AUDITING THEORY

1. The auditor’s responsibility in an audit engagement is limited to:

A. Expression of an opinion on the financial statements.
B. Expression of an opinion on the financial statements and adequacy of summary of accounting policies and
other notes.
C. Opinion issued and fairness of presentation of financial statements
D. Expression of opinion and inclusion of supplementary information, if necessary.
2. An expectation of the public is that the auditor will recognize that the primary users of the audit services are
A. The employees C. Investors and creditors
B. The Securities and Exchange Commission D. Board of Directors
3. The criteria are the standards or benchmarks used to evaluate the subject matter of an assurance engagement.
Among the following criteria, which one is the least objective?
A. Philippine financial reporting standards governing the preparation of financial statements.
B. Specific agreement in a contract.
C. Control policies and procedures.
D. Effectiveness and efficiency in carrying out operating procedures.
4. The following are the factors that a professional accountant should use as the basis of his acceptance of an
assurance engagement except
A. The auditor believes that a conclusion based on a suitable criteria can be expressed.
B. The subject matter is identifiable.
C. The conclusion can be meaningful to the intended user of the report of the practitioner.
D. The likelihood that the conclusion to be expressed always supports the assertion of the responsible party.
5. In pursuing its quality control objectives with respect to independence, a CPA firm may use policies and
procedures such as
A. Emphasizing independence in mental attitude in firm training programs and supervision and review of
work.
B. Prohibiting employees of owning shares of stock of publicly traded companies
C. Suggesting that employees conduct their banking transactions with banks that do not maintain accounts with
client firms.
D. Assigning employees who lack independence to research positions that do not require participation in field
audit work.
6. Which of the following is an element of a CPA firm’s quality control system that should be considered in
establishing its quality control policies and procedures?
A. Complying with laws and regulations
B. Using statistical sampling techniques
C. Assigning personnel to engagements
D. Considering audit risk and materiality
7. Which of the following is an invalid reason why an auditor cannot issue an absolute assurance?
A. Most audit evidence are conclusive rather than being persuasive.
B. The inherent limitations of any accounting and internal control system.
C. Audit is based on testing.
D. Audit procedures that are effective in detecting ordinary misstatements are ineffective in detecting intentional
misstatements.
8. In which of the following would the judgment of the auditor be most critical?
A. Verification of the authenticity of the transfer certificate of title
B. Classifying whether a liability is current or noncurrent
C. Verification of the cut-off transactions
D. Assessing the reasonableness of the estimates made by management.
9. An initial audit requires more audit time to complete than a recurring audit. One of the reasons for this is that.
A. The new auditors are usually assigned to an initial audit.
B. The predecessor auditors need to be consulted.
C. The client’s business, industry, and internal control are unfamiliar to the auditor and he needs to carefully
study them.
D. A larger proportion of customer accounts receivable need to be confirmed on an initial audit.
10. The steps that an audit firm should take prior to accepting an audit engagement include all of the following except
A. Obtaining a thorough understanding of the client’s business.
B. Evaluating independence.
C. Assessing the firm’s competence to perform the audit.
D. Determining the firm’s ability to use due professional care.

