
client and its management.
C. Consideration of whether sufficient
competent evidential matter may be obtained
to afford a reasonable basis for an opinion.
D. Consideration of whether the internal control
structure is sufficiently effective to permit a
reduction in the extent of required
substantive tests.
11. Auditing standards require that auditors be aware
of relevant factors relating to fraudulent reporting.
Which of the following statements is false
concerning fraudulent reporting?
A. Fraud frequently involves a pressure or an
Auditing Theory Long Test Part 2
incentive to commit fraud and a perceived
opportunity to do so.
B. Fraud involves actions of management but
excludes the actions of employees or third
parties.
C. Two types of fraud relevant to the auditor
include material misstatements arising from
fraudulent financial reporting and material
misstatements arising from misappropriation
of assets.
D. An audit rarely involves the authentication of
documentation; thus, fraud may go
undetected by the auditor.
12. Which of the following is most likely a fraud risk
factor?
A. Management has a practice of conveying
forecast information to analysts, creditors,
and other third parties.
B. Turnover of management has been low
throughout the preceding five-year period.
C. Several claims against the senior
management are outstanding alleging a
violation of the securities law.
D. The company has shown the ability to
generate a positive cash flow from
operations, while reporting earnings and
earnings growth.
13. Detection of noncompliance, regardless of
materiality, requires considerations of the
following:
A B C D 20. Which of the following situations will normally
Integrity of management Yes Yes Yes No
Possible effect on other
aspects of the audit report Yes Yes No Yes
Legal determination of the
act of non-compliance. Yes No Yes No
14. Assuming a recurring audit, in which of the
following situations would the auditor be unlikely
to send a new engagement letter to the client?
A. A recent change in partner and/or staff
involved in the audit engagement.
B. A change in the terms of engagement.
C. A recent change of client management.
D. A significant change in the nature or size of
the client's business.
15. When an auditor believes that an understanding
with the client has not been established, he or she
should ordinarily
A. Perform the audit with increased professional
skepticism.
B. Decline to accept or perform the audit.
C. Assess control risk at the maximum level and
perform a primarily substantive audit.
D. Modify the scope of the audit to reflect an
increased risk of material misstatement due
to fraud.
16. Which of the following procedures would an
auditor least likely perform in planning a financial
statement audit?
A. Selecting a sample of vendors invoices for
comparison to receiving reports.
B. Coordinating the assistance of entity
personnel in data preparation.
C. Discussing matters that may affect the audit
with firm personnel responsible for non-audit
services to the entity.
D. Reading the current years interim financial
statements.
17. The objective of performing analytical procedures
in planning an audit is to identify the existence of
A. Unusual transactions and events
B. Illegal acts that went undetected because of
internal control weaknesses.
C. Related party transactions.
D. Recorded transactions that were not properly
authorized.
18. When assessing an internal auditors objectivity,
an independent auditor should
A. Review the internal auditors working
papers.
B. Evaluate the adequacy of the internal
auditors audit programs.
C. Inquire about the internal auditors
educational background and professional
certification.
D. Consider the organizational level to which
the internal auditor reports.
19. Which of the following would an auditor most
likely use in determining the auditors preliminary
judgment about materiality?
A. The anticipated sample size of the planned
substantive tests.
B. The results of the internal control
questionnaire.
C. The contents of the management
representation letter
D. The entitys annualized interim financial
statements.
result to decrease in the extent of audit
procedures?
A. Increase in the risk of material misstatement.
B. Increase in the degree of assurance the
auditor plans to obtain.
C. Increase in materiality level.
D. None of the above.
21. An auditor uses the knowledge provided by the
understanding of internal control and the assessed
level of control risk primarily to
A. Determine whether procedures and records
concerning the safeguarding of assets are
reliable.
B. Determine the nature, timing and extent of
substantive tests for financial statement
assertions.
C. Ascertain whether the opportunities to allow
any person to both perpetrate and conceal
fraud are minimized.
D. Modify the initial assessments of inherent
risk and preliminary judgments about
materiality levels.
22. To obtain evidential matter about control risk, an
auditor selects tests from a variety of techniques
including
A. Inquiry.
B. Calculations.
C. Analytical procedures
D. Confirmations
23. To determine whether the system of internal
accounting control operated effectively to
minimize errors of failure to invoice a shipment,
the auditor would select a sample of transactions
from the population represented by the
A. Customer order file.
B. Bill of lading file.
C. Open invoice file.
Auditing Theory Long Test Part 2
D. Sales invoice file.
24. The report of the service organization auditor on
the suitability of design (Type A) will not
ordinarily include an opinion by the service
organization auditor that:
A. The description of the service organization's
accounting and internal control systems,
ordinarily prepared by the management of the
service organization is accurate.
B. The systems' controls have been placed in
operation.
C. The accounting and internal control systems
are operating effectively based on the results
from the tests of control.
D. The accounting and internal control systems
are suitably designed to achieve their stated
objectives.
