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QUIZ BOWLERS’ SOCIETY

AUDITING THEORY

EASY

1. Financial statement users often receive unreliable financial information from companies. Which of
the following is not a normal reason for this?
A. Complex business transactions.
B. Large amounts of data.
C. Lack of firsthand knowledge about the business.
D. Each of these choices is a common reason for unreliable information.

2. Which of the following is a type of audit evidence?


A. Oral responses to the auditor from employees of the company under audit.
B. Written communications from company employees or outsiders.
C. Observations made by an auditor.
D. Evidence may take any of the above forms.

3. An examination of part of an organization’s procedures and methods for the purpose of evaluating
efficiency and effectiveness is what type of audit?
A. Operational audit
B. Compliance audit
C. Financial statement audit
D. Production audit

4. On the date of the inventory count, the auditor does all of the following except
A. Note slow-moving inventory.
B. Make recommendations to the client on controls over inventory.
C. Observe the client’s count teams counting the inventory.
D. Make test counts of the client’s inventory.

5. Which of the following matters is generally included from an auditor’s engagement letter?
A. The factors to be considered in setting preliminary judgments about materiality.
B. A statement that the fees for the services rendered are based on our regular per diem rates,
plus travel and other out-of-pocket expenses.
C. A statement that after performing the preliminary analytical procedures, the auditor will
discuss with the client the other procedures that the auditors consider necessary to complete
the engagement.
D. Management’s vicarious liability for illegal acts committed by its employees.

6. Which of the following procedures would an auditor most likely perform while obtaining an
understanding of a client in a financial statement audit?
A. Supervise the entity personnel in data preparation.
B. Obtain a knowledge of the events and transactions that may have an effect on the client’s
financial statements.
C. Selecting a sample of vendor’s invoices for comparison to receiving reports.
D. Develop an attitude of professional skepticism concerning management’s financial statement
assertions.

7. During the consideration of internal control in a financial statement audit, an auditor is obligated to
A. Search for significant deficiencies in the operation of the internal control.
B. Understand the internal control and the information system.
C. Obtain knowledge on the consistency with which controls are currently being applied.
D. Obtain knowledge on controls related to each principal transaction class and account
balance.

8. The audit procedure which requires the auditor to record the last check number used on the last day
of the year and subsequently trace to the outstanding checks and the cash disbursement records is
performed to satisfy the audit objective of:
A. Detail tie-in.
B. Existence.
C. Completeness.
D. Cutoff.
9. The permanent file of an auditor’s working papers generally would not include
A. Bond indenture agreements.
B. One year lease agreements.
C. Table of organization.
D. Flowchart of internal control.

10. When auditing inventories, an auditor would most likely verify that
A. The financial statement presentation of inventories is appropriate.
B. Damaged goods and obsolete items have been disposed.
C. All inventory owned by the client is on hand at the time of the count.
D. The client has used LIFO as a proper inventory pricing.

11. In an audit of financial statements, due professional care requires


A. The exercise of error-free judgment.
B. The examination of all corroborating evidence available.
C. Testing the system of internal control.
D. A responsibility to exercise reasonable care.

12. Engagement letters


A. Are mandated for audit engagements.
B. Are recommended for all professional engagements.
C. Are signed by members of the audit committee.
D. Include an analysis of the results of the audit.

13. The market for auditing services is driven by


A. The regulations of the Securities and Exchange Commission.
B. A demand by external users of financial statements.
C. Pronouncements issued by the Auditing and Assurance Standards Council.
D. Government

14. Company A has a few large accounts receivable that total P1,000,000. Company B has a large
number of small accounts receivable that also total P1,000,000. The importance of a misstatement in
any one account is, therefore, greater for A than for B. This is an example of the auditor’s concept
of
A. Account bias.
B. Audit risk.
C. Materiality.
D. Reasonable assurance.

15. Which of the following is not a valid basis for omitting an audit test?
A. The difficulty and expense involved in testing a particular item.
B. The relative risk involved.
C. The degree of reliance on the relevant internal controls.
D. The relationship between the cost of obtaining evidence and its usefulness.