11. Which of the following attributes most clearly differentiates a CPA who audits management’s financial statements
as contrasted to managements?
A. Integrity C. Independence
B. Competence D. Keeping informed on professional issues.
12. Which of the following best describes the reason why independent auditors report on financial statements?
A. A management fraud may exist and it’s more likely to be detected by independent auditors.
 B. Different interests may exist between the company preparing the statements and the person using the
statements.
C. A misstatement of account balances may exist and is generally corrected as a result of the independent
auditor’s work.
D. A poorly designed internal control structure may be in existence.
13. Who is the client in an audit of a public company’s financial statements?
A. Client management. C.The public in general.
B. Client’s employees. D. The shareholders of the company.
14. The second standard of fieldwork requires the auditor to do all of the following except
A. Understand the business and its environment
B. Understand the risk to financial reporting
C. Perform analytical procedures to identify potential misstatements in the financial statements
D. Obtain an understanding of internal control and potential weaknesses in controls.
15. Which of the following is incorrect regarding professional competence?
A. Professional accountants may portray themselves as having the required expertise and experience they do
not possess.
B. Professional competence may be divided into two separate phases.
C. The attainment of professional competence requires initially a high standard of general education
D. The maintenance of professional competence requires a continuing awareness of development in the
accountancy profession.
16. An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting
errors and fraud that might have a material effect on the financial statements. Which of the following, if material,
would be a fraud as defined in PSA 240?
A. Misappropriation of an asset or group of assets.
B. Clerical mistakes in the accounting data underlying the financial statements.
C. Mistakes in the application of accounting principles.
D. Misinterpretation of facts that existed when the financial statements were prepared.
17. Which of the following statements reflects an auditor's responsibility for detecting errors and fraud?
A. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud
involving employee collusion or management override.
B. An auditor should plan the audit to detect errors and fraud that are caused by departures from GAAP.
C. An auditor is not responsible for detecting errors and fraud unless the application of GAAS would result in
such detection.
D. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are
material to the financial statements.
18. Which of the following factors would most likely heighten the auditor's concern about the risk of fraudulent
financial reporting?
A. Inability to generate cash flows from operations while reporting substantial earnings growth
B. Management's lack of interest in increasing the entity's stock trend
C. Large amounts of liquid assets that are easily convertible into cash
D. In ability to borrow necessary capital without granting debt covenants
19. Which of the following best represents an auditor responsibility for fraud?
A. Auditors are only required to find securities fraud.
B. Auditors defer to management to discover the extent of fraud
C. Auditors are required to discover misstatement resulting from material fraud.
D. Auditors are required to seek out and find all fraud, regardless of its magnitude.
20. With respect to errors and irregularities (fraud), the auditor should plan to search for
A. Errors that would have a material effect and for irregularities that would have either a material or immaterial
effect on the financial statements.
B. Irregularities that would have a material effect and for errors that would have either a material or immaterial
effect on the financial statements.
C. Errors or irregularities that would have a material effect on the financial statements.
D. Errors or irregularities that would have either material or immaterial effect on the financial statements.
21. Professional scepticism dictates that when management makes a statement to the auditors, the auditors should
A. Disregard the statement because such statement will be overruled by external evidence.
B. Corroborate the evidence with other supporting documentation whenever possible.
C. Ask the client management to put it in a form of board resolution.
D. Accept the statement at its face value because the management has no reason to put itself in shameful
misrepresentation.

22. An auditor obtains knowledge about a prospective client’s business and industry to
A. Identify areas of specific risk to the engagement
B. Determine whether the client’s management is sufficiently trustworthy to justify accepting the engagement
C. Make preliminary judgment about material misstatements in the client’s financial statements
D. Document weaknesses in the client’s internal control
23. Which of the following would an auditor least likely discuss with the former auditors of a potential client prior to
acceptance?
A. Integrity of management
B. Fees charged to services
C. Predecessor’s disagreements with management regarding the use of accounting policies
D. Reasons for changing audit firms.
24. What is the most likely course of action to be taken by an auditor in assessing management integrity?
A. Tour the plant
B. Review the minutes of the board of directors
C. Research the background and histories of officers
D. Review the bank reconciliations
25. Prior to acceptance of an audit engagement with a client who has terminated the services of the predecessor
auditor, the CPA should
A. Contact the predecessor auditor without advising the prospective client and request a complete report of the
circumstances leading to the termination of the engagement with the understanding that all information
disclosed will be kept confidential
B. Accept the engagement without contacting the predecessor auditor since the CPA can include audit
procedures to verify the reason given by the client for the termination of the engagement
C. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate
the confidential relationship between an auditor and the client.
D. Advise the client of the intention to contact the predecessor auditor and request a permission for the
contact.
26. A successor auditor would most likely make specific inquiries of the predecessor auditor regarding
A. Specialized accounting principles being used by the client’s industry
B. The competency of the client’s internal audit staff
C. The uncertainty inherent in applying sampling procedures
D. Disagreements with management as to auditing procedures
27. What is the responsibility of a successor auditor with respect to communicating with the predecessor auditor in
connection with a prospective new audit client?
A. The successor has no responsibility to contact the predecessor auditor.
B. The successor auditor should obtain permission from the prospective client to contact the predecessor
auditor.
C. The successor auditor should contact the predecessor regardless of whether the prospective client authorizes
contact.
D. The successor auditor needs to contact the predecessor if the successor is aware of all available relevant facts.
28. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor
auditor regarding the predecessor's:
A. Opinion of any subsequent events occurring since the predecessor's 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
29. A document in an auditor's working papers includes the following statement: "Our audit is subject to the inherent
risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will
inform you of fraud that comes to our attention, unless it is inconsequential." This passage is most likely from
a(an)?
A. Comfort letter C. Letter of audit inquiry
B. Engagement letter D. Representation Letter
30. An auditor's engagement letter should include:
A. Management's acknowledgment of its responsibility for maintaining effective internal control
B. The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent
financial reporting
C. A reminder that management is responsible for illegal acts committed by employees
D. A request for permission to contact the client's lawyer for assistance in identifying litigation, claims, and
assessments
31. Which of the following statements best represents the reason why auditors prepare engagement letters to be signed
by the clients?
A. They provide documentation of the management’s responsibility for the financial statements.
B. They document the audit fees and deadlines that have been agreed upon with the clients.
C. They communicate and clarify the expectations and responsibilities of both the client and the auditor.
D. They help to limit auditor liability in the event of misunderstanding.

