UNIVERSITY OF THE IMMACULATE CONCEPTION

COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION

AUD002-Auditing and Assurance Concepts and Applications 1
Midterm Exam

Multiple Choice. Write the letter of your choice. No erasures allowed.

1. According to Section 9(A) of the IRR, the Commission, upon the recommendation of the Board, shall create an auditing ststandard-setting
body to be known as the
a. Auditing and Assurance Standards Council (AASC)
b. Auditing Standards and Practices Council (ASPC)
c. Auditing Standards Board
d. Auditing Standards Council

2. An auditor's report would be designated as a special report when it is issued in connection with financial statements that are
a. For an interim period and are subjected to a limited review.
b. Unaudited and are prepared from a client's accounting records.
c. Prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles.
d. Purported to be in accordance with generally accepted accounting principles but do not include a presentation of the Statement of Cash
Flows.

3. An unqualified conclusion is not appropriate for either reasonable or limited assurance engagement when
a. Circumstances prevent the practitioner from obtaining evidence required to reduce assurance engagement risk to the appropriate level.
b. The responsible party or the engaging party imposes a restriction that prevents the practitioner from obtaining evidence required to
reduce assurance engagement risk to the appropriate level.
c. Both A and B.
d. Neither A nor B

4. The best statement of the responsibility of the auditor with respect to audited financial statement is:
a. The auditor's responsibility on fair presentation of financial statements is limited only up to the date of the audit report.
b. The auditor's responsibility is confined to the expression of opinion on the financial statements audited.
c. The responsibility over the financial statements rests with the management and the auditor assumes responsibility with respect to the
notes of financial statements.
d. The auditor is responsible only to his unmodified opinion but not for any other types of opinion.

5. Within the context of quality control, the primary purpose of continuing professional education and training activities is to enable a CPA firm
to provide its personnel with:
a. technical training that assures proficiency as a valuation expert.
b. professional education that is required in order to perform with due professional care.
c. knowledge required to fulfill assigned responsibilities.
d. knowledge required to perform a peer review

6. A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit client would most likely include
a. Inquiry of management as to whether disagreements between the predecessor auditor and the prospective client were resolved
satisfactorily.
b. Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable basis for an opinion.
c. Inquiry of third parties, such as the prospective client's bankers and attorneys, about information regarding the prospective client and its
management.
d. Consideration of whether the internal control structure is sufficiently effective to permit a reduction in the required substantive tests.

7. When obtaining an understanding of an entity's control environment, an auditor should concentrate on the substance of management's
policies and procedures rather than their form because
a. The auditor may believe that the policies and procedures are inappropriate for that particular entity
b. The board of directors may not be aware of management's attitude toward the control environment
c. Management may establish appropriate policies and procedures but not act on them
d. The policies and procedures may be so ineffective that the auditor may assess control risk at a high level

8. In general, a material weakness in internal control may be defined as a condition in which material errors or irregularities may occur and
not be detected within a timely period by
a. An independent auditor during tests of controls.
b. Management when reviewing interim financial statements and reconciling account balances.
c. Employees in the normal course of performing their assigned functions.
d. Outside consultants who issue a special-purpose report on internal control structure

9. Inherent limitations in an internal control must be considered in evaluating its effectiveness in preventing and detecting errors and fraud.
Inherent limitations do not include
a. Misunderstanding of instructions, mistakes of judgment, personal carelessness, distraction, or fatigue.
b. Incompatible functions performed by the same person.
c. Collusion among employees.
d. Management override of certain policies or procedures

10. The use of CIS will least likely affect the

a. The procedures followed by the auditor in obtaining a sufficient understanding of the accounting and internal control systems.
b. The auditor's specific audit objectives.
UNIVERSITY OF THE IMMACULATE CONCEPTION
COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION
AUD002-Auditing and Assurance Concepts and Applications 1
Midterm Exam
c. The consideration of inherent risk and control risk through which the auditor arrives at the risk assessment.
d. The auditor's design and performance of tests of control and substantive procedures appropriate to meet the audit objective

11. To determine that user ID and password controls are functioning, an auditor would most likely:
a. test the system by attempting to sign on using invalid user 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

12. In their consideration of a client's CIS controls, the auditors will encounter general controls and application controls. Which of the following
is an application control?
a. The operations manual
b. Hash total
c. Systems documentation
d. Control over program changes

13. Refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit.
a. Scope of an audit
b. Scope of a review
c. Audit program
d. Scope limitation

14. Assurance services are best described as

a. Services designed for the improvement of operations, resulting in better outcomes.
b. Independent professional services that improve the quality of information, or its context, for decision makers.
c. The assembly of financial statements based on assumptions of a reasonable party.
d. Services designed to express an opinion on historical financial statements based on the results of an audit.

