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AUDITING THEORY
ARRIANE P. NISPEROS, CPA
NOTRE DAME OF DADIANGAS UNIVERSITY
JULY 12, 2013
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Which of the following models expresses the general relationship of
risks associated with the auditor's evaluation of internal control (CR),
study of the business and application of analytical procedures (IR), and
overall audit risk (AR), that would lead the auditor to conclude that
additional substantive tests of details of an account balance are not
necessary?
IR CR AR
a. 20% 40% 10%
b. 20% 60% 5%
c. 10% 70% 4.5%d. 30% 40% 5.5%
Answer: A
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Answer: B
An independent auditor asked a client's internal auditor to assist in
preparing a standard financial institution confirmation request for a
payroll account that had been closed during the year under audit.
After the internal auditor prepared the form, the controller signed itand mailed it to the bank. What was the major flaw in this
procedure?
a. The internal auditor did not sign the form.
b. The form was mailed by the controller.c. The form was prepared by the internal auditor.
d. The account was closed, so the balance was zero.
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What type of Evidence(s) is being tested.
Inquired of corporate treasurer as toreason(s) for acquiring marketable securities
Answer: Hearsay Evidence
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Answer: B
In testing plant and equipment balances, an auditor may
inspect new additions listed on the analysis of plant and
equipment. This procedure is designed to obtain evidence
concerning management's assertions of:
Existence Presentation and occurrence disclosure
a. Yes Yes
b. Yes No
c. No Yesd. No No
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What type of assertion(s) is being tested.
Obtained letter from clients outside legalcounsel regarding pending litigation
Answer: Presentation and Disclosure
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Answer: A
An auditor suspects that a clients cashier is misappropriating cash
receipts for personal use by lapping customer checks received in the mail.
In attempting to uncover this embezzlement scheme, the auditor most
likely would compare the
a. Dates checks are deposited per bank statements with dates
remittance credits are recorded.
b. Daily cash summaries with the sums of the cash receipts journal
entries.
c. Individual bank deposit slips with the details of the monthly bankstatements.
d. Dates uncollectible accounts are authorized to be written off with the
dates the write-offs are actually recorded.
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What type of assertion(s) is being tested.
Confirmed customer accounts receivable
Answer: Existence or Occurrence/
Presentation and Disclosure
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Answer: B
In assessing audit risk, the CPA needs to do all of the following
except
a. Gather audit evidence in support of recorded transactions.
b. Obtain an understanding of the client's system of internalcontrol.
c. Understand the economic substance of significant
transactions completed by the client.
d. Understand the entity and the industry in which it operates.
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What type of Evidence(s) is being tested.
Obtained replies directly from customersconcerning the correctness of clients
recorded year-end accounts receivable
balances
Answer: Confirmatory Evidence
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Answer: c
Which of the following tasks should be performed prior
to the final audit?
a. Determining the fairness of property, plant, and
equipment.
b. Confirming accounts receivable.
c. Testing internal control.
d. Collecting and evaluating evidence supporting thefairness of inventory values.
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What type of assertion(s) is being tested.
Vouched property additions to underlyingdocumentation consisting of vendors
invoices and work orders
Answer: Existence or Occurrence/
Valuation and Allocation
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Which of the following may be considered to be a primary
objective of the auditor in the examination of accounts
receivable?
a. Establish validity and collectability of receivables
b. Determine approximate time of collectability of
receivables
c. Determine the relationship of receivables to salesd. Determine the reasonableness of the sales figure
Answer: A
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Answer: Document
In satisfying the requirements of PSA 82,
the auditor must assess the risk ofmaterial misstatement due to fraud,
develop an appropriate audit response,
and ___________ the response.
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Aside from completeness what other type of
assertion(s) is being tested.
Examined vendors invoices recorded after
year-end to determine whether any of these
invoices represent liabilities of the client asof year-end
Answer: Rights and obligation
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Answer: D
An aged trial balance of accounts receivable is
usually used by the auditor to
a. Verify the validity of recorded receivables
b. Evaluate the results of compliance tests
c. Ensure that all accounts are prompted creditedd. Evaluate the provision for bad debt expense
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What type of assertion(s) is being tested.
Selected a sample of bills of ladingrepresenting shipments to customers and
traced to sales invoices to determine that all
shipments have been billed to customers
Answer: Completeness
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The reporting standards relate to
the function.