32. Which of the following does not require the auditor to send a new engagement letter?
A. An indication that the client misunderstands the objective and scope of audit.
B. A change of engagement from higher to lower level of assurance
C. A recent change in the lead engagement partner
D. Legal requirements and other government agencies’ pronouncements
33. When a CPA is the auditor of a parent entity and also the auditor of its subsidiary, branch or division, which of
the following factors need not be considered in deciding whether to send separate engagement letter to the
component?
A. Who appoints the auditor of the component
B. Legal requirements
C. Number of reports to be prepared during the peak audit season
D. Whether a separate audit report is to be issued to the component
34. The auditor should perform the following risk assessment procedures to obtain an understanding of the entity and
its environment, including its internal control, except
A. Inquiries of managements and others within the entity
B. Inquiries of the entity’s external legal counsel or of valuation experts that the entity has used.
C. Analytical procedures
D. Observation and inspection
35. In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to
the
A. Selected audit techniques.
B. Cost-benefit of gathering audit evidence.
C. Timing of audit procedures.
D. Financial statement assertions.
36. An audit program should be designed for each individual audit and should incorporate steps and procedures to
A. Detect and eliminate fraud of any type.
B. Gather sufficient amount of management information available.
C. Provide assurances that the objectives of the audit are satisfied.
D. Insure that only material items are audited.
37. Adequate planning helps ensure that (select the exception)
A. Appropriate attention is devoted to important areas of the audit
B. Potential problems are identified
C. An unqualified opinion is expressed
D. Work is completely expeditiously
38. The extent of the planning will vary according to the following
A. Size of the audit client
B. Auditor’s experienced with the entity and knowledge of business
C. The nature and complexity of the audit engagement
D. All of these affect the extent of planning
39. Which of the following is an aspect of scheduling and controlling the audit engagement?
A. Including in the engagement letter an estimate of the minimum and maximum audit fee.
B. Writing a conclusion in individual working papers indication how the results of the audit will affect the
auditor’s report.
C. Performing audit work only after the entity’s books has been closed for the period under audit.
D. Including in the audit program a column for budgeted and actual time.
40. In connection with the planning phase of an audit engagement, which of the following statements is always
correct?
A. Final staffing decisions must be made prior to completion of the planning stage.
B. Observation of inventory count should be performed at year-end.
C. A portion of the audit of a continuing audit client can be performed at interim dates.
D. An engagement should not be accepted after the client’s financial year-end.
41. Which of the following statements concerning materiality is not correct?
A. When establishing the overall audit strategy, the auditor shall determine materiality for the financial
statements as a whole.
B. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account
balances or disclosures for which misstatements of lesser amounts than materiality for the financial statements
as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of
the financial statements, the auditor shall also determine the materiality level or levels to those particular
classes of transactions, account balances or disclosures.
C. Determining materiality involves the exercise of professional judgment.
D. The materiality level for the financial statements as a whole determined in the planning stage of the audit
should not be affected by changes in the circumstances of the engagement.
42. The concept of materiality would be least important to an auditor when considering the
A. Adequacy of disclosure of a client illegal act
B. Discovery of weaknesses in a client’s internal control structure
C. Effects of direct financial interest in the client on the CPA’s independence
D. Decision whether to use positive or negative confirmations of account receivables

