Burauen Community College

Poblacion District 9, Burauen, Leyte

College of Business and Public Administration

Quiz No. 5 in Auditing and Assurance Principles
Name of student: ____________________________________ Score: _______________
Program: ____________________________________ Date: _______________

INSTRUCTION: Please read the statements carefully. Write your answers on the
table provided below. Use CAPITAL letter only. No erasures allowed.

1. 11. 21. 31.

2. 12. 22. 32.
3. 13. 23. 33.
4. 14. 24. 34.
5. 15. 25. 35.
6. 16. 26. 36.
7. 17. 27. 37.
8. 18. 28. 38.
9. 19. 29. 39.
10. 20. 30. 40.

1. Management's responses to inquiries can be corroborated by each of the following,

except:
a. Visits to the entity's premises and plant facilities.
b. Inspection of documents and internal control manuals.
c. Preparation of the summary of unadjusted differences.
d. Observation of entity activities and operations.
2. Manual controls would most likely be more suitable than automated controls for which of
the following?
a. Large, unusual, or nonrecurring transactions.
b. High-volume transactions that require additional calculations.
c. Situations with routine errors that can be predicted and corrected.
d. Circumstances that require a high degree of accuracy.
3. Which of the following most accurately describes the process of a walkthrough?
a. Testing and documenting the results of tests of selected controls.
b. Inspection of selected documents, records, and internal control documentation.
c. Observation of an entity's activities and operations.
d. Following a transaction from its origination until it is reflected in the financial
statements.
4. If an auditor is obtaining an understanding of an entity’s information and communication
component of internal control, which of the following factors should the auditor assess?
a. The integrity and ethical values of top management.
b. The philosophy and operating style of management to promote effective internal
control over financial reporting.