Answer: Attest
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Answer: C
To determine whether internal control relative to the revenue
cycle of a wholesaling entity is
operating effectively in minimizing the failure to prepare sales
invoices, an auditor most likelywould select a sample of transactions from the population
represented by the:
a. Sales order file.
b. Customer order file.c. Shipping document file.
d. Sales invoice file.
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Answer: Decrease
A preliminary expectation of few errors,
followed by subsequent discovery ofnumerous errors should lead to a
in the aggregate materiality threshold.
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Client outsourcing of certain accounting
functions, such as internal auditing, to the
national accounting firms may causefinancial statement users to question
___________ _______________.
Answer: Auditors Independence
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Which of the following statements is not true regarding the
competence of audit evidence?
a. Relevance is enhanced by an effective information
system.b. To be competent, evidence must be both valid and
relevant.
c. Validity is related to the quality of the clients information
system.d. Relevance must always relate to audit objectives.
Answer: A
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The field work standards are
concerned with the__________process.
Answer: Audit
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The scope and nature of an auditor's
contractual obligation to a client is ordinarily set
forth in the
a. Scope paragraph of the auditors report.
b. Opinion paragraph of the auditors report.
c. Management letter.
d. Engagement letter.
Answer: D
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The generally accepted auditing standards,
as promulgated by the American Institute of
Certified Public Accountants, define the______________ of independent auditing.
Answer: Quality
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Competence as a certified public accountant includes all of
the following except
a. Having the technical qualifications to perform an
engagement.b. Possessing the ability to supervise and evaluate the
quality of staff work.
c. Warranting the infallibility of the work performed. d.
Consulting others if additional technical information isneeded.
Answer: C
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Which of the following is mandatory if the auditor is to
comply with generally accepted auditing standards?
a. Possession by the auditor of adequate technical training.
b. Use of analytical review on audit engagements.c. Use of statistical sampling whenever feasible on an
audit engagement.
d. Confirmation by the auditor of material accounts
receivable balances.
Answer: A
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As a guidance for measuring the quality of the performance
of an auditor, the auditor should refer to
a. Statements of the Financial Accounting Standards
Board.b. Generally Accepted Auditing Standards.
c. Interpretations of the Statements on Auditing
Standards.
d. Statements on Quality Control Standards.
Answer: B
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The general standards relate to
the and of theauditor.
Answer: Character, Competence
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The standard ofdue audit care requires the auditor to
a. Apply judgment in a conscientious manner, carefully
weighing the relevant factors before reaching a decision.
b. Ensure that the financial statements are free fromerror.
c. Make perfect judgment decisions in all cases.
d. Possess skills clearly above the average for the
profession.
Answer: A
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A CPA who has never audited a commercial bank
a. May not accept such an engagement.
b. May accept the engagement only if the accounting
firm specializes in the audit of commercial banks.c. May accept the engagement after attaining a suitable
level of understanding of the transactions and
accounting practices unique to commercial banking.
d. May accept the engagement because training as a
CPA transcends unique industry characteristics.
Answer: C
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The first general standard requires that a person or
persons have adequate technical training and proficiency as
an auditor. This standard is met by
a. An understanding of the field of business andfinance.
b. Education and experience in the field of auditing.
c. Continuing professional education.
d. A thorough knowledge of the Statements on Auditing
Standards.
Answer: B
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In determining estimates of fees, an auditor may
take into account each of the following, except the
a. Value of the service to the client.
b. Degree of responsibility assumed by
undertaking the engagement.
c. Skills required to perform the service.
d. Attainment of specific findings.
Answer: D
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What type of Evidence(s) is being tested.
Calculated year-end interest accrual andcompared with general ledger balance
Answer: Mathematical Evidence
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The audit trail consists of that stream of evidence
that enables the auditor to trace a transaction or
event forward from its inception to the appropriate
ledger account, or conversely, vouch a transaction
backward from the ledger account to the inception
of the transaction or event. For the audit trail to
exist, transactions must be .
Answer: Documented
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Evidence consisting of everything that can
be counted, examined, observed, or
inspected is referred to as_____________ evidence.
Answer: Physical Evidence
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Which of the following does not describe one of the
functions of audit work papers?
a. Facilitates third-party reviews.
b. Aids in the planning, performance, and review of
audits.
c. Provides the principal evidential support for the
auditor's report.d. Aids in the professional development of the
operating staff.
Answer: D
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What type of Evidence(s) is being tested.