43. When setting a preliminary judgment about the materiality,

A. More evidence is required for a low peso amount than for a high peso amount
B. Less evidence is required for a low peso amount than for a high peso amount
C. The same amount of evidence is required for either low or high peso amounts.
D. There is no relationship between this and the peso amount of evidence needed.
44. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about
materiality?
A. The results of the initial assessment of control risk
B. The anticipated sample size for planned substantive tests
C. The entity's financial statements of the prior year
D. The assertions that are embodied in the financial statements
45. PAS 315 requires the auditor to perform risk assessment procedures at
A. The financial statement level only.
B. The assertion level only.
C. The financial statement level and the assertion level for classes of transactions, account balances and
disclosures.
D. Either the financial statement or assertion level.
46. Risk assessment procedures include the following except
A. Inquiries of management
B. Confirmation of accounts receivable
C. Observation and inspection
D. Analytical procedures
47. Which of the following represents a procedure the auditor may use because plausible relationships among
financial statements balances are expected to exist?
A. Attributes testing C. Inherent tests of controls
B. Enterprise risk assessment D. Analytical review
48. Which of the following is not a reason for using analytical review procedures?
A. To assess the entity’s ability to continue as a going concern
B. To identify areas with no unusual fluctuations so that fewer detailed test may be performed on those accounts.
C. To highlight changes from prior period to the current year so that trends can be identified which will influence
audit planning.
D. To determine the magnitude of errors in the financial statements.
49. Analytical procedures are used
A. To set materiality limits
B. To assess the reasonableness of financial statement amounts
C. To provide direct evidence about the numbers in the financial statements
D. To test internal controls
50. A basic premise underlying analytical procedures is that
A. Plausible relationships among data may reasonably be expected to exist and continue in the absence of
known conditions to the contrary.
B. These procedures cannot replace tests of details or transactions or balances.
C. Statistical tests of financial information may lead to the detection of material misstatements in the financial
statements.
D. The study of the financial ratios is an acceptable alternative to the investigation of unusual fluctuations.
51. Which of the following statements concerning analytical procedures is true?
A. Analytical procedures are more efficient, but not more effective, than tests of details of transactions.
B. Analytical procedures used as risk assessment procedures used data aggregated at a high level.
C. Analytical procedures can replace tests of controls in gathering audit evidence to support assessed level of
control risks.
D. Analytical procedures usually involve comparisons of ratios developed from recorded amounts with ratios
developed by management.
52. The purpose of analytical procedures in the audit planning stage is to
A. Aid in planning the observation of physical inventory
B. Identify unusual circumstances that the auditor may need to investigate further
C. Flag individual transactions for further review
D. Determine whether sales transactions were approved.
53. When must an auditor perform analytical procedures in a financial statement audit?
A. Testing controls over financing cycle
B. Performing tests to substantiate balances
C. Planning the nature, timing and extent of procedures
D. Performing tests to substantiate transactions.

