NAQDOWN – Elimination

AUDITING THEORY

Name:______________________________________
Year and Section:_____________________________
Instruction: Write the letter of your answer before each number. Use UPPERCASE letters only.
1. Who should take responsibility for the overall quality on each audit engagement?
a. Engagement quality control review
b. Engagement partner
c. Engagement team
d. CPA firm

2. An auditor is not required to plan the audit to cover information that is indicative of:
a. Adverse relationships between the entity and its employees.
b. Fraudulent financial reporting.
c. Misappropriation of assets.
d. Errors.

3. A CPA, while performing an audit, strives to achieve independence in appearance in order to

a. Reduce risk and liability
b. Maintain public confidence in the profession
c. Become independent in fact
d. Comply with PSAs

4. Which of the following conditions and events may most likely indicate the existence of risks of
material misstatements?
a. Having personnel with appropriate accounting and financial reporting skills.
b. Accounting measurements that involve simple processes
c. Significant amount of routine or systematic transactions
d. Constraints on the availability of capital and credit

5. Which of the following factors does an auditor generally need to consider in planning a particular
audit sample for a test of control?
a. Number of items in the population.
b. Total peso amount of the items to be sampled.
c. Acceptable level of risk of assessing control risk too low.
d. Tolerable misstatement.

6. Materiality should be considered by the auditor when

a. Determining the nature, timing and extent of auditor’s procedures
b. Evaluating the effect of misstatements
c. Both a and b
d. Neither a nor b

7. There are many kinds of statistical estimates that an auditor may find useful, but basically every
accounting estimate is either of a quantity or of an error rate. The statistical terms that roughly
correspond to “quantities” and “error rate”, respectively, are
a. Attributes and variables
b. Variables and attributes
c. Constant and attributes
d. Constants and variables

8. When an auditor expresses an adverse opinion he/she should disclose the substantive reasons for such
an opinion in an explanatory paragraph.
a. Preceding the opinion paragraph
b. Within the notes to the financial statements
c. Following the opinion paragraph
d. Preceding the introductory paragraph

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9. Which of the following procedures is not included in a review engagement on a nonpublic entity?
a. Inquiries of management.
b. Inquiries regarding events subsequent to the balance sheet date.
c. Any procedures designed to identify relationships among data that appear to be unusual.
d. A study and evaluation of internal control structure.

10. As part of an audit, a CPA often request a representation letter from the client. Which one of the
following is not a valid purpose of such a letter?
a. To provide as audit evidence.
b. To emphasize to the client his responsibility for the correctness of the financial statements.
c. To satisfy himself by means of other auditing procedures when certain customary auditing
procedures are not performed.
d. To provide possible protection to the CPA against a charge of knowledge in cases where fraud is
subsequently discovered to have existed in the accounts.

11. The auditor’s report should be titled, and the title should include the word
a. standard c. audit
b. opinion d. independent

12. . A written request and acknowledgement requiring a letter reply only in the event of a discrepancy
a. negative confirmation
b. positive confirmation
c. letter of confirmation
d. client’s representation letter

13. Which of the following engagements do not require independence?

I. Agreed-upon procedures
II. Compilation
III. Audit
IV. Review
a. a. I and IV c. I, II and IV
b. b. I and II d. I, II, III and IV

14. The grandfather-father-son approach to providing protection for important computer files is a concept
that is most often found in
a. On-line, real-time systems
b. Punched-card systems
c. Magnetic tape systems
d. Magnetic drum systems

15. Which of the following methods of testing application controls utilizes a generalized audit software
package prepared by the auditors?
a. Parallel simulation.
b. Integrated testing facility approach.
c. Test data approach.
d. Exception report tests.

16. Which of the following is a prospective financial statement for general use upon which an accountant
may appropriately report?
a. Financial projection
b. Partial presentation
c. Pro forma financial statements
d. Financial forecasts

17. A report issued in connection with the independent audit of financial information other than an
auditor's report on financial statements.
a. Special purpose auditor's report
b. Compilation report
c. Annual report

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 d. Modified auditor’s report

18. Which of the following events most likely indicates the existence of related parties?
a. Borrowing a large sum of money at a variable rate of interest
b. Selling real estate at a price that differs significantly from its book value
c. Making a loan without scheduled terms of repayment of the funds
d. Discussing merger terms

19. Tolerable error means

a. An error that arises from an isolated event that has not recurred other than on specifically
identifiable occasions and is therefore not representative of errors in the population.
b. An error that the auditor expects to be present in the population.
c. The maximum error in a population that the auditor is willing to accept.
d. The possibility that the auditor's conclusion, based on a sample may be different from the
conclusion reached if the entire population
20. In “auditing around the computer” the auditor
a. Processes test data on the client’s computer system as part of the check of internal controls.
b. Processes test data on a separate computer system as part of the check of internal controls.
c. Tests transactions and performs account verification procedures as in non-EDP systems.
d. Uses the client’s computer program rerun on client’s EDP facilities.