15. The auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is best
expressed by which of the following statements?
a. The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last
day of fieldwork.
b. The auditor is responsible for determining that a proper cut-off has been made and performing a general review of events occurring in
the subsequent period.
c. The auditor’s responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance
sheet date actually occurred.
d. The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or
before the balance sheet date

16. According to the Code of Professional Ethics for CPAs, which of the following fee arrangements is prohibited?
a. A fee for a review of financial statements that is based on time spent on the engagement.
b. A fee for a review of financial statements that is based on time spent and a premium for the risk involved.
c. A fee for a review engagement that is based on a fixed fee of P15, 000.
d. A fee for a review engagement that varies depending on the amount of financing that the company may obtain.

17. Early in an audit, the auditor discovered several fraud risk factors. Which of the following is the least likely response of the auditor?
a. Substantive test procedures are moved away from the end of the client’s accounting period so that differences can be more easily
resolved.
b. The auditor should attempt to incorporate in the audit more elements of unpredictability.
c. The auditor should attempt to gather more audit evidence through physical inspection.
d. Analytical procedure should still be applied but at a more disaggregated level.

18. A purpose of a management representation letter is to reduce

a. Audit risk to an aggregate level of misstatement that could be considered material.
b. An auditor’s responsibility to detect material misstatements only to the extent that the letter is relied on.
c. The possibility of a misunderstanding concerning management’s responsibility for the financial statements.
d. The scope of an auditor’s procedures concerning related party transactions and subsequent events.

19. A client decides not to make an auditor's proposed adjustments that collectively are not material, and wants the auditor to issue the report
based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?
a. The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
b. The financial statements do not conform with the requirements of the PFRS.
c. The financial statements contain unadjusted misstatements that should result in a qualified opinion.
d. The Financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the
financial statements.

20. The marketing department’s proposal was finally accepted, and the marketing employees attended a class in using the mainframe report
writer. Soon, marketing analysts found that it was easier to download the data and manipulate it on their own microcomputers than to
perform all the data manipulation with the mainframe report writer directly. One analyst became highly skilled at downloading and wrote
UNIVERSITY OF THE IMMACULATE CONCEPTION
COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION
AUD002-Auditing and Assurance Concepts and Applications 1
Midterm Exam
downloading command sequences for the other employees. When the analyst left the company for a better job, the department had
problems making modifications to these command sequences. The department’s problems are most likely due to inadequate
a. Documentation.
b. Program and data backup.
c. Program testing.
d. Anti-virus software.

21. An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited
financial statements. The auditor believes that the financial statements do not require revision, but the client is unwilling to revise or
eliminate the material inconsistency in the other information. Under these circumstances, what action would the auditor most likely take?
a. Revise the auditor's report to include
b. Consider the situation closed-because the other information is not in the audited financial statements.
c. Issue an "except for" qualified opinion after discussing the matter with the client's audit committee.
d. Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate “other matter” paragraph.

22. A financial statement audit aids in the communication of economic data because audit
a. Assures the readers of financial statements that any fraudulent activity has been corrected.
b. Guarantees that financial data are fairly presented.
c. Lends credibility to the financial statements.
d. Confirms the accuracy of management’s financial representations

23. Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
a. The auditor is unable to obtain the audited financial statements of a consolidated investee.
b. Management does not provide reasonable justification for a change in accounting principles.
c. The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures
to verify inventory quantities.
d. Management refuses to allow the auditor to have access to the company's cancelled checks and bank statements.