54. In planning an audit, the auditor considers audit risk. Audit risk is the
A. Susceptibility of an assertion to the material misstatement assuming there are no related controls.
B. Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the
client’s internal control.
 C. Risk that the auditor’s procedures for verifying account balances will not detect a material misstatement ha
in fact exists.
D. Risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements
that are materially misstated.
55. Inherent risk is
A. The susceptibility of an assertion to a material misstatement, assuming that there are no related controls.
B. The risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial
statements that are materially misstated.
C. The risk that a material misstatement that could occur in an assertion will not be prevented or detected on a
timely basis by the entity’s internal control.
D. The risk that the auditor will not detect a material misstatements that exists in an assertion.
56. The acceptable level of detection risk is inversely related to the
A. Assurance provided by substantive tests
B. Risk of misapplying auditing procedures
C. Preliminary judgment about materiality levels
D. Risk of failing to discover material misstatements
57. As the acceptable level of detection risk increases, the auditor may:
A. Increase the assessed level of control risk
B. Change the assurance provided by tests of controls by using a larger sample size than planned
C. Change the timing of substantive tests from year-end to an interim date.
D. Change the nature of substantive tests from a less effective to a more effective procedure
58. The primary objective of procedure performed to obtain an understanding of the entity and its environment,
including its internal control, is to provide an auditor with
A. Knowledge necessary to assess the risk of material misstatement and design further audit procedures
B. An evaluation of the consistency of application of management's policies
C. A basis for modifying tests of controls
D. Audit evidence to use in assessing inherent risk
59. The risk that material misstatements have occurred in transactions entering the accounting system is
A. Audit risk C. Control risk
B. Inherent risk D. Detection risk
60. Adequate planning and design of an audit is necessary for an auditor to restrict which component of audit risk?
A. Control risk C. Sufficiency risk
B. Detection risk D. Inherent risk
61. The risk that financial statements are likely to be misstatement materially without regard to the effectiveness of
internal control is which type of risk?
A. Inherent risk C. Client risk
B. Audit risk D. Control risk
62. Which of the following statements is true with regard to the relationship among audit risk, audit evidence and
materiality?
A. The lower the inherent risk and control risk, the lower the aggregate materiality threshold
B. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining
external evidence and should reduce reliance on internal evidence.
C. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.
D. Aggregate materiality thresholds should not change under conditions of changing risks levels
63. Which of the following conditions supports an increase in detection risk?
A. Internal control over cash receipts is excellent.
B. Application of analytical procedures reveals a significant increase in sales revenue in December, the last
month of the fiscal year.
C. Internal control over shipping, billing, and recording of sales revenue is weak.
D. Study of the business reveals that the client recently acquired a new company in an unrelated industry.
64. Control risk is a measure of the auditor’s expectation that the internal control structure
A. Will prevent material misstatements from occurring
B. Will detect and correct material misstatements
C. Will either prevent material misstatements or detect and correct them
D. Will neither prevent material misstatements nor detect and correct them
65. A reason to establish internal control is to
A. Have a basis of planning the audit
B. Provide reasonable assurance that the objectives of the organizations are achieved.
C. Encourage compliance with organization objectives.
D. Ensure accuracy, reliability, and timeliness of information.

66. Which of the following is not an element of an entity’s internal control?

A. Control risk C. Control activities
B. The information system D. The control environment
67. The understanding of internal control that relates to a financial statement assertion should be used to do all the
following except
A. Determine inherent risk for that assertion
B. Identify types of potential misstatements for that assertion
C. Consider factors that affect the risk of material misstatement for that assertion and assess control risk
D. Design substantive test that correspond with the assessment of control risk
68. An auditor evaluates the existing internal control in order to
A. Determine the extent of substantive tests which must performed
B. Determine the extent of control tests which must be performed
C. Ascertain whether irregularities are probable
D. Ascertain whether any employees have incompatible functions
69. Which of the following is an appropriate form of dementing the auditor’s understanding of a client’s internal
control?
A. Narratives C. Internal control questionnaires
B. Flowcharts D. Any of the three
70. To obtain understanding of the relevant policies and procedures of internal control, the auditor performs all of the
following except
A. Make inquiries C. Inspect documents and records
B. Make observations D. Design substantive tests
71. Of the following statements about internal control system, which one is not valid?
A. No one person should be responsible for the custodial responsibility and recording responsibility of an asset.
B. Transaction must be properly authorized before such transactions are processed
C. Because the cost benefit relationship, a client may apply control procedures on a test basis
D. Control procedures reasonably ensure that collusion among employees cannot occur.
72. Which of the following statement with respect to the independent auditor’s evaluation of internal control is
correct?
A. The auditor should decrease control testing when weaknesses in cash receipts are mitigated by strong controls
in cash disbursement procedures
B. The auditor should increase control testing when weaknesses in billing procedures are mitigated by strong
controls in collection procedures
C. The auditor should generally not evaluate the overall effectiveness of internal control but should
separately evaluate each of the transaction cycles
D. The auditor should evaluate all internal control weaknesses before determining the control procedures that
should prevent or detect errors or irregularities
73. When obtaining an understanding of an entity’s internal control, the auditor should concentrate on the substance
of controls rather than on their form because
A. The controls may be operating effectively but may not be documented
B. Management may establish appropriate controls but not act on them
C. The controls may be so inappropriate that no reliance is contemplated by the auditor
D. Management may implement controls with costs in excess of benefits.
74. Which is the primary purpose of an effective internal control in an organization?
A. Achievement of certain organizational goals
B. Completion of a successful audit for the entity
C. A shareholder’s involvement in the company’s success.
D. Obtaining profitability and financial strength
75. An auditor considers internal control in order to
A. Determine whether assets are safeguarded
B. Suggest improvements in internal control
C. Plan the audit procedures
D. Express an opinion
76. An auditor would most likely be concerned with internal control policies and procedures that provide reasonable
assurance about:
A. The efficiency of management’s decision-making process.
B. Appropriate prices that the entity should charge for its products.
C. Methods of assigning production tasks to employees.
D. The entity’s ability to process and summarize financial data.
77. Corporate directors, management, external auditors, and internal auditors all play important roles in creating a
proper control environment. Top management is primarily responsible for
A. Establishing a proper environment and specifying overall internal control
B. Reviewing the reliability and integrity of financial information and the means used to collect and report such
information.
C. Ensuring that external and internal auditors adequately monitor the control environment
D. Implementing and monitoring controls that are designed by board of directors