25. To achieve good internal accounting control
which department should perform the activities of
matching shipping documents with sales orders
and preparing daily sales summaries?
A. Billing.
B. Shipping.
C. Credit.
D. Sales order.
26. Identify the reason why employers bond
employees who handle cash receipts:
A. Because fidelity bonds reduce the possibility
of employing dishonest individuals and force
employees in position of trust to take periodic
vocations and rotate their assigned duties.
B. Because fidelity bonds reduce the possibility
of employing dishonest individuals and
facilitate an independent monitoring of the
receiving and depositing of cash receipts.
C. Because fidelity bonds reduce the possibility
of employing dishonest individuals and deter
dishonesty by making employee aware of
that insurance companies may investigate
and prosecute dishonest acts.
D. Because fidelity bonds reduce the possibility
of employing dishonest employees and from
possible monetary damages resulting from
their errors.
27. Which of the following relates to rights and
obligations assertion?
A. The entity holds or controls the rights to
assets, and liabilities are the obligations of the
entity.
B. All assets, liabilities and equity interests that
should have been recorded have been
recorded.
C. Transactions and events that have been
recorded have occurred and pertain to the
entity.
D. Assets, liabilities, and equity interests are
included in the financial statements at
appropriate amounts
28. Which statement is correct regarding auditing fair
value measurements and disclosures?
A. Many measurements based on estimates,
including fair value measurements, are
inherently precise.
B. Assumptions used in fair value
measurements are different in nature to those
required when developing other accounting
estimates.
C. Underlying the concept of fair value
measurements is a presumption that the entity
will be liquidated.
D. The measurement of fair value may be
relatively simple for assets that are bought
and sold in active and open markets.
29. Which statement is correct regarding small
entities?
A. There is concentration of ownership and
management in a small number of individuals
(often a single individual).
B. An entity owned by another enterprise cannot
be regarded as a small entity.
C. The meaning of small entity gives
consideration only to the size of an entity.
D. Small entities do not have internal controls.
30. Which of the following statements relating to the
competence of evidential matter is always true?
A. Evidential matter gather by an auditor from
outside an enterprise is reliable.
B. Accounting data developed under
satisfactory conditions of internal control are
more relevant than data developed under
unsatisfactory internal control conditions.
C. Oral representations made by management
are not valid evidence.
D. Evidence gathered by auditors must be both
valid and relevant to be considered
competent.
31. Which of the following procedures would an
auditor ordinarily perform first in evaluating
managements accounting estimates for
reasonableness?
A. Develop independent expectations of
managements estimates.
B. Consider the appropriateness of the key
factors or assumptions used in preparing the
estimates.
C. Test the calculations used by management in
developing estimates.
D. Obtain an understanding of how management
developed its estimates.
32. Which of the following audit procedures provides
the best evidence about the collectability of notes
receivable?
A. Confirmation of note receivable balances
with the debtors.
B. Examination of notes for appropriate debtors'
signatures.
C. Reconciliation of the detail of notes
receivable and the provision for uncollectible
amounts to the general ledger control.
D. Examination of cash receipts records to
determine promptness of interest and
principal payments.
33. To satisfy the valuation assertion when auditing
an investment accounted for by the equity
method, an auditor most likely would
A. Inspect the stock certificates evidencing the
investment.
B. Examine the audited financial statements of
the investee company.
C. Review the brokers advice or canceled check
for the investments acquisition.
D. Obtain market quotations from financial
newspapers or periodicals.
34. Conditions leading to smaller sample size in
compliance testing:
- Reliance on internal control
Auditing Theory Long Test Part 2
1.1 lower reliance
1.2 higher reliance
- Acceptance rate of deviation from planned
reliance on internal control
2.1 lower acceptable rate
2.2 higher acceptable rate
- Allowance risk of over reliance
3.1 lower risk
3.2 higher risk
- Likely rate or population deviation
4.1 lower expected rate
4.2 higher expected rate
A. Combination of 1.1, 2.1, 3.1, 4.1
B. Combination of 1.2, 2.1, 3.1, 4.2
C. Combination of 1.1, 2.2, 3.2, 4.1
D. Combination of 1.2, 2.2, 3.2, 4.2
35. An auditor selects a preliminary sample of 100
items out of a population of 1,000 items. The
sample statistics generate an arithmetic mean of
P60, a standard deviation of P6 and a standard
error of the mean of P.60.If the sample was
adequate for the auditor's purposes and the
auditor's desired precision was plus or minus
P1,000, the minimum acceptable peso value of the
population would be
A. P61,000
B. P59,000
C. P60,000
D. P58,800
36. An important statistic to consider when using a
statistical sampling audit plan is the population
variability. The population variability is measured
by the
A. Sample mean.
B. Standard deviation.
C. Standard error of the sample mean.
D. Estimated population total minus the actual
population total.
37. At times a sample may indicate that the auditor's
173. planned degree of reliance on a given control
is reasonable when, in fact, the true compliance
rate does not justify such reliance. This situation
illustrates the risk of
A. Over-reliance
B. Under-reliance
C. Incorrect precision
D. Incorrect rejection
38. Which of the following statements is correct
concerning the auditor's use of statistical
sampling?