24. When companies use information technology (IT) extensively, evidence may be available only in electronic form. What is an auditor's best
course of action in such situations?
a. Assess the control risk as high.
b. Use audit software to perform analytical procedures.
c. Use generalized audit software to extract evidence from client databases.
d. Perform limited tests of controls over electronic data.

25. The best argument against the use of negative accounts receivable confirmations is
a. The cost-per-response is excessively high.
b. There is no way of knowing if the intended recipients received them.
c. Recipients are likely to feel that in reality the confirmation is a subtle request for payment.
d. The inference drawn from receiving no reply may not be correct

26. Which of the following services would be most likely to be structured as an attest engagement?
a. Advocating a client’s position in tax matter.
b. A consulting engagement to develop a new data base system for the revenue cycle.
c. An engagement to issue a report addressing an entity’s compliance with requirements of specified laws.
d. The compilation of a client’s forecast information.

27. In verifying a November 30 sales cutoff date, an auditor would be most concerned with comparing records of
a. November cash receipts with December bank deposits.
b. November purchases with December shipments.
c. November accounts receivable with November sales.
d. November sales with November shipping documents.

28. A CPA firm is completing the fieldwork for an audit of Dunhill Co. for the current year ended December 31. The manager in charge of the
audit is performing the final steps in the evidence accumulation phase of the audit and notes that there have been several changes in
Dunhill Co. during the year under audit. Which of the following items would indicate there could be substantial doubt about Dunhill's ability
to continue as a going concern for a reasonable period of time?
a. Cash infusion by a venture capital firm.
b. Recurring working capital shortages.
c. A lack of significant contracts with new customers.
d. Term debt refinanced with a new bank

29. What type of evidence would provide the highest level of assurance in an assurance engagement?
a. Evidence secured solely from within the entity.
b. Evidence obtained from independent sources.
c. Evidence obtained indirectly.
d. Evidence obtained from multiple internal inquiries.

30. An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance
sheet date. The auditor should be aware that this practice.
UNIVERSITY OF THE IMMACULATE CONCEPTION
COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION
AUD002-Auditing and Assurance Concepts and Applications 1
Midterm Exam
a. Eliminates the use of certain statistical sampling methods that would otherwise be available.
b. Presumes that the auditor will reperform the tests as of the balance sheet date.
c. Should be especially considered when there are rapidly changing economic conditions.
d. Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

31. Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?
a. The CPA does not understand the entity's operations and industry.
b. Management acknowledges that the entity has had recurring operating losses.
c. The CPA is unable to review the predecessor auditor's working papers.
d. Management is unwilling to permit inquiry of its legal counsel

32. The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to
a. Observe physical counts of the inventory items.
b. Trace the total on the inventory listing to the general ledger inventory account.
c. Obtain a confirmation from the client indicating inventory ownership.
d. Analytically compare the current-year inventory balance to the prior-year balance

33. If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions
from the
a. Sales invoices to the shipping documents.
b. Cash receipts journal to the sales journal.
c. Shipping documents to the sales invoices.
d. Sales journal to the cash receipts journal.

34. Other than a full financial statement audit, which is the highest level of assurance that a CPA provides?
a. A review.
b. A confirmation.
c. A compilation.
d. Unaudited financial statements.

35. Omitting quantities from copies of purchase. orders sent to the receiving department is a control procedure intended mainly to
a. Ensure that goods received are physically counted by receiving department personnel.
b. Identify and return damaged goods as soon as they are received.
c. Provide a cross-check for verifying the accuracy of perpetual inventory records.
d. Prevent theft of goods by receiving department personnel.

36. Substantive tests of details

a. Are intended to detect material misstatements in financial statement accounts.
b. Are concerned with how internal control policies or procedures are applied.
c. Are evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data.
d. Are procedures that lend hindsight to amounts and information disclosed in financial statements as of the balance sheet date

37. Auditor confirmation of accounts payable balances at the end of the reporting period may be unnecessary because
a. There is a duplication of cutoff tests.
b. Accounts payable balances at the end of the reporting period may not be paid before the audit is completed.
c. There is likely to be other reliable externai audit evidence available to support the balances.
d. Correspondence with the client's attorney will reveal all legal actions by vendors for nonpayment.

