Final Exam Audit 1
Final Exam Audit 1
Instruction: Write the letter of the correct answer before the number.
1. This involves the application of the procedures to less than 100% of the items within an account
balance or class of transactions. This enables the auditor to obtain and evaluate audit evidence
about some characteristics of the selected items in order to form an opinion about the
characteristics of all the items supporting an account balance or transaction class.
a. Audit techniques
b. Audit sampling
c. Selective testing
d. Specific identification
2. The auditor’s principal objective when using a sample tests of details of balances is whether the:
a. Account balance being audited is fairly stated
b. Transactions being audited are free of misstatements
c. Controls being tested are operating effectively
d. Transactions and account balances being audited are fairly stated.
3. The possibility that the auditor’s conclusion based on a sample may be different from the
conclusion reached if the entire population were subjected to the same procedure is called:
a. Audit risk
b. Non-sampling risk
c. Sampling risk
d. Detection risk
9. In performing substantive tests, the auditor is concerned with two risks or errors of sampling,
the alpha error and the beta error.
a. The alpha error is of greater concern to the auditor than the beta error
b. The beta error is of greater concern to the auditor than the alpha error
c. The beta error and the alpha error are of equal importance to the auditor
d. Neither the alpha error nor the beta error need be considered by the auditor
11. What is the proper order of steps for the following activities?
1) Analyze exceptions
2) Select the sample
3) Design audit procedure
4) State the objectives of the audit test
5) Determine the appropriate sample size
a. 1, 3, 2, 4, 5
b. 4, 3, 1, 2, 5
c. 4, 3, 5, 2, 1
d. 1, 2, 3, 4, 5
12. PSA 530 identifies two general approaches to audit sampling. They are:
a. Random and nonrandom
b. Statistical and nonstatistical
c. Precision and reliability
d. Risk and non-risk
13. Which of the following methods is most appropriate when performing tests of controls?
a. Stratified random sampling
b. Unrestricted random sampling with replacement
c. Variable sampling
d. Attribute sampling
14. The risk that the assessed level of control risk based on the sample is less than the true
operating effectiveness of the control policy or procedure is the risk of:
a. Assessing control risk too low
b. Assessing control risk too high
c. Incorrect acceptance
d. Incorrect rejection
19. In attribute sampling, a 5% change in which of the following factors normally will have the least
effect on the size of a statistical sample?
a. Expected deviation rate
b. Risk of assessing control risk too low
c. Population size
d. Tolerable deviation rate
20. If the size of the sample to be used in a particular test of attributes has not been determined by
utilizing statistical concepts, but the sample has been randomly chosen
a. The auditor will have to evaluate the results by reference to the principles of discovery
sampling
b. May not use statistical evaluation
c. The auditor has committed a non-sampling error
d. No inferences can be drawn from the sample
21. In determining the number of items to be selected in a sample for a particular substantive test
of details, the auditor should consider all of the following, except:
a. Tolerable misstatement
b. Characteristics of variation within the population
c. Deviation rate
d. Allowable risk of incorrect acceptance
22. Which of the following statements best describes the concept of sampling risk?
a. A randomly chosen sample may not be representative of the population as a whole on the
characteristic of interest.
b. The documents related to the chosen sample may not be available for inspection
c. An auditor may fail to recognize errors in the documents examined for the chosen sample
d. An auditor may select audit procedures that are not appropriate to achieve the specific
objective
23. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too
high relate to the:
a. Effectiveness of the audit
b. Efficiency of the audit
c. Audit quality controls
d. Selection of the sample
24. When performing a test of a control with respect to control over cash receipts, an auditor may
use a systematic sampling technique, with a start at any randomly selected item. The biggest
disadvantage of this type of sampling is that the items in the population
a. Must be systematically replaced in the population after sampling
b. Must be recorded in a systematic pattern before the sample can be drawn.
