Auditing Theory

Prof. Francis H. Villamin

CPA Review
AT Quizzer 3
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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

9.

A CPA firms personnel partner periodically studies the CPA firms personnel advancement experience to
ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This
evidence of the CPA firms adherence to prescribed standards of
a. Quality Control
b. Due professional care
c. Supervision and review
d. Fieldwork

10. The objective and scope of audit and the extent of the auditors responsibilities to the client are best
documented in
a. Independent auditors report
b. Audit engagement letter
c. Clients representation letter
d. Audit program
11. The following are valid reasons why an auditor sends to his client an engagement letter
a
b
c
a. Avoid misunderstanding with respect to engagement
Yes
Yes
No
b. Confirms the auditors acceptance of the appointment
Yes
Yes
Yes
c. Objective and scope of the audit
Yes
Yes
Yes
d. Assures CPAs compliance to PSAs
Yes
No
No

D
Yes
No
Yes
Yes

12. Which of the following is appropriately included in an audit engagement letter?

I. Because of the test nature and other inherent limitations of an audit, together with the inherent
limitations of any accounting and internal control system, there is an unavoidable risk that even some
material misstatement may remain undiscovered.
II. The audit will be made within the objective of expressing an opinion of the financial statements.
III. An audit also includes assessing the accounting procedures used and significant estimates made by
management.
a. I and II
c.
II and III
b. I and III
d.
I, II and III
13. Which of the following is least likely included in an audit engagement letter?
a. The objective of financial reporting
b. Management responsibility for the financial statements
c. The form of any reports or other communication of the results of the engagement
d. Arrangement concerning the involvement of other auditors or experts in some aspects of the audit
14. An audit engagement letter least likely includes
a. A reference to the inherent limitation of an audit that some material misstatements may remain
undiscovered
b. Identification of specific audit procedures that the auditor needs to undertake.
c. Description of any letters or reports that the auditor expects to submit to the client.
d. Arrangements concerning the involvement of internal auditors and other clients staff.
15. Which of the following least likely requires the auditor to send a new engagement letter?
a. An indication that the client misunderstands the objective and scope of the audit.
b. Any revised or special terms of the engagement.
c. A recent change in the audit firms management.
d. Legal requirements and other government agencies pronouncements
16. Which of the following least likely influence the auditors decision to send a separate engagement letter
to a component of parent entity client?
a. Legal requirements
b. Degree of ownership over a component entity by parent company
c. Location of the principal place of business of the component entity
d. Who appoints the auditor of the component
17. According to PSA 210, which of the following statements is incorrect?
a. The auditor and the client need not agree on the terms of the engagement.
b. Where the terms of the engagement are changed, the auditor and the client need not agree on the
new terms if they already agreed on the old terms.
c. The engagement letter assists in the supervision and review of the audit work.
d. The auditor may agree to a change of engagement where there is reasonable justification for doing
so.

18. Which of the following is NOT a valid reason for a change of the engagement to a lower level of
assurance?
a. Change in circumstances affecting the need of service.
b. Restriction of the scope of engagement.
c. Misunderstanding as to the nature of the engagement originally requested.
d. The clients need is satisfied by an engagement that provides lower level of assurance.
19. When a change in the type of engagement from higher to lower level of assurance is reasonably justified,
the report based on the revised engagement
a. Should contain a separate paragraph that refers to the original engagement.
b. Should always refer to any procedures that may have been performed in the original engagement.
c. Should qualify the opinion due to scope limitation.
d. Omits reference to the original engagement.
20. Which of the following actions may be appropriate if the auditor is unable to agree to a change of the
engagement and is not permitted to continue the original engagement?
I. Issue a qualified opinion due to a significant scope limitation.
II. Auditor should withdraw from the engagement.
III. Consider whether there is any obligation to report to the board of directors or shareholders the
circumstances necessitating withdrawal.
a. I only
c. II and III
b. I and II
d. I, II and III
21. Which of the following is not an objective of an engagement letter?
a. Document the audit procedures to be performed.
b. Document the scope and objective of the audit.
c. Document the existent of the auditors responsibilities.
d. Avoid misunderstanding with the client.
22. Which of the following is not a principal content of an engagement letter?
a. The form of any reports to be issued to the client
b. The fact that the inherent limitations result to some misstatements
c. The confirmation that financial statements conform with applicable reporting framework
d. Any arrangement regarding the involvement of other professionals
23. Which of the following is an objective of the terms of engagement?
a. Document and confirm the audit evidence to be gathered.
b. Document and confirm the fact of auditors independence.
c. Helps avoid misunderstanding with respect to the audit.
d. Demonstrate the proof that the auditor is competent.
24. An auditor who accepts an audit engagement and does not possess the industry expertise of business
entity, should
a. Engage financial experts familiar with the nature of the business entity
b. Obtain a knowledge of matters that relate to the nature of entitys business.
c. Refer a substantial portion of the audit to another CPA who will act as the principal auditor.
d. First inform management that an unqualified opinion cannot be issued.
25. A CPA, while performing an audit, strives to achieve independence in appearance in order to
a. Reduce risk and liability.
b. Comply with the generally accepted standards of fieldwork.
c. Become independent in fact.
d. Maintain public confidence in the profession
26. A successor auditor ordinarily should request to review the predecessors audit documentation relating
to:
Contingencies
Internal Control
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
no
No
27. An auditors engagement letter most likely would include:
a. Managements acknowledgement of its responsibility for maintaining effective internal control.
b. The auditors preliminary assessment of the risk factors relating to misstatements arising from
fraudulent financial reporting.
c. A reminder that engagement is responsible for illegal acts committed by employees.
d. A request for permission to contact the clients lawyer for assistance in identifying litigation, claims
and assessments.