38. Which of the following is not an appropriate activity for the treasurer’s department?
a. Prepare checks.
b. Forward checks to vendors.
c. Cancel vouchers.
d. Prepare vouchers.

39. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because
a. A majority of recipients are usually unwilling to respond objectively.
b. Some recipients may report incorrect balances that require extensive follow-up.
c. The auditor cannot infer that all nonrespondents have verified the account information.
d. Negative confirmations do not produce evidence that is statistically quantifiable.

40. Assurance engagement risk is the risk

a. That the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated.
b. Of expressing an inappropriate conclusion when the subject matter information is not materially misstated.
c. Through loss from litigation, adverse publicity, or other events arising in connection with a subject matter reported on.
d. Of expressing an inappropriate conclusion when the subject matter information is either materially misstated or not materially misstated.

41. To avoid misunderstandings between a practitioner and client, engagement arrangements are written in
a. A legal letter
b. An engagement letter
c. A client representation letter
UNIVERSITY OF THE IMMACULATE CONCEPTION
COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION
AUD002-Auditing and Assurance Concepts and Applications 1
Midterm Exam
d. A letter on significant deficiencies in internal control

42. Which one of the following is not a provider of assurance services?

a. CPAs
b. Governmental auditors
c. Internal auditors
d. PICPA

43. Which of the following is the most appropriate action to be taken by a CPA who has been asked to perform a consulting services
engagement concerning the analysis of a potential merger if he/she has little experience with the industry involved?
a. Accept the engagement but he/she should conduct research or consult with others to obtain sufficient competence.
b. Decline the engagement because he/she lacks sufficient knowledge.
c. Accept the engagement and issue a report that contains his/her opinion on the achievability of the results of the merger.
d. Accept the engagement and perform it in accordance with Philippine Standards on Auditing (PSAs).

44. An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected to
a. Express an opinion as to the fairness of Camden's financial statements.
b. Express an opinion as to the attractiveness of Camden for investment purposes.
c. Certify to the correctness of Camden's financial statements.
d. Critique the wisdom and legality of Camden's business decisions.

45. The five major phases in conducting a risk-based audit process are:
a. Audit planning and risks assessment activities
b. Preliminary engagement activities
c. Completing the audit and post-audit responsibilities
d. Reporting and communication
e. Responses to assessed risks.
The proper sequence in applying the above steps is:
a. baecd
b. baedc
c. beacd
d. beadc

46. 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.

47. Detection risk is

a. The risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated.
b. The risk that a misstatement, that could occur in an account balance or class of transactions and that could be material individually or
when aggregated with misstatements in other balances or classes, will not be prevented or detected and corrected on a timely basis by the
accounting and internal control systems.
c. The risk that an auditor's substantive procedures will not detect a misstatement that exists in an account balance or class of transactions
that could be material, individually or when aggregated with misstatements in other balances or classes.
d. The susceptibility of an account balance or class of transactions to misstatement that could be material, individually or when aggregated
with misstatements in other balances of classes, assuming that there were no related internal controls.

48. Which of the following types of audits are most similar?

a. Operational audits and compliance audits.
b. Independent financial statement audits and operational audits.
c. Compliance audits and independent financial statement audits.
d. Internal audits and independent financial statement audits.

49. This quality control element requires a CPA firm to establish policies and procedures to provide it with reasonable assurance that
engagements are performed in accordance with professional standards and regulatory and legal requirements, and that the firm or the
engagement partner issue reports that are appropriate in the circumstances.
a. Ethical requirements
b. Engagement performance
c. Human resource
d. Monitoring

50. Review responsibilities are determined on the basis that more experienced team members review the work of less experienced team
members. Engagement review process includes the following, except:
UNIVERSITY OF THE IMMACULATE CONCEPTION
COLLEGE OF ACCOUNTING AND BUSINESS EDUCATION
AUD002-Auditing and Assurance Concepts and Applications 1
Midterm Exam
a. Considering whether the work has been performed in accordance with professional standards and applicable legal and regulatory
requirements.
b. Determining if there is a need to revise the nature, timing and extent of work performed.
c. Contemplating if the work performed supports the conclusions reached and is appropriately documented.
d. Identifying matters for consultation or consideration by more experienced engagement team members during the engagement

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