Examined securities purportedly owned bythe client and held by local brokers
Answer: Physical Evidence
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Which of the following is generally included or shown in the auditor's
working papers?
a. The procedures used by the auditor to verify the personal financial
status of members of the client's management team.
b. Analyses that are designed to be a part of, or a substitute for,the client's accounting records.
c. Excerpts from authoritative pronouncements that support the
underlying generally accepted accounting principles used in
preparing the financial statements.
d. The manner in which exceptions and unusual matters disclosedby the auditor's procedures were resolved or treated.
Answer: D
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What type of Evidence(s) is being tested.
Obtained letter from clients outside legalcounsel regarding pending litigation
Answer: Confirmation Evidence
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During an audit of the accounts receivable function, you
found that the accounts receivable turnover rate had fallen
from 7.3 to 4.3 over the last three years. What is the
most likely cause of the decrease in the turnover rate?a. An increase in the discount offered for early payment.
b. A more liberal credit policy.
c. A change from net 30 to net 25.
d. Greater cash sales.
Answer: B
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An auditor who gathers increased quantities
of evidence for larger account balances is
observing the standard relating to ofaudit evidence.
Answer: Suficiency
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Sales commissions as a percentage of sales declined
significantly during the year under audit. Of the following
possible causes, the most likely is
a. Sales increased during the year.b. The sales force was reduced at the end of the year.
c. Sales commission rates were increased at the
beginning of the year.
d. Fictitious sales were recorded at year-end to inflate
earnings. Commissions were not recorded on these
sales.
Answer: D
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What type of assertion(s) is being tested.
Inquired of corporate treasurer as to reasonsfor buying and holding securities
Answer: Presentation and Disclosure
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The two factors that contribute to the
probability that unaudited financial
statements contain material errors or fraudare and .
Answer: IR and CR
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When a CPA is approached to perform an audit for the first time, the
CPA should make inquiries of the predecessor auditor. This is a
necessary procedure because the predecessor may be able to provide
the successor with information that will assist the successor in
determininga. Whether the predecessor's work should be utilized.
b. Whether the company follows the policy of rotating its auditors
c. Whether, in the predecessor's opinion, internal control of the
company has been satisfactory.
d. Whether the engagement should be accepted.
Answer: D
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In a recurring audit, the best source of
business and industry information may
be found in the.
Answer: Permanent File
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Warning signs that cause the auditor to question management integrity
must be taken seriously and pursued vigorously. Which of the following
may lead the auditor to suspect management dishonesty?
a. The president and chief executive officer of the client corporation has
held numerous meetings with the controller for the purpose ofdiscussing accounting practices that will maximize reported profits.
b. The client has been named as a defendant in a product liability suit.
c. The client has experienced a decrease in revenue from increased
import competition.
d. A new federal regulation making customer licenses more difficult toobtain may adversely affect the client's operations.
Answer: A
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The financial statement impact of a
single error is referred to as ________
__ materiality, whereas the totaleffect of a series of errors is termed
materiality.
Answer: Individual Item, Aggregate
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Which of the following statements best describes the auditor's
responsibility regarding the detection of fraud?
a. The auditor is responsible for the failure to detect fraud only when
such failure clearly results from nonperformance of audit procedures
specifically described in the engagement letter.b. The auditor should design audit procedures that will provide
reasonable assurance that the financial statements are free from
material misstatement due to errors and/or fraud.
c. The auditor must extend auditing procedures to actively search for
evidence of fraud where the examination indicates that fraud mayexist.
d. The auditor is responsible for the failure to detect fraud only when
an unqualified opinion is issued.
Answer: B
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Inherent risk is defined as the susceptibility of an account balance or
class of transactions to error that could be material assuming that there
were no related internal controls. Of the following conditions, which one
does not increase inherent risk?
a. The client has entered into numerous related party transactionsduring the year under audit.
b. Internal control over shipping, billing, and recording of sales revenue
is weak.
c. The client has lost a major customer accounting for approximately
30% of annual revenue.d. The board of directors approved a substantial bonus for the president
and chief executive officer, and also approved an attractive stock option
plan for themselves.
Answer: B
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Which of the following statements concerning materiality thresholds is
incorrect?
a. Aggregate materiality thresholds are a function of the auditor's
preliminary judgments concerning audit risk.
b. In general, the more misstatements the auditor expects, thehigher should be the aggregate materiality threshold.
c. The smallest aggregate level of errors or fraud that could be
considered material to any one of the financial statements is
referred to as a "materiality threshold."
d. Materiality thresholds may change between the planning andreview stages of the audit. These changes may be due to
quantitative and/or qualitative factors.