Auditing Theory QUIZ NO.2

Working papers that record the procedures used by the auditor to gather evidence should be:
a. Considered the primary support for the FSs being examined.
b. Viewed as the connecting link between the books of account and the financial statements.
c. Designed to meet the circumstances of the particular engagement.
d. Destroyed when the audited entity ceases to be a client.

c. Designed to meet the circumstances of the particular engagement.

Which of the following statements is incorrect regarding the reliability of audit evidence?
a. Oral representation by the client management is not a valid evidence.
b. Audit evidence obtained directly by the auditor is more reliable than that one provided by the client.
c. The effectiveness of accounting and internal control adds to the reliability of internal evidence.
d. While internal audit evidence is considered to be acceptable, the auditor usually prefers audit evidence form external sources.

a. Oral representation by the client management is not a valid evidence

Which of the following statements regarding the relevance of evidence is correct?
a. To be relevant, evidence must pertain to the audit objective of the evidence.
b. To be relevant, evidence must be persuasive.
c. To be relevant, evidence must relate to multiple audit objectives.
d. To be relevant, evidence must be derived from a system including effective internal controls.

a. To be relevant, evidence must pertain to the audit objective of the evidence.

“Physical examination” is the inspection or count by the auditor of items such as:
a. cash, inventory, and payroll timecards.
b. cash, inventory, and sales documents.
c. cash, inventory, canceled checks, and tangible fixed assets.
d. cash, inventory, securities, notes receivable, and tangible fixed assets.

d. cash, inventory, securities, notes receivable, and tangible fixed assets.

The extent of procedures is affected mostly by which of the following factors?
a. the sheer volume of procedures to be applied by the auditor.
b. the time of year in which the client takes a physical inventory in the warehouse.
c. the auditor's judgment that misstatements are probable in certain balances.
d. the availability of the client's staff at or near the balance sheet date.

c. the auditor's judgment that misstatements are probable in certain balances.

Which of the following is not a basic procedure used in an audit?
a. Risk assessment procedures.
b. Substantive procedures.
c. Tests of controls.
d. Tests of direct evidence.

d. Tests of direct evidence.

Which of the following statements is not correct about materiality?
a. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important
b. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments
c. 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
d. An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually.

d. An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually.

Which of the following statements is correct concerning the concept of materiality?
a. Materiality is determined by reference to PICPA guidelines
b. Materiality depends only on the peso amounts of an item relative to other items in the financial statements
c. Materiality depends on the nature of an item rather than the peso amount
d. Materiality is a matter of professional judgment

d. Materiality is a matter of professional judgment

Which of the following statements is correct regarding the auditor's determination of materiality?
a. The planning level of materiality should normally be the larger of the amount considered for the balance sheet versus the income statement.
b. The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.
c. Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality.
d. The amount used for the planning should equal that used for evaluation.

b. The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.

Regardless of how the allocation of the preliminary judgment about materiality about materiality was done, when the audit is complete the auditor must be confident that the combined misstatements in all accounts are ________ the preliminary judgment.
a. less than c. more than
b. equal to d. less than or equal to

d. less than or equal to

Statement 1: For the provisions of those laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements such as tax and pension laws and regulations, the auditor’s responsibility is to obtain sufficient appropriate audit evidence about compliance with the provisions of those laws and regulations.

Statement 2: For other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the financial statements, but compliance with which may be fundamental to the operating aspects of the business, to an entity’s ability to continue its business, or to avoid material penalties, the auditor’s responsibility is limited to undertaking specified audit procedures (i.e., inquiries of management and TCWG and inspection of correspondence with relevant licensing and regulatory authorities) to help identify noncompliance with those laws and regulations that may have a material effect on the financial statements.
a. True, true c. False, true
b. True, false d. False, false

a. True, true

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.

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

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if
a. The payments violated the client's policies regarding the prevention of illegal acts.
b. The client receives financial assistance from a federal government agency.
c. Documentation that is necessary to prove that the bribes were paid does not exist.
d. Management fails to take the appropriate remedial action and reliance on management’s representation becomes doubtful.

d. Management fails to take the appropriate remedial action and reliance on management’s representation becomes doubtful.

Which of the following is not an example of a type of defalcation?
a. A warehouse employee takes home two units of electronic entertainment inventory each week without authorization.
b. The president of the company utilizes the organization's cash to add a floor to her 15,000 square foot house.
c. The chief financial officer of the company falsely adds P20 million to the accounts receivable and revenue accounts.
d. The treasurer of the company makes an unauthorized wire transfer from the organization's bank to a personal account in Grand Cayman.

c. The chief financial officer of the company falsely adds P20 million to the accounts receivable and revenue accounts.

If an auditor believes a client may have committed illegal acts, which of the following actions should the auditor take?
a. Consult with the client’s counsel and the auditor’s counsel to determine how the suspected illegal acts will be communicated to stockholders.
b. Extend auditing procedures to determine whether the suspected illegal acts have a material effect on the financial statements.
c. Make inquiries of the client’s management and obtain an understanding of the circumstances underlying the acts and of other evidence to determine the effects of the acts on the financial statements.
d. Notify each member of the audit committee of the board of directors about the nature of the acts and request that they advise an approach to be taken by the auditor.

c. Make inquiries of the client’s management and obtain an understanding of the circumstances underlying the acts and of other evidence to determine the effects of the acts on the financial statements.