c. May occur in a systematic pattern, thus destroying the sample randomness
d. May systematically occur more than once in the sample
25. For which of the following audit tests would an auditor most likely use attribute sampling?
a. Selecting accounts receivable for confirmation of account balances
b. Examining invoices in support of the valuation of property, plant and equipment additions
c. Making an independent estimate of the amount of FIFO inventory
d. Inspecting employee time cards for proper approval by supervisors
26. Which of the following sampling methods would be used to estimate a numerical measurement
of a population, such as a peso value?
a. Variable sampling
b. Attribute sampling
c. Random-number sampling
d. Stop-or-go sampling
27. Which of the following combinations results in a decrease in sample size in an attribute sample?
28. Which of the following factors is usually not considered in determining the sample size for a test
of controls?
a. Expected population deviation rate
b. Risk of assessing control risk too low
c. Tolerable deviation rate
d. Population size, when the population is large
b. Yes Yes
c. No Yes
d. Yes No
30. In planning a statistical sample for a test of controls, an auditor increased the expected
population deviation rate (EDR) from the prior year’s rate because of the results of the prior
year’s tests of controls and the overall control environment. The auditor most likely would then
increase the planned
a. Risk of assessing control risk too low
b. Sample size
c. Allowance for sampling risk
d. Tolerable deviation rate
31. Which of the following factors does an auditor usually need to consider in planning a particular
audit sample for a test of controls?
a. Acceptable level of risk of assessing control risk too low
b. Tolerable misstatement
c. Number of sampling units in the population
d. Total peso amount of the items to be sampled.
32. Which of the following statements is true concerning statistical sampling in tests of controls?
a. For a given tolerable rate, a larger sample size should be selected as the expected
population deviation rate decreases.
b. As the population size doubles, the sample size also should double
c. The expected population deviation rate has little or no effect on determining sample size
except for very small populations
d. The population size has little or no effect on determining sample size except for very small
populations
33. An auditor plans to examine a sample of 20 purchase orders for proper approvals as prescribed
by the client’s internal control. One of the purchase orders in the chosen sample of 20 cannot be
found, and the auditor is unable to use alternative procedures to test whether the purchase
order was properly approved. The auditor should:
a. Choose another purchase order to replace the missing purchase order in the sample
b. Select a completely new set of 20 purchase orders
c. Consider this test of controls invalid and proceed with substantive tests because internal
control is ineffective
d. Treat the missing purchase order as a deviation for the purpose of evaluating the sample
34. As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses
control risk lower than appropriate. Which of the following is the most likely explanation for this
situation?
a. The deviation rate in the auditor’s sample exceeds the tolerable rate, but the deviation rate
in the population is less than the tolerable rate
b. The deviation rate in the auditor’s sample is less than the tolerable rate, but the deviation
rate in the population exceeds the tolerable rate
c. The deviation rates of both the auditor’s sample and the population are less than the
tolerable rate
d. The deviation rates of both the auditor’s sample and the population exceed the tolerable
rate.
35. Which of the following sample planning factors would influence the sample size for a
substantive test of details for a specific account?
b. no No
c. yes No
d. no yes
36. Which of the following statements concerning factors that influence sample size for tests of
details is incorrect?
a. The higher the auditor’s assessment of the risk of material misstatement, the smaller the
sample size needs to be.
b. The lower the tolerable misstatement, the larger the sample size needs to be
c. For large populations, the actual size of the population has little, if any, effect on sample size
d. The auditor may consider stratifying the population when there is a wide range (variability)
in the monetary size of items in the population
37. A misstatement or deviation that, according to the standard, is demonstrably not representative
of misstatements or deviations in a population is a/an
a. Fraud
b. Anomaly
c. Error
d. Abnormality
38. In statistical sampling methods used in substantive testing, an auditor most likely would stratify
a population into meaningful groups if:
a. Probability-proportional to size (PPS) sampling is used
b. The population has highly variable recorded amounts
c. The standard deviation of recorded amounts is relatively small
d. The auditor’s estimated tolerable misstatement is extremely small.
39. How would decreases in tolerable misstatement and assessed level of control risk affect the
sample size in a substantive test of details?