16. An increased extent of tests of controls is most likely to occur when:


A. It is a first-year audit.
B. The auditor is doing a “fraud audit.”
C. Controls are effective and the preliminary control risk assessment is low.
D. Controls are ineffective and the preliminary controls risk assessment is high.

17. Analytical procedures must be performed in:


A. The planning and test of controls stages.
B. Conjunction with tests of transactions and tests of details of balances.
C. The planning and completion stages.
D. The planning, tests control and completion stages.

18. Which of the following is not an application control?


A. Reasonableness test for unit selling price of sale.
B. Preprocessing authorization of sales transactions.
C. Post-processing review of sales transactions by the sales department.
D. Separation of duties between computer programmer and operators.
19. An agreed-upon procedures engagement is one in which:
A. the auditor and management agree that procedures will be applied to all accounts and
circumstances.
B. the auditor and management agree that procedures will not be applied to all accounts and
circumstances.
C. the auditor and management or a third party agree that the engagement will be limited to
certain specific procedures.
D. the auditor and management or a 3rd party agree that the auditor will apply his or her
judgment to determine procedures to be performed.

20. Before an operational audit for effectiveness can be performed, there must be:
A. a financial audit by an internal auditor.
B. a financial audit by an independent auditor.
C. specific criteria developed to define effectiveness.
D. a review performed by either an independent or an internal auditor.

AVERAGE

1. As the acceptable level of detection risk increases, an auditor may


A. Reduce substantive testing by choosing a smaller sample size.
B. Postpone the planned timing of substantive tests from interim dates to the year end.
C. Eliminate the assessed level of inherent risk from consideration as a planning factor.
D. Lower the assessed level of control risk from the maximum level of below the maximum.

2. The client issued new stock during the year at an amount above par. The auditor is verifying that the
amount of par was allocated to the capital stock account and the remainder was credited to the paid-
in-excess account. This procedures
A. Primarily supports the completeness assertion.
B. Is a required audit procedure.
C. Primarily addresses the valuation or allocation assertion.
D. Substitutes for sending confirmations to stockholders.

3. Listing all bank transfers made a few days before and after the balance sheet date and tracing each to
the accounting records for proper recording is a useful approach to test for:
A. Kiting.
B. Lapping.
C. Income smoothing.
D. Channel stuffing.

4. Which of the following errors would be least likely to be discovered during the tests of the bank
reconciliation?
A. Payment was made to an employee for more hours than he worked.
B. Cash received by the client subsequent to the balance sheet date was recorded as cash
receipts in the current year.
C. Payments on notes payable were debited directly to the bank balance by the bank were not
entered in the client’s records.
D. Deposits were recorded in the cash receipts records near the end of the year, deposited in
the bank, and were included in the bank reconciliation as a deposit in transit.

5. When an auditor decreases the assessed level of control risk because certain control activities were
determined to be ineffective, the auditor would most likely increase the
A. Extent of tests of controls.
B. Level of detection risk.
C. Extent of tests of details.
D. Level of inherent risk.
6. After obtaining an understanding of internal control and assessing the risk of material misstatement,
an auditor decided not to perform tests of controls. The auditor most likely decided that
A. It would be efficient to perform tests of controls that would result in reduction in planned
substantive tests.
B. Additional evidence to support a further reduction in the risk of material misstatement is
available.
C. A decrease in the assessed level of the risk of material misstatement is justified for certain
financial statement assertions.
D. There were many internal controls weaknesses that could allow misstatements to enter the
accounting system.

7. Which of the following statements is incorrect concerning significant deficiencies noted in an audit?
A. Significant deficiencies are material weaknesses in the design or operation of specific internal
control components.
B. The auditor is not obligated to search for significant deficiencies that could adversely affect
the entity’s ability to record and report financial data.
C. An auditor may communicate significant deficiencies during an audit or after the audit’s
completion.
D. An auditor may report that significant deficiencies were noted during an audit.