Which of the following is typically not a significant risk factor that an auditor will consider in the client acceptance of Stitch Magee Co.?
a. Brad Stitch, the president and 50% owner of Stitch Magee was investigated for securities violations four years earlier.
b. Stitch Magee Co. is a public company in the high technology industry.
c. Stitch Magee Co. is a manufacturing company that procures much of its raw materials from the Detroit, Michigan area.
d. Stitch Magee Co. sells 25% of its inventory to Nani, Inc. which is owned primarily by Nani Magee, the father of Stitch Magee's treasurer, vice president of finance and 50% owner.

c. Stitch Magee Co. is a manufacturing company that procures much of its raw materials from the Detroit, Michigan area.

Which of the following matters is generally included in auditor's engagement letter?
a. Management's responsibility for the entity's compliance with laws and regulations.
b. The factors to be considered in setting preliminary judgments about materiality.
c. Management's liability for illegal acts committed by its employees.
d. The auditor's responsibility to search for significant internal control deficiencies.

a. Management's responsibility for the entity's compliance with laws and regulations.

The auditor should not agree for a change of engagement when there is no reasonable justification for doing so.

If the auditor is unable to agree to a change of the engagement and is not permitted to continue the original engagement, this will have an effect on the auditor’s report.
a. True, False c. True, True
b. False, False d. False, True

a. True, False

Which of the following statements is incorrect about audit planning documentation?
a. Although the precise form and content of the overall audit plan (overall audit strategy) may vary, it should sufficiently be detailed to guide the development of an audit program.
b. The audit plan and related audit program are not connected and should no longer be changed once the audit has started.
c. The audit program should set out the nature, timing and extent of planned audit procedures required to implement the overall audit plan.
d. In preparing audit program, the auditor should consider the specific assessments of inherent and control risks and the required level of assurance to be provided by substantive tests.

b. The audit plan and related audit program are not connected and should no longer be changed once the audit has started.

Which of the following tasks is most likely to be performed by a firm partner on an audit team engaged in the examination of the consolidated financial statements of a large corporate client?
a. Estimating the required allowance for bad debt expense
b. Reviewing the work of junior staff accountants
c. Preparing the client’s consolidated income tax return
d. Advising the client on the choice of accounting policies to be used

d. Advising the client on the choice of accounting policies to be used

Which of the following is not one of the benefits why the auditor should properly plan engagements?
a. Assist in the proper selection of engagement team members and the assignment of work to them.
b. Facilitate the direction and supervision of engagement team members and the review of their work.
c. Assist in coordination of work done by auditors of components and experts.
d. Ensure gathering of sufficient appropriate audit evidence.

d. Ensure gathering of sufficient appropriate audit evidence.

Which of the following statements is true with respect to planning meetings held at the beginning of an audit engagement and debriefing meetings held at its conclusion?
a. Planning meetings are required by generally accepted auditing standards; debriefing meetings are not so required.
b. Debriefing meetings are required by generally accepted auditing standards; planning meetings are not so required.
c. Both planning meetings and debriefing meetings are required by generally accepted auditing standards.
d. Neither planning meetings nor debriefing meetings are required by generally accepted auditing standards.

a. Planning meetings are required by generally accepted auditing standards; debriefing meetings are not so required.

Which of the following statements is not correct?
a. Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively.
b. For certain immaterial accounts, analytical procedures may be the only evidence needed.
c. In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable.
d. Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures.

d. Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures.

Which of the following is not an example of analytical evidence?
a. Compared inventory turnover by major class with the prior year on a monthly and quarterly basis.
b. Compared gross profit percentages by major product classes with the prior year.
c. Examined monthly performance reports and investigated significant variations from budgeted amounts.
d. Examined invoices for plant asset additions to determine whether the client had erroneously recorded ordinary repairs as plant assets.

d. Examined invoices for plant asset additions to determine whether the client had erroneously recorded ordinary repairs as plant assets.

Inquiries directed towards those charged with governance may most likely
a. Relate to their activities concerning the design and effectiveness of the entity’s internal control and whether management has satisfactorily responded to any findings from those activities
b. Help the auditor in understanding the environment in which the financial statements are prepared
c. Relate to changes in the entity’s marketing strategies, sales trends or contractual arrangements with its customers
d. Help the auditor in evaluating the appropriateness of the selection and application of certain accounting policies

b. Help the auditor in understanding the environment in which the financial statements are prepared

Which of the following statements concerning the relationship between internal control objectives and financial statement assertions is not correct?
a. The control objective of “validity” is related to the existence assertion.
b. The control objective of “classification” is related to the completeness assertion.
c. The control objective of “accuracy” is related to the valuation assertion.
d. The control objective of “proper period” is related to the existence assertion.

b. The control objective of “classification” is related to the completeness assertion.

Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase?
a. Obtaining client’s agreement on the engagement letter.
b. Obtaining knowledge about the client’s business and industry.
c. Touring the client’s plant and offices.
d. Identifying related parties.

a. Obtaining client’s agreement on the engagement letter

Which of the following statements is not true?
a. Inherent risk is inversely related to detection risk.
b. Inherent risk is inversely related to evidence.
c. Inherent risk is the susceptibility of the financial statements to material error, assuming no internal controls.
d. Inherent risk is the auditor’s assessment of the likelihood that errors exceeding a tolerable amount exist in a segment before considering the effectiveness of internal controls.

b. Inherent risk is inversely related to evidence.

The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors during the preliminary planning stage when they are trying to obtain a general understanding of audit problems that might be encountered?
a. Client manuals of accounts and charts of accounts.
b. Industry Audit Guides.
c. Prior year working papers of the predecessor auditors.
d. Latest annual and interim financial statements issued by the client.

c. Prior year working papers of the predecessor auditors.

Which of the following statements is not correct about materiality?
a. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important
b. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments
c. 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
d. An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually.

d. An auditor considers materiality for the aggregate level of misstatements that could be material to any one of the financial statements individually.