40. Which of the following sample selection methods is not appropriate when using statistical
sampling?
a. Random selection
b. Systematic selection
c. Monetary unit sampling
d. Haphazard selection
41. Which of the following sample selection methods cannot ordinarily be used in audit sampling?
a. Value-weighted selection
b. Random selection
c. Block selection
d. Systematic selection
42. In systematic selection, the number of sampling units in the population is divided by the sample
size to determine the:
a. Sampling interval
b. Pattern that may exist in the population
c. Sampling risk
d. Non-sampling risk
43. This involves dividing the population into discrete sub-populations which have an identifying
characteristic
a. Value-weighted selection
b. Stratification
c. Random selection
d. Block selection
44. Which of the following statements relating to stratification is incorrect?
a. When performing tests of details of transactions and account balances, the population is
often stratified by monetary value
b. The results of audit procedures applied to a sample of items within a stratum can be
projected to the entire population
c. When verifying the valuation assertion for accounts receivable, account balances may be
stratified by age
d. Stratification reduces the variability of items within each stratum
45. Audit efficiency may be improved when the sampling unit is defined as the individual monetary
units that comprise the population, the technique is called
a. Stratification
b. Random selection
c. Systematic selection
d. Value-weighted selection
46. Which of the following is not among the characteristics of the procedures performed in
completing the audit?
a. They are optional since they have only an indirect impact on the opinion to be expressed.
b. They involve many subjective judgments by the auditor
c. They are performed after the financial statement date
d. They are usually performed by audit managers or other senior members of the audit team
who have extensive experience with the client.
47. Which of the following procedures should an auditor generally perform regarding subsequent
events?
a. Compare the latest interim financial statements with the financial statements being audited.
b. Send second requests to the client’s customers who failed to respond to initial accounts
receivable confirmation requests
c. Communicate material weaknesses in the internal control structure to the client’s audit
committee
d. Review the cut-off bank statements for several months after the year-end
48. Which of the following procedures would an auditor most likely perform to obtain evidence
about an entity’s subsequent events?
a. Reconcile bank activity for the month after the financial statement date with cash activity
reflected in the accounting records.
b. Examine on a test basis the purchase invoices and receiving reports for several days after
the inventory date
c. Review the treasurer’s monthly reports on temporary investments owned, purchased and
sold
d. Reading minutes of directors and stockholder’s meetings.
49. Which of the following material events occurring subsequent to the financial statement date
would require an adjustment to the financial statements before they are issued?
a. Sale of long-term debt or capital stock
b. Loss of a plant as a result of a flood
c. Major purchase of a business which is expected to double sales volume
d. Settlement of litigation, in excess of the recorded liability
50. Which of the following events in the subsequent period will require disclosure in the notes to
financial statements?
a. Realization of recorded year-end receivables at a different amount than recorded
b. Settlement of recorded year-end estimated product warranty liabilities at a different
amount than recorded
c. Purchase of a machine
d. Purchase of a business
52. If an auditor dates the auditor’s report on the financial statements for the year ended December
31, 20x1, as of February 10, 20x2, except for Note 5, as to which the date is March 3, 20x2, the
auditor is taking responsibility for:
a. All subsequent events occurring through March 3, 20x2
b. All subsequent events through February 10, 20x2
c. All subsequent events occurring through February 10, 20x2, and the specific subsequent
event referred to in Note 5 through March 3, 20x2
d. Only the specific subsequent event referred to in Note 5 through March 3, 20x2
53. The primary source of information about litigation, claims and assessment is obtained by
auditors from the:
a. Client’s lawyers
b. Client’s management
c. Client’s previous auditor
d. All of the above
55. If a lawyer refuses to furnish corroborating information regarding litigation, claims and
assessments, the auditor should:
a. Honor the confidentiality of the client-lawyer relationship
b. Consider the refusal to be a scope limitation
c. Seek to obtain the corroborating information from management
d. Disclose this fact in a footnote to the financial statements
56. The primary reason an auditor requests letters of inquiry be sent to a client’s attorneys is to
provide the auditor with:
a. A description and evaluation of litigation, claims and assessments that existed at the date of
balance sheet date
b. An expert opinion as to whether a loss is possible, probable or remote
c. The opportunity to examine the documentation concerning litigation, claims and
assessments
d. Corroboration of the information furnished by management concerning litigation, claims
and assessments
57. When considering the use of management’s written representations as audit evidence about
completeness assertion, an auditor should understand that such representations
a. Complement but do not replace, substantive tests designed to support the assertion
b. Constitute sufficient evidence to support the assertion when considered in combination
with a sufficiently low assessed level of control risk
c. Are not part of the evidence considered to support the assertion.
