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Since 1977

AT L. R. Cabarles/J.M. D. Maglinao
Quiz 2 OCTOBER 2019

1. Which of the following is the most important qualitative

factor that auditors should consider when making 7. An understanding of a client’s business and industry
materiality judgments? and knowledge about operations are essential for
a. A misstatement exceeded five percent of net performing an adequate audit. For a new client, most
income of this information is obtained:
b. The auditor also provides consulting services to the a. from the predecessor auditor.
audit client b. from the Securities and Exchange Commission.
c. The misstatement will cause the client to fail to c. from the permanent file.
meet an earnings forecast d. all of the above.
d. The audit committee is not well educated about the
accounting principle in question 8. Which of the following procedures would an auditor
least likely perform while obtaining an understanding
of a client in a financial statement audit?
2. If it is probable that the judgment of a reasonable a. Coordinating the assistance of entity personnel in
person would have been changed or influenced by the data preparation.
omission or misstatement of information, then that b. Discussing matters that may affect the audit with
information is: firm personnel responsible for nonaudit services to
a. material. the entity.
b. insignificant. c. Selecting a sample of vendors' invoices for
c. significant. comparison to receiving reports.
d. relevant. d. Reading the current year's interim financial
statements.
3. An auditor obtains knowledge about a new client's
business and its industry in order to 9. The basic concept of internal control which recognizes
a. Make constructive suggestions concerning that the cost of internal control should not exceed the
improvements to the client's internal control benefits expected to be derived is known as
structure a. Management by exception.
b. Develop an attitude of professional skepticism b. Management responsibility.
concerning management's financial statement c. Limited liability.
assertions d. Reasonable assurance.
c. Evaluate whether the aggregation of known
misstatements causes the financial statements 10. Which of the following is not one of the subcomponents
taken as a whole to be materially misstated of the control environment?
d. Understand the events and transactions that may a. Management’s philosophy and operating style.
have an effect on the client's financial statements b. Organizational structure.
c. Adequate separation of duties.
4. Concluding analytical procedures are used: d. Commitment to competence.
a. To assist the auditor in assessing the risk of
material misstatements of the FS 11. During the consideration of internal control in a
b. As a substantive test to obtain evidential matter financial statement audit, an auditor is not obligated to
about particular assertion related to account a. Search for significant deficiencies in the operation
balances or classes of transaction. of the internal control.
c. As an overall review of financial information in the b. Understand the internal control and the
final review stage of the audit. information system.
d. All of the above. c. Determine whether the control activities relevant
to audit planning have been implemented.
5. During which of the following phases of an audit is the d. Perform procedures to understand the design of
performance of analysis not performed? internal control.
a. Internal control evaluation phase
b. Planning phase 12. Flowcharting as a means of internal control evaluation
c. Substantive testing phase provides the following advantage over the use of
d. Completion phase questionnaires and descriptive narratives:
a. Ease of preparation.
6. An assumption underlying analytical procedures is that b. Comprehensive coverage of controls.
a. These procedures cannot replace tests of balances c. Simplicity.
and transactions. d. Ease in following information flow.
b. Statistical tests of financial information may lead to
the discovery of material errors in the financial 13. The single most effective control procedure established
statements. to avoid allowing any person to be in a position to
c. The study of financial ratios is an acceptable perpetrate and then conceal errors or fraud is
alternative to the investigation of unusual a. The separation of the functional responsibilities
fluctuations. custodianship, record keeping, operations, and
d. Relationships among data may reasonably be authorization.
expected to exist and continue in the absence of b. Require each employee to take a vacation each
known conditions to the contrary. year.

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c. Established an internal auditing department. b. Checking of accuracy, completeness, and