8. Which of the following statements is incorrect about the auditor’s use of the work of a specialist?
A. The work of a specialist who is related to the client may be acceptable under certain
circumstances.
B. An auditor may not use a specialist in the determination of physical characteristics relating to
inventories.
C. The client should have an understanding of the nature of the work to e performed by the
specialist.
D. The auditor should obtain an understanding of the methods and assumptions used by the
specialist.

9. For effective internal control purposes, the vouchers payable department generally should:
A. Obliterate the quantity ordered on the receiving department copy of the purchase order.
B. Stamp, perforate or otherwise cancel supporting documentation after payment is mailed.
C. Establish the agreement of the vendor’s invoice with the receiving report and purchase
order.
D. Ascertain that each requisition is approved as to price, quantity and quality by an authorized
employee.

10. When an acquisition is on an FOB origin basis, the inventory and related accounts payable must be
recorded in the current period if the goods were:
A. Received prior to the balance sheet date.
B. Shipped prior to the balances sheet date.
C. Both shipped and received prior to the balance sheet date.
D. Paid for in advance.

11. Evidence of the arrival of fixed asset additions might be found in


A. Receiving reports.
B. Board of directors’ minutes.
C. The cash disbursement journal.
D. Purchase orders.

12. The auditor’s objective during an observation of a client’s physical inventory count is to:
A. Discover whether a client has counted a particular inventory item or group of items.
B. Obtain direct knowledge that the inventory exists and has been properly counted.
C. Provide an appraisal of the quality of the merchandise on hand on the day of the physical
count.
D. Allow the auditor to supervise the conduct of the count so as to obtain assurance that
inventory quantities are reasonable accurate.
13. An auditor should perform alternative procedures to substantiate the existence of accounts receivable
when
A. No reply to a positive confirmation request is received.
B. No reply to a negative confirmation request is received.
C. Collectibility of the receivables is in doubt.
D. Pledging of the receivables is probable.

14. A client has a calendar year-end. Listed below are four events that occurred after December 31.
Which one of these subsequent events might result in adjustment of the December 31 financial
statements?
A. Sale of a major subsidiary.
B. Adoption of accelerated depreciation methods.
C. Write-off of a substantial portion of inventory as obsolete.
D. Collection of 90% of the accounts receivable existing at December 31.

15. Which of the following is generally more important in a review than in a compilation?
A. Determining the accounting basis on which the financial statements are to be presented.
B. Gaining familiarity with industry accounting principles and practices.
C. Obtaining a signed management representation letter.
D. Obtaining a signed engagement letter.

16. An audit client's board of directors and audit committee refused to take action about an immaterial
illegal act that was brought to their attention by the auditor. Because of their failure to act, the
auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to
doubts concerning
A. Inadequate financial statement disclosures.
B. Scope limitations resulting from the inaction.
C. Reliance on management's representations.
D. Compliance with the Foreign Corrupt Practices Act.

17. It would not be appropriate for the auditor to initiate discussion with the audit committee concerning
A. Details of the procedures which the auditor intends to apply.
B. Details of potential problems which the auditor believes might cause a qualified opinion.
C. The extent to which the work of internal auditors will influence the scope of the
examination.
D. The extent to which change in the company’s organization will influence the scope of the
examination.

18. Familiarity threat could be created under the following circumstance, except
A. A professional accountant accepting gifts from a client whose value is inconsequential or
trivial.
B. A member of the engagement team is the spouse of the chief accountant of the client.
C. Senior personnel of an engagement team having a long association with the assurance client.
D. A member of the engagement team is the spouse of one of the directors of the client.