d. Replace a low assessed level of control risk as evidence to support the assertion
58. Management’s refusal to furnish a written representation letter on a matter which the auditor
considers essential constitutes
a. Prima facie evidence that the financial statements are not presented fairly
b. An illegal act
c. An uncertainty sufficient to preclude an unmodified opinion
d. A scope limitation sufficient to preclude an unmodified opinion
59. PSA 570 requires the auditor to evaluate whether there is a substantial doubt about a client’s
ability to continue as a going concern for at least:
a. One quarter from the financial statement date
b. One quarter from the date of the auditor’s report
c. One year from the financial statement date
d. One quarter from the date of the auditor’s report
60. If, on the basis of the additional procedures carried out and the information obtained, including
the effect of mitigating circumstances, the auditor’s judgment is that the entity will not be able
to continue as a going concern, the financial statements should be prepared using an
appropriate basis, otherwise the auditor will issue a(an):
a. Disclaimer of opinion
b. Qualified opinion
c. Adverse opinion
d. Unmodified opinion with a separate going concern section
61. When a question arises about an entity’s continued existence, the auditor should consider
factors tending to mitigate the significance of negative information concerning the entity’s
means for maintaining adequate cash flow. An example of such a factor is the:
a. Possibility of purchasing certain assets rather than leasing them
b. Capability of extending the due dates of existing debts
c. Appropriateness of changing depreciation methods from double declining balance to
straight line
d. Marketability of property and equipment that management plans to keep.
62. The purpose of analytical procedures at the completion of the audit includes all of the following
except:
a. Revising the audit plan
b. Considering overall reasonableness of the financial statements
c. Reviewing adequacy of evidence gathered to investigate unusual fluctuation
d. Recalculating some of the ratios examined during audit planning
63. Where an unusual fluctuation is indicated by analytical procedures and management is unable
to provide a satisfactory explanation, the auditor must assume that there is a high probability
that an error or irregularity exists. In this case, the auditor must:
a. Issue either a qualified or an adverse opinion
b. Issue a disclaimer
c. Issue either a qualified opinion or a disclaimer of opinion
d. Design other appropriate audit procedures to determine if such errors do exist
64. If the results of the audit procedures do not enable the auditor to conclude that the aggregate
of uncorrected misstatements is not material and the management refuses to adjust the
financial statements, the auditor’s report should be modified to include:
a. An unmodified opinion with emphasis of matter paragraph
b. A disclaimer of opinion
c. Either qualified or disclaimer of opinion
d. Either qualified or adverse opinion
65. Analytical procedures used in the overall review stage of an audit generally include
a. Considering unusual or unexpected account balance that were not previously identified
b. Performing test of transactions to corroborate management’s financial statement assertion
c. Gathering evidence concerning account balances that have not changed from the prior year
d. Re-testing control procedures that appeared to be ineffective during the assessment of
control risk
66. Which of the following procedures would an auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
a. Recomputing a sample of large-peso transactions occurring year-end for arithmetic accuracy
b. Investigating changes in stockholder’s equity after year-end.
c. Inquiring of the entity’s legal counsel concerning litigation, claims, and assessments arising
after year-end.