28. Which of the following auditor concerns most likely could be so serious that the auditor concludes that a
financial statement audit cannot be performed?
a. Management fails to modify prescribed internal controls for changes in information technology.
b. Internal control activities requiring segregation of duties are rarely monitored by management.
c. Management is dominated by one person who is also the majority stockholder.
d. There is a substantial risk of intentional misapplication of accounting principles.
29. Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
a. The prospective client has already completed its physical inventory count.
b. The CPA lacks an understanding of the prospective clients operations and industry.
c. The CPA is unable to review the predecessor auditors audit documentation.
d. The prospective client is unwilling to make all financial records available to the CPA.
30. Which of the following factors most likely would lead a CPA to conclude a potential audit engagement
should be rejected?
a. The details of most recorded transactions are not available after a specified period of time.
b. Internal control activities requiring the segregation of duties are subject to management override.
c. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial
statements.
d. Management has a reputation for consulting with several accounting firms about significant
accounting issues.
31. Which of the following factors most likely would cause a CPA to decide not to accept a new audit
engagement?
a. The CPAs lack of understanding of the prospective clients internal auditors computer-assisted audit
techniques.
b. Managements disregard of its responsibility to maintain an adequate internal control environment.
c. The CPAs inability to determine whether related party transactions were consummated on terms
equivalent to arms-length transactions.
d. Managements refusal to permit the CPA to perform substantive tests before the year-end.
32. Which of the following matters generally is included in an auditors engagement letter?
a. Managements responsibility for the entitys compliance with laws and regulations.
b. The factors to be considered in setting preliminary judgments about materiality.
c. Managements vicarious liability for illegal acts committed by its employees.
d. The auditors responsibility to search for significant internal control deficiencies.
33. Before accepting an engagement to audit a new client, a CPA is required to obtain:
a. An understanding of the prospective clients industry and business.
b. The prospective clients signature to the representation letter.
c. A preliminary understanding of the prospective clients control environment.
d. The prospective clients consent to make inquiries of the predecessor auditor, if any.
34. Which of the following auditor concerns most likely could be so serious that the auditor concludes that a
financial statement audit cannot be conducted?
a. The entity has no formal written code of conduct.
b. The integrity of the entitys management is suspect.
c. Procedures requiring segregation of duties are subject to management override.
d. Management fails to modify prescribed controls for changes in conditions.
35. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:
a. Specialized accounting principles of the clients industry.
b. The competency of the clients internal audit staff.
c. The uncertainty inherent in applying sampling procedures.
d. Disagreements with management as to auditing procedures.
36. Which of the following statements would least likely appear in an auditors engagement letter?
a. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket
expenses.
b. During the course of our audit we may observe opportunities for economy in, or improved controls
over, your operations.
c. Our engagement is subject to the risk that material errors or fraud, including defalcations, if they
exist, will be detected.
d. After performing our preliminary analytical procedures we will discuss with you the other procedures
we consider necessary to compete the engagement.