21. In testing for cut-off, the objective is to determine

a. Whether all of the current period’s transactions are recorded
b. That no transactions from the prior period are included in the current period’s balances
c. That no transactions of the current period have been delayed and recorded in the future
period.
d. Whether transactions are recorded in the proper period.

22. A modification of the CPA’s report on a review of the interim financial statements of a publicly-held
company would be necessitated by which of the following?
a. An uncertainty
b. Lack of consistency
c. Reference to another accountant
d. Inadequate disclosure

23. Unqualified financial statements for the prior year presented in comparative form with audited
financial statements for the current year should be clearly marked to indicate their status and
I. The report on the prior period should be reissued to accompany the current period
report
II. The report on the current period should include as a separate paragraph
description of the responsibility assumed for the prior period’s financial statements

a. I only
b. II only
c. Both I and II
d. Either I or II

24. When an auditor goes through a population and selects items for the sample without regard to their
size, source, or other distinguishing characteristics, it is called
a. Block selection
b. Haphazard selection
c. Systematic selection
d. Statistical selection

25. Which of the following conditions or events most likely would cause an auditor to have substantial
doubt about an entity’s ability to continue as a going concern?
a. Cash flows from operating activities are negative.

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 b. Research and development projects are postponed.
c. Significant related party transactions are pervasive.
d. Stock dividends replace annual cash dividends.

26. Tracing shipping documents to prenumbered sales invoices provides evidence that
a. No duplicate shipments or billings occurred.
b. Shipments to customers were properly invoiced.
c. All goods ordered by customers were shipped.
d. All prenumbered sales invoices were accounted for.

27. Which of the following is not a component of an entity’s internal control?

a. a. Control risk. c. Monitoring.
b. b. Control activities. d. Control environment.

28. 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.

29. When an auditor has chosen a random sample and is using nonstatistical attributes sampling, that
auditor
a. Need not consider the risk of assessing control risk too low.
b. Has committed a nonsampling error.
c. Will have to use discovery sampling to evaluate the results.
d. Should compare the deviation rate of the sample to the tolerable deviation rate.

30. The accounts payable department receives the purchase order form to accomplish all of the following
except to
a. Compare invoice price to purchase order price
b. Ensure that the purchase had been properly authorized
c. Ensure that the goods had been received by the party requesting the goods
d. Compare quantity ordered to quantity purchased

31. When comparative financial statements are presented, the fourth standard of reporting, which refers to
financial statements "taken as a whole," should be considered to apply to the financial statements of
the
a. Periods presented plus the one preceding period
b. Current period only
c. Current period and those of the other periods presented
d. Current and immediately preceding period only

32. Which of the following auditing procedures most likely would assist an auditor in identifying
conditions and events that may indicate substantial doubt about an entity's ability to continue as a
going concern?
a. Inspecting title documents to verify whether any assets are pledged as collateral
b. Confirming with third parties the details of arrangements to maintain financial support
c. Reconciling the cash balance per books with the cut-off bank statement and the bank
confirmation
d. Comparing the entity's depreciation and asset capitalization policies to other entities in the
industry

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33. During a review of the financial statements of a nonpublic entity, the CPA finds that the financial
statements contain a material departure from generally accepted accounting principles. If
management refuses to correct the problem, the CPA should
a. Disclose the departure in a separate paragraph of the report
b. Issue an adverse opinion
c. Attach a footnote explaining the effects of the departure
d. Issue a compilation report

34. Which of the following statements is true regarding the performance of an assurance service on
information systems reliability by a CPA?
a. The CPA is not permitted to provide any other services for the client if he or she is to perform the
service
b. The service will require the CPA to apply all of the attestation and auditing standards
c. The service provides information regarding whether the information system provides reliable
information for internal operating decisions
d. Performing the service will not require the collection of evidence

35. The party responsible for assumptions identified in the preparation of prospective financial statements
is usually
a. A third-party lending institution
b. The client's management
c. The reporting accountant
d. The client's independent auditor

36. Preliminary engagement activities include:

a. Evaluating internal controls.
b. Assessing audit risk at the account balance level.
c. Setting materiality.
d. Determining engagement team requirements.

37. Which of the following is NOT a requirement of the Sarbanes-Oxley Act?

a. Audit firms cannot provide most types of nonaudit services to their public company audit clients
b. Audit firms are required to rotate audit partners off audit engagements every five years for public
company audits
c. Firms that audit public companies are subject to inspection by the PCAOB
d. A certain number of hours, which is based on the size of the company being audited, must be
spent on each audit engagement

38. Which of the following is not included in the broad category of assurance services?
a. operational audit
b. reporting on internal control
c. accounting or review services
d. evaluation of the client's risk management framework

39. An internal auditor is likely to be more concerned with _________________ than the external
auditor.
a. Internal administrative procedures c. The efficiency of operations
b. Cost accounting procedures d. Internal control

40. Which of the following would an auditor most likely use in determining the auditor's planning
materiality?
a. The anticipated sample size for planned substantive procedures
b. The entity's annualized interim (i.e. quarterly) financial statements
c. The results of the internal control questionnaire
d. The contents of the management representation letter

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