d. Confirming bank accounts established after year-end
67. After issuing a report, an auditor has no obligation to make continuing inquiries or perform
other procedures concerning audited financial statement unless,
a. Information which existed at the report date and may affect the report, comes to the
auditor’s attention
b. Management of the entity requests the auditor to reissue the auditor’s report
c. Information about an event that occurred after the end of fieldwork comes to the auditor’s
attention
d. Final determinations or resolutions are made of contingencies that had been disclosed in
the financial statements
68. Which of the following events occurring after the issuance of an auditor’s report most likely
would cause the auditor to make further inquiries about the previously issued financial
statements?
a. A technological development that could affect the entity’s future ability to continue as a
going concern
b. The discovery of information regarding a contingency that existed before the financial
statements were issued
c. The entity’s sale of subsidiary that accounts for 30% of the entity’s consolidated sales
d. The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report.
69. When an investigation of the discovery of facts existing at the report date confirms the existence
of the fact and the auditor believes the information is important to those relying or likely to rely
on the financial statements, the auditor should immediately:
a. Take steps to prevent future reliance on the audit report
b. Notify the SEC or other regulatory agency
c. Resign from the engagement
d. Take no action since the auditor is not responsible for such matters
70. Which of the following would a subsequent discovery of facts which would not require response
by the auditor?
a. Discovery of the inclusion of material nonexistent sales
b. Discovery of the failure to write-off material obsolete inventory
c. Discovery of the omission of a material footnote
d. Decrease in the value of investments
71. An auditor concludes that a substantive auditing procedure considered necessary during the
prior period’s audit was omitted. Which of the following factors would most likely cause the
auditor promptly to apply the omitted procedure?
a. There are no alternative procedures available to provide the same evidence as the omitted
procedure
b. The omission of the procedure impairs the auditor’s present ability to support the previously
expressed opinion
c. The source documents needed to perform the omitted procedure are still available
d. The auditor’s opinion on the prior period’s financial statements was unmodified
72. An auditor concludes that an audit procedure considered necessary at the time of the
examination had been omitted. The auditor should assess the importance of the omitted
procedure to the ability to support the previously expressed opinion. Which of the following
would be least helpful in making that assessment?
a. A discussion with the client about whether there are persons relying on the auditor’s report
b. A reevaluation of the overall scope of the examination
c. A discussion of the circumstances with engagement personnel
d. A review of the other audit procedures that were applied that might compensate for the
one omitted
73. On March 15, 2022, Clark, CPA issued an unmodified opinion on a client’s audited financial
statements for the year ended December 31, 2021. On May 4, 2022, Clark’s internal inspection
program disclosed that engagement personnel failed to observe the client’s physical inventory.
Omission of this procedure impairs Clark’s present ability to support the unmodified opinion. If
the stockholders are currently relying on the opinion, Clark should first:
A. Advise management to disclose to the stockholders that Clark’s unmodified opinion should
not be relied on
B. Undertake to apply alternative procedures that would provide a satisfactory basis for the
unmodified opinion
C. Reissue the auditor’s report and add an explanation paragraph describing the departure
from PSA
D. Compensate for the omitted procedure by performing tests of control to reduce audit risk to
a sufficiently low level
74. The auditor is most likely to discover omitted audit procedures during
a. Preparation of management letter
b. Follow-up procedures in compliance with GAAS
c. The conference held with the client prior to issuing the audit report
d. A post engagement review performed as part of the firm’s quality control inspection
program
75. Which of the following conditions or events most likely would cause an auditor to have
significant doubt about the entity’s ability to continue as a going concern?
a. Cash flow from operating activities are negative
b. Research and development projects are postponed
c. Significant related party transactions are pervasive
d. Stock dividends replace annual cash dividends
77. Which of the following elements of the auditor’s report affirms the auditor’s independence?
a. Introductory paragraph
b. Auditor’s responsibility
c. Title
d. Signature
78. The auditor does not normally address the report to:
a. Those for whom the report is prepared
b. The president of the client company
c. Those charged with governance of the client company or the board of directors
d. The stockholders of client company
79. The appropriate date for the auditor’s report is the one on which the
a. Client’s fiscal year ended
b. Auditor has concluded procedures in the field
c. Auditor and client entered into contract
d. Auditor types and delivers the report to client
81. Which of the following sections in the auditor’s report shall be placed immediately after the
“Opinion” Section?