19. Which of the following requires recognition in the auditor’s opinion as to consistency?
A. A change in the estimate of provisions for warranty costs.
B. The change from the cost method to the equity method of accounting for investments in
common stock.
C. The correction of an error in the prior year’s financial statements resulting from a
mathematical mistake in capitalizing interest.
D. A change in depreciation method which has no effect on current year’s financial statements
but is certain to affect future years.
20. An auditor’s decision concerning whether or not to “dual date” the audit report is based upon the
auditor’s willingness to:
A. permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the
auditor’s report.
B. extend auditing procedures and assume responsibility for a greater period of time.
C. assume responsibility for events subsequent to the issuance of the auditor’s report.
D. accept responsibility for subsequent events.
DIFFICULT

1. The auditor’s program for testing long-term debt should include steps that require
A. Verifying the existence of the bondholders.
B. Examining any bond trust indenture agreement.
C. Inspecting the accounts payable subsidiary ledger.
D. Investigating credits to bond interest income.

2. On the basis of the audit evidence gathered and evaluated, an auditor decides to decrease the
assessed level of control risk from that originally planned. To achieve an overall audit risk level that
is substantially the same as the planned audit risk level, the auditor would
A. Decrease substantive testing.
B. Decrease detection risk.
C. Increase inherent risk.
D. Decrease materiality levels.

3. Which of the following is correct about materiality?


A. The concept of materiality recognizes that all matters are important for fair presentation of
financial statements in conformity with GAAP.
B. An auditor considers materiality for planning purposes in terms of the largest aggregate level
of misstatements that could be immaterial to any one of the financial statements.
C. Materiality judgments are made in light of surrounding circumstances and necessarily involve
quantitative judgments only.
D. An auditor’s consideration of materiality is influenced by the auditor’s perception of the
needs of a reasonable person who will rely on the financial statements.

4. In violation of company policy, the client erroneously capitalized the cost of painting its warehouse.
An auditor is most likely to detect this when
A. Discussing capitalization policies with the client’s controller.
B. Examining maintenance expense accounts.
C. Observing that the warehouse had been painted.
D. Examining construction work orders that support items capitalized during the year.

5. Which of the following is not likely a motive for management to manipulate the timing and amount
impaired asset writedowns?
A. Steady increases in earnings per share over the past 5 years.
B. Investor’s desire for income smoothing.
C. Taking a “big bath” writedown in the current year.
D. An abnormally unprofitable year.

6. In order to efficiently establish the correctness of the accounts payable cutoff, the auditor is most
likely to
E. Coordinate cutoff tests with physical inventory observation.
F. Compare cutoff reports with purchase orders.
G. Compare vendors’ invoices with vendor statements.
H. Coordinate mailing of confirmations with cutoff tests.

7. During the course of an audit, a CPA observes that the recorded interest expense seems to be
excessive in relation to the balance in the long-term debt account. This observation could lead the
auditor to suspect that:
A. Long-term debt is understated.
B. Discount on notes payable is overstated.
C. Long-term debt is overstated.
D. Premium on notes payable is overstated.

8. The audit of year-end physical inventories should include steps to verify that the client’s purchases
and sales cutoffs were adequate. The audit steps should be designed to detect whether merchandise
included in the physical count at year-end was not recorded as a:
A. Sale in the current period.
B. Sale in the subsequent period.
C. Purchase in the current period.
D. Purchase return in the subsequent period.
9. A weak internal control systems allows a department supervisor to “clock in” for a fictitious
employee and then approve the employee’s time card at the end of the pay period. This fraud would
be detected if other controls were in place, such as having an independent party:
A. Distribute paychecks.
B. Recompute hours worked from time cards.
C. Foot the payroll journal and trace posting to the general ledger and the payroll master file.
D. Compare the date of the recorded check in the payroll journal with the date on the canceled
checks and time cards.

10. The failure to capitalize a permanent asset, or the recording of an asset acquisition at the improper
amount, affects the income statement:
A. For the current period.
B. For the depreciable life of the asset.
C. Until the firm disposes of the asset.
D. Forever.

11. A client’s procedures for the day of the inventory count should include all of the following except
A. Documenting obsolete inventory.
B. Pretesting weight scales.
C. Segregating stock not to be included in the count.
D. Locating vendor invoices for inventory in stock.