37. The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants:
a. That fraud is not to be reported to those charged with governance
b. How the results of various auditing procedures performed by the assistants should be evaluated.
c. What benefits may be attained by the assistants adherence to established time budgets.
d. Why certain documents are being transferred from the current file to the permanent file.
38. Which of the following factors most likely influence an auditors determination of the auditability of an
entitys financial statements?
a. The complexity of the information system relevant to financial reporting.
b. The existence of related party transactions.
c. The adequacy of the accounting records.
d. The operating effectiveness of controls.
39. Hill, CPA has been retained to audit the financial statements of Monday Co. Mondays predecessor
auditor was Post, CPA, who has been notified by Monday that Posts services have been terminated.
Under these circumstances, which party should initiate the communications between Hill and Post?
a. Hill, the successor auditor.
b. Post, the predecessor auditor.
c. Mondays controller or CFO.
d. The chairman of Mondays board of directors.
40. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessors:
a. Opinion of any subsequent events occurring since the predecessors audit report was issued.
b. Understanding as to the reasons for the change of auditors.
c. Awareness of the consistency in the application of GAAP between periods.
d. Evaluation of all matters of continuing accounting significance.
41. Which of the following factors most likely cause an auditor not to accept a new engagement?
a. An inadequate understanding of the entitys internal control.
b. The close proximity to the end of the entitys fiscal year.
c. Concluding that the entitys management probably lacks integrity.
d. An inability to perform preliminary analytical procedures before accepting the engagement.
42. The audit work performed by each assistant should be reviewed to determine whether it was adequately
performed and to evaluate whether the:
a. Auditors system of quality control has been maintained at a high level.
b. Results are consistent with the conclusions to be presented in the auditors report.
c. Audit procedures performed are approved in the professional standards.
d. Audit has been performed by persons having adequate technical training and proficiency as auditors.
43. Before accepting an engagement to audit a new client, an auditor is required to:
a. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
b. Obtain an understanding of the entity and its environment, including its internal control.
c. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary
audit plan.
d. Discuss the management representation letter with the prospective clients audit committee.
44. An auditors engagement letter most likely would include a statement regarding:
a. Managements responsibility to provide certain written representations to the auditor.
b. Conditions under which the auditor may modify the preliminary judgment about materiality.
c. Internal control activities that would reduce the auditors assessment of risk.
d. Materiality maters that could modify the auditors preliminary assessment of fraud risk.
45. A successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding
the predecessors:
a. Understanding of the reasons for the change in auditors.
b. Methodology used in applying sampling techniques.
c. Opinion on subsequent events that have occurred since the balance sheet date.
d. Perception of the competency and reliance on the clients internal audit function.
46. A successor auditor is required to attempt communication with the predecessor auditor prior to:
a. Performing test of controls
b. Testing beginning balances for the current year
c. Making a proposal for the audit engagement
d. Accepting the engagement

47. Which of the following factors most likely influence an auditors determination auditability of an entitys
financial statements?
a. The complexity of the accounting system.
b. The existence of related party transactions.
c. The adequacy of accounting records.
d. The operating effectiveness of control activities.
48. Which of the following auditor concerns most likely could be so serious that the auditor concludes that a
financial statement audit cannot be conducted?
a. The entity has no formal written code of conduct.
b. The integrity of the entitys management is suspect.
c. Procedures requiring segregation of duties are subject to management override.
d. Management fails to modify prescribed controls for changes in conditions.
49. An auditors engagement letter most likely would include a statement that:
a. Lists potential significant deficiencies discovered during the prior years audit.
b. Explains the analytical procedures responsibility that the auditor expects to apply.
c. Describes the auditors responsibility to evaluate going concern issues.
d. Limits the auditors responsibility to detect errors and fraud.
50. An auditor is required to establish an understanding with a client regarding the services to be performed
for each engagement. This understanding generally includes:
a. The auditors responsibility for determining the preliminary judgments about materiality and audit
risk factors.
b. Managements responsibility for identifying mitigating factors when the auditor has doubt about the
entitys ability to continue as a going concern.
c. The auditors responsibility for ensuring that those charged with governance are aware of any
significant deficiencies in internal control that comes to the auditors attention.
d. Managements responsibility for providing the auditor with an assessment of the risk of material
misstatement due to fraud.