78. Which of the following is not a part of the control environment?

A. Management philosophy and operating style
B. Organizational structure
C. Information and communication system
 D. Assignment of authority and responsibility
79. Which of the following statement about internal control is correct?
A. Effectively designed internal control reasonably ensures that collusion among employees cannot occur.
B. The establishment and maintenance of internal control are important responsibilities of the internal auditor.
C. Exceptionally strong internal control is enough for the auditor to eliminate substantive tests on a significant
account balance.
D. The cost benefit relationship is a primary criterion that should be considered in designing an internal
control.
80. Internal control can only provide reasonable assurance and not an absolute assurance of achieving entity’s control
objectives. One of the factors limiting the likelihood of achieving those objectives is that
A. The auditor’s primary responsibility is the detection of fraud
B. The board of directors is active and independent
C. The cost of internal control should not exceed its benefits
D. Management monitors internal control
81. Proper segregation of functional responsibilities in an effective system of internal control calls for separation of
the functions of
A. Authorization, execution, and payment C. Custody, execution, and reporting
B. Authorization, recording, and custody D. Authorization, payment, and recording
82. Which of the following duties would indicate a weakness in the internal control system?
A. The accounting function is under the controller
B. The custodianship of cash is the responsibility of the treasurer’s function.
C. The internal auditors reports to the board of directors
D. The custodianship of building and equipment is the responsibility of the controller’s function
83. A proper segregation of duties requires that an individual who is
A. Authorizing a transaction records it
B. Authorizing a transaction maintains custody of the asset that results from transaction
C. Maintaining a custody of an assets be entitled to have access to the accounting records for the assets
D. Recording a transaction not compares the accounting record of the asset with the asset itself.
84. A proper understanding of the client’s internal control is an integral part of the audit planning process. The results
of the understanding
A. Must be reported to the major stakeholders
B. Always require the auditor in testing the control policies and procedures
C. Are not reported to client management
D. May be used as the basis for withdrawing from an audit engagement.
85. The purpose of tests of controls is to provide reasonable assurance that the
A. Accounting treatment of transactions and balances is valid and proper
B. Control procedures are functioning as intended
C. Entity has complied with disclosure requirements of PFRS
D. Entity has complied with requirements of quality control
86. After documenting internal control in an audit engagement, the auditor may perform tests on
A. Those controls that the auditor plans to rely
B. Those controls in which deficiencies were identified
C. Those controls that have a material effect on the financial statement balances
D. A random sample of the controls that were reviewed
87. To obtain understanding of the relevant policies and procedures of internal control, the auditor performs
all of the following except
A. Make inquiries C. Inspect documents and records
B. Make observations D. Design substantive tests
88. The procedures to test effectiveness of control policies and procedures in support of a reduced assessed control
risk is called
A. Test of transactions C. Tests of controls
B. Analytical tests D. A walk-through
89. After the study and evaluation of a client’s internal control policies and procedures has been completed, an auditor
might decide to
A. Increase the extent of substantive testing in areas where the internal control policies and procedures are strong
B. Reduce the extent of control testing in areas where the internal control policies and procedures are strong
C. Reduce the extent of both substantive and control testing in areas where the internal control policies and
procedures are strong
D. Increase the extent of substantive testing in areas where the internal controls are weak