d. Require the bonding of personnel in positions that authorization of transactions, which include general
necessitate handling of cash and other universally controls and application controls.
desirable valuables. c. The safeguarding of assets, records, periodic
counts, and reconciliations that creates asset
14. When the auditor attempts to understand the accountability.
operation of the accounting system by tracing a few d. The separation of the functions to minimize the
transactions through the accounting system, the opportunities for a person to be able to perpetrate
auditor is said to be: and conceal errors or fraud in the normal course of
a. tracing. his/her duties.
b. vouching.
c. performing a walk-through. 21. The auditor must evaluate the design of relevant
d. testing controls. controls and determine whether they have been
implemented. Evaluating the implementation of the
15. The auditor could assess control risk for an account at entity’s internal control would involve
the maximum when a. Considering whether the control, individually or in
a. immaterial control deficiencies exists in the combination with other controls, is capable of
account. effectively preventing or detecting and correcting,
b. significant control deficiencies exists in an account. material misstatements.
c. material weaknesses exists in an account. b. Determining whether control exists and the entity
d. both A and B. is using it.
c. Determining the how, by whom, and consistency of
16. Which of the following is responsible for establishing a application of internal control.
private company’s internal control? d. Determining whether the control is operating
a. Management. effectively.
b. Auditors.
c. Management and auditors. 22. Transaction cycles begin and end:
d. Committee of Sponsoring Organizations. a. at the beginning and end of the fiscal period.
b. each start of the annual audit.
17. Which of the following is not one of the three primary c. at January 1 and December 31.
objectives of effective internal control? d. at the origin and final disposition of the company.
a. Reliability of financial reporting
b. Efficiency and effectiveness of operations 23. From the point of view of good procedural control,
c. Compliance with laws and regulations distributing payroll checks to employees is best
d. Assurance of elimination of business risk. handled by the
a. Treasurer's department.
18. Control activity component of internal control b. Personnel department.
a. Consists of the policies and procedures that help c. Employee's department supervisor.
ensure that management directives are carried d. Accounting department.
out.
b. Includes the governance and management 24. The accounts payable department generally should
functions and the attitudes, awareness, and a. Cancel supporting documentation after a cash
actions of those charged with governance and payment is mailed
management concerning the entity’s internal b. Approve the price and quantity of each purchase
control and its importance in the entity. requisition
c. Is the entity’s process for identifying business risks c. Assure that the quantity ordered is omitted from
relevant to financial reporting objectives and the receiving department’s copy of the purchase
deciding about actions to address those risks, and order
the results thereof. d. Agree the vendor’s invoice with the receiving
d. Consists of the procedures and records established report and purchase order
to initiate, authorize, record, process, and report
entity transactions, events and conditions and to 25. What critical event must take place before goods can
maintain accountability for the related assets, be shipped?
liabilities, and equity. a. Determination of correct delivery address
b. Credit approval
19. Which of the following relates to management’s c. Receipt of cash
philosophy and operating style of control environment? d. Receipt of sales order from the customer
a. Effective communication of standards and values
and removal of incentives and temptations for 26. Contact with banks for the purpose of opening
dishonest or unethical acts. company bank accounts should normally be the
b. Management’s approach to taking and managing responsibility of the corporate:
business risks. a. board of directors. c. controller.
c. Consideration of key areas of authority and b. treasurer. d. executive committee.
responsibility and appropriate lines of reporting.
d. Recruitment, orientation, training, evaluation, 27. Which of the following is a primary function of the
counseling, promotion, compensation, and purchasing department?
remedial action. a. Ensuring the acquisition of goods of a specified
quality.
20. Which of the following control activities refers to b. Authorizing the acquisition of goods.
performance reviews control? c. Verifying the propriety of goods of a specified
a. Reviews of actual performance versus budgets and quality.
prior performance. d. Reducing expenditures for goods acquired.

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28. Which of the following functions is not appropriate for c. Authorization of transactions from the custody of
the accounts (or vouchers) payable department of related assets
accounting department? d. Operational responsibility from the record keeping
a. Prepare purchase orders. responsibility
b. Prepare voucher and daily summary.
c. File voucher package by due date. 30. The objectives of the internal structure for a production
d. Compare purchase requisitions, purchase orders, cycle are to provide assurance that transactions are
receiving reports, and vendors' invoices to ensure properly executed and recorded, and that
that the purchase had been properly authorized at a. Production orders are prenumbered and signed by
the correct price and quantity. a supervisor
b. Custody of work in process and of finished goods is
29. The purpose of segregating the duties of hiring properly maintained
personnel and distributing payroll checks is to separate c. Independent internal verification of activity reports
the is established
a. Human resources function from the controllership d. Transfers to finished goods are documented by a
function completed production report and a quality control
b. Administrative controls from the internal report
accounting controls
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