12. Generally, audit evidence gathered from the sales and collection cycle is combined with evidence
from other parts of the audit:
A. As the evidence accumulation process proceeds.
B. Only when all fieldwork processes of the engagement are completed.
C. Only after the audit of the sales and collection cycle is concluded.
D. After the conclusion of both the cash cycle and the sales and collection cycle.

13. After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical
inventory listing to obtain evidence that all items:
A. Included in the listing have been counted.
B. Represented by inventory tags actually exist.
C. Represented by inventory tags are included in the listing.
D. Included in the listing are represented by inventory tags.

14. An auditor confirms a representative number of open accounts receivable as of December 31 and
investigates respondent’s exceptions and comments. By this procedure, the auditor would most
likely to learn of which of the following?
A. One of the cashiers has been covering embezzlement by lapping.
B. One of the sales clerks has not been preparing charge slips for credit sales to family and
friends.
C. One of the computer control clerks has been removing from the data file all sales invoices
applicable to his own account.
D. The credit manager has misappropriated remittances from customers whose accounts have
been written off.

15. The major reason that the difference and ratio estimation methods would be expected to produce
audit efficiency is that the
A. Beta risk may be completely ignored.
B. Variability of the population of differences or ratios is less than that of the population of
book values or audited values.
C. Number of members of the populations differences or ratios is smaller than the number of
members of the population of book values.
D. Calculations required in using difference or ratio estimation are less arduous and fewer than
those required when using direct estimation.
16. Richard, CPA, performs accounting services for Norton Corporation. Norton wishes to offer shares
to the public and asks Richard to audit the financial statements. Richard refers Norton to Cruz, CPA,
who is more competent in the area of registration statements. Cruz performs the audit of Norton's
financial statements and subsequently thanks Richard for the referral by giving Richard a portion of
the audit fee without informing Norton. Richard accepts the fee. Who, if anyone, has violated
professional ethics?
A. Neither Richard nor Cruz.
B. Both Richard and Cruz.
C. Only Richard.
D. Only Cruz.

17. An auditor concludes that there is a material inconsistency in the other information in an annual
report to shareholders containing audited financial statements. If the auditor concludes that the
financial statements do note require revision, but the client refuses to revise or eliminate the material
inconsistency, the auditor may
A. Consider the matter closed since the other information is not in the audited financial
statements.
B. Issue an “except for” qualified opinion after discussing the matter with the client’s board of
directors.
C. Revise the auditor’s report to include a separate explanatory paragraph describing the
material inconsistency.
D. Disclaim an opinion on the financial statements after explaining the material inconsistency in
a separate explanatory paragraph.

18. If a nonpublic company asks an accountant to perform a review engagement, and the accountant has
an immaterial direct financial interest in the company, the accountant is:
A. not independent and, therefore, may not issue a review report.
B. not independent and, therefore, may not be associated with the financial statements.
C. independent because the financial interest is immaterial and, therefore, may issue a review
report.
D. not independent and, therefore, may issue a review report, but may not issue an auditor’s
opinion.

19. Management furnishes the independent auditor with information concerning litigation, claims, and
assessments. Which of the following is the auditor’s primary means of initiating action to corroborate
such information?
A. Request that client management send a letter of inquiry to those lawyers with whom
management consulted concerning litigation, claims, and assessments.
B. Request that client lawyers undertake a reconsideration of matters of litigation, claims, and
assessments with which they were consulted during the period under examination.
C. Request that client lawyers provide a legal opinion concerning the policies and procedures
adopted by management to identify, evaluate, and account for litigation, claims, and
assessments.
D. Request that client management engage outside attorneys to suggest wording for the text of
a footnote explaining the nature and probable outcome of existing litigation, claims, and
assessments.

20. Internal control is ineffective when computer personnel:


A. design flowcharts and narratives for computerized systems.
B. participate in computer software acquisition decisions.
C. originate changes in customer master files.
D. provide physical security over program files.

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