90. The primary purpose of performing tests of controls is to provide reasonable assurance that
A. The internal control is effective
B. The accounting system is documented accurately
C. Transactions are recorded at the amounts executed
D. All control activities leave visible evidence
91. A procedure that involves tracing a transaction from its origination through the company’s information system is
referred to as a(n);
A. Inquiry/analysis approach C. Remediation
B. Re-analysis approach D. Walkthrough
92. Which of the following types of evidence will be gathered in order to test internal controls?
A. Confirmation of accounts receivable with customers
B. Observation of client’s personnel receiving inventory shipments
C. Observation of inventory counts
D. Inquiry of management regarding significant litigation
93. Tests of controls least likely include:
A. Inquiries of appropriate client vendors
B. Reperformance of a control
C. Observation of the application of an accounting procedure
D. Inspection of documents
94. A procedure that would most likely be used by an auditor in performing test of control regarding segregation of
functions on which no audit trail is available
A. Inspections C. Reprocessing
B. Observation D. Reconciliation
95. Which of the following procedures most likely would be included as part of an auditor’s tests of control
procedures?
A. Inspection C. Confirmation
B. Reconciliation D. Analytical procedures
96. Which of the following tests would be a test of controls?
A. Tests of the specific items making up the balance in a financial statement account
B. Comparing inventory prices to vendor’s invoice
C. Tracing signatures on cancelled checks to board of directors’ authorizations
D. Tests of additions to property, plant, and equipment by physical inspections.
97. Which of the following statement is true?
A. Tests of controls are necessary if the auditor plans to use primarily substantive approach
B. Tests of controls are necessary if the auditor plans to assess the level of control risk at maximum
C. The auditor can simultaneously obtain an understanding of internal control and perform tests of controls.
D. After performing tests of controls, the auditor will always assess control risk at maximum
98. Which of the following is not an advantage of a computerized accounting system?
A. Computers process transactions uniformly
B. Computers help alleviate human error
C. Computers can process many transactions quickly
D. Computers leave a thorough audit trail which can be easily followed
99. A common difficulty in auditing a computerized accounting system is
A. Data can be erased from the computer with no visible evidence
B. Because of the lack of an audit trail, computers have weaker controls and more substantive testing is required
C. Because of the uniform nature of transaction processing, computer systems have strong controls and less
substantive testing is required
D. The large dissemination of entry points into the computer system leads to weak overall reliance on
information generated by a computer.
100. The possibility of losing a large amount of information stored in computer files most likely would be reduced by
the use of
A. Back-up files C. Completeness test
B. Check digits D. Conversion verification
101. Controls which are designed to assure that the information processed by the computer is valid, complete, and
accurate are called
A. Input controls C. Processing controls
B. Output controls D. General controls
102. To obtain evidence that used identification and password control procedures are functioning as designed, an
auditor would most likely
A. Attempt to sign on to the system using invalid used identifications and passwords
B. Write a computer program that simulates the logic of the client’s access control software
C. Extract a random sample of processed transactions and ensure that the transactions were appropriately
authorized
D. Examine statements signed by employees stating that they have not divulged their user identifications and
passwords to any other person

103. When auditing around the computer, the auditor perform tests of
A. General computer controls, but not test application computer controls
B. Application computer controls but does not test general computer controls
C. Neither general no application computer controls
D. Both general and application computer controls
104. Which of the following computer assisted auditing techniques allows fictitious and real transactions to be
processed without client operating personnel being aware of the testing process?
A. Integrated test facility C. Parallel simulation
B. Input controls matrix D. Data entry monitor
105. Which of the following methods of testing application controls utilizes a generalized audit software package
prepared by the auditors?
A. Parallel simulation C. Test data approach
B. Integrated testing facility approach D. Exception report tests