A. An auditor needs to estimate the peso amount
of the standard deviation of the population to
use classical variables sampling.
B. An assumption of PPS sampling is that the
underlying accounting population is
normally distributed.
C. A classical variables sample needs to be
designed with special considerations to
include negative balances in the sample.
D. The selection of zero balances usually does
not require special sample design
considerations when using PPS sampling.
39. Which of the following would not be an
appropriate procedure for testing the general
control activities of an information system?
A. Inquiries of client personnel.
B. Inspecting computer logs.
C. Testing for the serial sequence of source
documents.
D. Examination of the organizational chart to
determine the segregation of duties.
40. The most critical aspect of the separation of duties
within a mainframe information systems
environment is between
A. Programmers and project leaders
B. Programmers and systems analysts
C. Programmers and users
D. Programmers and computer operators
41. An online sales order processing system most
likely would have an advantage over a batch sales
order processing system by
A. Detecting errors in the data entry process
more easily by the use of edit programs.
B. Enabling shipment of customer orders to be
initiated as soon as the orders are received.
C. Recording more secure backup copies of the
database on magnetic tape files.
D. Maintaining more accurate records of
customer accounts and finished goods
inventories.
42. Which of the following controls most likely
would assure that an entity can reconstruct its
financial records?
A. Hardware controls are built into the computer
by the computer manufacturer.
B. Backup diskettes or tapes of files are stored
away from originals.
C. Personnel who are independent of data input
perform parallel simulations.
D. System flowcharts provide accurate
descriptions of input and output operations.
43. A client is presenting comparative (2-year)
financial statements. Which of the following is
correct concerning reporting responsibilities of a
continuing auditor?
A. The auditor should issue one audit report
which is on both presented years.
B. The auditor should issue two audit reports,
one on each year.
C. The auditor should issue one audit report, but
only on the most recent year.
D. The auditor may issue either one audit report
on both presented years, or two audit reports,
one on each year.
44. Good has completed an examination of the
financial statements of Bold, Inc. Last year's
financial statements were examined by Luck,
CPA. Since last year's financial statements will be
presented for comparative purposes with Luck's
report, Good's report should
A. State that the prior year's financial statements
were examined by another auditor.
B. State that the prior year's financial statements
were examined by Luck.
C. Not refer to the prior year's examination.
D. Refer to Luck's report only if the opinion was
other than unqualified.
45. In determining the type of opinion to express, an
auditor assesses the nature of the reporting
qualification and the materiality of their effects.
Materiality will be the primary factor considered
in the choice between
A. An except for opinion and an adverse
opinion.
B. An except for opinion and a subject to
opinion.
Auditing Theory Long Test Part 2

C. An adverse opinion and a disclaimer of include a presentation of the Statement of

opinion. Cash Flows.
D. A subject to opinion and a piecemeal
opinion.
46. When a qualified opinion results from a limitation
on the scope of the audit, the situation should be
described in an explanatory paragraph
A. Preceding the opinion paragraph and referred
to only in the scope paragraph of the auditor's
report.
B. Following the opinion paragraph and referred
to in both the scope paragraph and opinion
paragraphs of the auditor's report.
C. Following the opinion paragraph and referred
to only in the scope paragraph of the auditor's
report.
D. Preceding the opinion paragraph and referred
to in both the scope and opinion paragraphs
of the auditor's report.
47. Which of the following phrases would an auditor
most likely include in the auditors report when
expressing a qualified opinion because of
inadequate disclosure?
A. Subject to the departure from generally
accepted accounting principles, as described
above.
B. With the foregoing explanation of these
omitted disclosures.
C. Except for the omission of the information
discussed in the preceding paragraph.
D. Does not present fairly in all material
respects.
48. Because an expression of opinion as to certain
identified items in financial statements tends to
overshadow or contradict a disclaimer of opinion
or adverse opinion, it is inappropriate for an
auditor to issue a (an)
A. Piecemeal opinion
B. Unqualified opinion
C. Except for opinion
D. Subject to opinion
49. When an auditor reports on financial statements
prepared on an entitys income tax basis, the
auditors report should
A. Disclaim an opinion on whether the
statements were examined in accordance
with GAAS.
B. Not express an opinion on whether the
statements are presented in conformity with
the comprehensive basis of accounting used.
C. Include an explanation of how the results of
operations differ from the cash receipts and
disbursements basis of accounting.
D. State that the basis of presentation is a
comprehensive basis of accounting other than
GAAP.
50. An auditor's report would be designated as a
special report when it is issued in connection with
financial statements that are
A. For an interim period and are subjected to a
limited review.
B. Unaudited and are prepared from a client's
accounting records.
C. Prepared in accordance with a
comprehensive basis of accounting other than
generally accepted accounting principles.
D. Purported to be in accordance with generally
accepted accounting principles but do not