a. Management’s Responsibilities for the financial statements
b. Auditor’s responsibilities for the audit of the financial statements
c. “Basis for Opinion”
d. Other reporting responsibilities
82. To emphasize the fact that the auditor is independent, it would be desirable to address the
report to:
a. The company’s management
b. The stockholders of the client company
c. The board of directors of the client company
d. The Securities and Exchange Commission
83. The following statements relate to the date of the auditor’s report. Which is false?
a. The auditor should date the report as of the completion date of the audit
b. The date of the auditor’s report should not be earlier than the date on which the financial
statements are signed or approved by management
c. The date of the auditor’s report should not be later than the date on which the financial
statements are signed or approved by management
d. The date of the auditor’s report should always be later than the statement of financial
position date
85. When the client’s financial statements are misstated by a material and pervasive amount, the
auditor should issue a report that contains:
a. An adverse opinion
b. A disclaimer of opinion
c. Either a qualified opinion or an adverse opinion, depending on which conditions exist
d. Either a qualified opinion or an unmodified opinion with modified wording, depending on
which condition exist
87. If the auditor believes that a required material disclosure is omitted from the financial
statements, the auditor should decide between issuing a(n)
a. Qualified opinion and an adverse opinion
b. Disclaimer of opinion and a qualified opinion
c. Adverse opinion and disclaimer of opinion
d. Unmodified opinion and a qualified opinion
88. The auditor should consider the nature of the item and the significance of the effect when
formulating an opinion on financial statements. Accordingly, the auditor should express a
qualified opinion when the potential effect of an item under consideration is:
a. Material and pervasive
b. Material but not pervasive
c. Not material but pervasive
d. Not material and not pervasive
89. When the auditor is unable to obtain sufficient appropriate audit evidence, the auditor’s report
may contain:
b. Yes Yes No
c. No No Yes
90. The qualified opinion, adverse opinion and disclaimer of opinion are known as:
a. Modified opinion
b. Standardized statements
c. Unmodified explanation
d. Unmodified opinions
91. In extreme cases, such as situations involving multiple uncertainties that are significant to the
financial statements, the auditor may consider it appropriate to express a(n)
a. Qualified opinion
b. Report with emphasis of a matter paragraph
c. Disclaimer of opinion
d. Adverse opinion
Beyond the control of the Related to the nature Related to client’s request to
entity or timing of the omit certain procedures
auditor’s work
a. yes No Yes
b. Yes Yes No
c. No No Yes
d. Yes Yes yes
93. When an auditor modifies his opinion on the financial statements because of material
misstatements, the basis for modification paragraph should include:
b. Yes Yes
c. No No
d. No Yes
94. When an auditor modifies his opinion on the financial statements because of inability to obtain
sufficient appropriate evidence, the basis for modification paragraph should include:
b. Yes Yes
c. No No
d. No Yes
98. An auditor may wish to emphasize a matter included in the financial statements by adding a
separate paragraph to the report. In this case, the following sections of the audit report should
be modified:
a. Basis for Opinion
b. Auditor’s responsibility
c. Opinion
d. None
99. When the auditor concludes that there is substantial doubt about the entity’s ability to continue
as a going concern, and this fact is adequately disclosed in the notes to financial statements; the
appropriate audit report would be:
I. An unmodified opinion with emphasis of matter paragraph
II. A qualified opinion
a. I only
b. II only
c. I or II
d. Neither I nor II
100. When the auditor concludes that there is substantial doubt about the entity’s ability to
continue as a going concern, which was not adequately disclosed in the notes to financial
statements, the auditor’s report would include:
a. A qualified or adverse opinion
b. An unmodified opinion with emphasis of matter paragraph
c. A qualified opinion or disclaimer of opinion
d. An unmodified opinion with going concern section