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 c. The classes of transactions in the issuer’s operations that are significant to the
issuer’s financial statements.
d. The oversight responsibility over financial reporting and internal control by the
board or audit committee.
5. Which of the following situations represents a limitation, rather than a failure, of internal
control?
a. A jewellery store employee steals a small necklace from a display cabinet.
b. A bank teller embezzles several hundred dollars from the cash drawer.
c. A purchasing employee and an outside vendor participate in a kickback scheme.
d. A movie theater cashier sells reduced-price tickets to full-paying customers and
pockets the difference.
6. Which of the following statements is not an example of an inherent limitation of internal
control?
a. The effectiveness of control procedures depends on segregation of duties.
b. Errors may arise from mistakes in judgments.
c. Most internal controls tend to be directed at routine transactions rather than non-
routine transactions.
d. The cost-benefit relationship is a primary criterion in designing internal control,
7. The risk of not detecting material misstatement resulting from fraud is greater than the
risk of not detecting a material misstatement arising from error, because:
a. Fraud ordinarily involves acts designed to conceal it.
b. The auditor designs only procedures to detect material error but no procedures are
designed to detect material fraud.
c. The PSA do not require the auditor to discover information that is indicative of fraud.
d. It is the responsibility of the management to detect fraud and the auditor's
responsibility is confined only to the detection of material errors.
8. The assessment of the risks of material misstatement at the financial statement level is
affected by the auditor’s understanding of the control environment. Weaknesses in the
control environment ordinarily will lead the auditor to
a. Modify the nature of audit procedures to obtain more persuasive audit evidence.
b. Have more confidence in internal control and the reliability of audit evidence
generated internally within the entity.
c. Conduct some audit procedures at an interim date rather than at period end.
d. Decrease the number of locations to be included in the audit scope.
9. Which of the following statements best describes the auditor's responsibility to detect
material errors and fraud?
a. The auditor is responsible for the failure to detect material errors and frauds only
when such failure results from the misapplication of generally accepted accounting
principles.
b. The auditor is responsible for the failure to detect material errors and frauds only
when the auditor fails to confirm receivables or observe inventories.
c. The audit should be designed to provide reasonable assurance that material errors
and fraud are detected.
d. Extended auditing procedures are required to detect unrecorded transactions even
if there is no evidence that material errors and frauds may exist.
10.As the acceptable level of detection risk decreases, the assurance directly provided from
a. Substantive tests should increase. c. Tests of controls should increase.
b. Substantive tests should decrease. d. Tests of controls should
decrease.
11.The auditor’s judgment as to what is sufficient, appropriate audit evidence is influenced by
such factors as the following, except
a. Auditor’s assessment of the nature and level of inherent risk at both the financial
statement level and the account balance level or class of transactions level.
b. Nature of the accounting and internal control systems and the assessment of control
risk.
c. Materiality of the item being examined.
d. Results of audit procedures, excluding fraud or error which may have been found.
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12.The negative form of accounts receivable confirmation request is useful except when
a. internal control surrounding accounts receivable is considered to be effective
b. a large number of small balances are involved
c. the auditor has reason to believe the persons receiving the requests are likely to
give them consideration
d. individual account balances are relatively large
13.Which of the following conditions would not normally cause the auditor to question
whether material misstatements exist?
a. bookkeeping errors are listed on an EDP-generated error listing
b. differences exist between control accounts and supporting master files
c. transactions are not supported by proper documentation
d. differences are disclosed by confirmations
14.In a small company that employs inadequate number of employees to permit proper
division of responsibilities, effective internal control can best be strengthened by:
a. Direct participation by the owner of the business in the record-keeping activities of
the business.
b. Employment of temporary personnel to aid in the separation of duties.
c. Delegation of full clear-cut responsibility to each employee for the functions
assigned to each.
d. Affirm in writing management’s approval of limitation on the scope of the audit.
15.A document which the auditor receives from the client, but which was prepared by
someone outside the client’s organization, is a(n):
a. Confirmation. c. External document.
b. Internal document. d. Inquiry.
16.When performing analytical tests, a CPA is least likely to compare the current year’s
balances or ratios to expectations derived from:
a. informed judgment c. industry data
b. budgetary data d. unaudited data
17.Leovic, CPA, is planning the audit of Theory, Inc. Theory verbally asserts to Leovic that all
the expenses for the year have been recorded in the accounts. Theory’s representation in
this regard:
a. Is sufficient evidence for Leovic to conclude that the completeness assertion is
supported for the expenses.
b. Can enable Leovic to minimize his work on the assessment of control risk for the
completeness of expenses.
c. Should be disregarded because it is not in writing.
d. Is not considered a sufficient basis for Leovic to conclude that all expenses have
been recorded.
18.PSA 500, Audit Evidence, requires an auditor to obtain sufficient, appropriate audit
evidence to be able to draw reasonable conclusions on which to base the audit opinion.
Substantive procedures means
a. The information obtained by the auditor in arriving at the conclusion on which the
audit opinion is based.
b. The tests performed to obtain evidence about the suitability of design and effective
operation of the accounting and internal control systems.
c. The tests performed to obtain audit evidence to detect material
misstatements in the financial statements.
d. Procedures which comprise the source documents and accounting records
underlying the financial statements under audit.
19.During consideration of internal control in a financial statement audit, an auditor is not
obligated to:

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 a. Search for all significant deficiencies in the operation of internal control.
b. Understand the internal control environment and the accounting system.
c. Determine whether the control activities relevant to audit planning have been
implemented.
d. Perform procedures to understand the design of internal control.
20.The permanent (continuing) file of audit documentation most likely would include copies of
the:
a. Lead schedules. c. Bank statements.
b. Attorney's letters. d. Debt agreements.
21.Which of the following pairs of accounts would be analyzed together in the audit
documentation?
a. Notes receivable and interest income.
b. Accrued interest receivable and accrued interest payable.
c. Notes payable and notes receivable.
d. Interest income and interest expense.
22.Which of the following factors would least likely affect the nature and extent of audit
documentation?
a. The nature of the specific audit procedures.
b. The risk of material misstatement.
c. The extent to which judgment was required in performing the specific audit
procedures.
d. The content of the representation letter.
23.Audit documentation should be prepared in enough detail so that:
a. An experienced auditor who has worked with the client in the past can understand
the procedures performed and the evidence obtained.
b. A reader of the financial statements who has no previous connection with the audit
can understand the procedures performed and the evidence obtained.
c. A reader of the financial statements who has a background in financial analysis can
understand the procedures performed and the evidence obtained.
d. An experienced auditor who has no previous connection with the audit can
understand the procedures performed and the evidence obtained.
24.Which of the following circumstances most likely would cause an auditor to suspect that
material misstatements exist in a client's financial statements?
a. The assumptions used in developing the prior year's accounting estimates have
changed.
b. Differences between reconciliations of control accounts and subsidiary records are
not investigated.
c. Negative confirmation requests yield fewer responses than in the prior year's audit.
d. Management consults with another CPA firm about complex accounting matters.
25.An auditor may achieve audit objectives related to particular assertions by:
a. Performing analytical procedures. c. Preparing audit documentation.
b. Adhering to a system of quality control. d. Increasing the level of detection
risk.
26.Which of the following presumptions is correct about the reliability of audit evidence?
a. Information obtained indirectly from outside sources is the most reliable evidential
matter.
b. To be reliable, audit evidence should be conclusive rather than persuasive.
c. Reliability of audit evidence refers to the amount corroborative evidence obtained.
d. An effective internal control structure provides more assurance about the reliability
of audit evidence.
27.Which of the following types of audit evidence generally is the most reliable?

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 a. Inquiries made of management. c. Analytical procedures.
b. Confirmation of account information. d. Review of prior-year audit
procedures.
28.Tests designed to detect purchases made before the end of the year that have been
recorded in the subsequent year most likely would provide assurance about
management's assertion regarding:
a. Accuracy. c. Cutoff.
b. Obligations. d. Classification.
29.When an auditor does not receive replies to positive requests for year-end accounts
receivable confirmations, the auditor most likely would:
a. Inspect the allowance account to verify whether the accounts were subsequently
written off.
b. Increase the assessed level of detection risk for the valuation and completeness
assertions.
c. Ask the client to contact the customers to request that the confirmations be
returned.
d. Increase the assessed level of inherent risk for the revenue cycle.
30.The audit documentation that makes up the current file most likely would include a copy of
the:
a. Bank reconciliation. c. Articles of incorporation.
b. Pension plan contract. d. Flowchart of the internal control.
31.In testing the existence assertion for an asset, an auditor ordinarily works from the:
a. Financial statements to the potentially unrecorded items.
b. Potentially unrecorded items to the financial statements.
c. Accounting records to the supporting evidence.
d. Supporting evidence to the accounting records.
32.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.
33.Which of the following audit procedures probably would provide the most reliable evidence
concerning the entity's assertion of rights and obligations related to inventories?
a. Trace test counts noted during the entity's physical count to the entity's
summarization of quantities.
b. Inspect agreements to determine whether any inventory is pledged as collateral or
subject to any liens.
c. Select the last few shipping advices used before the physical count and determine
whether the shipments were recorded as sales.
d. Inspect the open purchase order file for significant commitments that should be
considered for disclosure.
34.Which of the following statements concerning audit evidence is correct?
a. To be appropriate, audit evidence should be either reliable or relevant, but need not
be both.
b. The measure of the sufficiency of audit evidence lies in the auditor's judgment.
c. The difficulty and expense of obtaining audit evidence concerning an account
balance is always a valid basis for omitting the test.
d. A client's accounting data can be sufficient audit evidence to support the financial
statements.

35.An auditor assesses control risk because it:

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 a. Is relevant to the auditor's understanding of the control environment.
b. Provides assurance that the auditor's materiality levels are appropriate.
c. Indicates to the auditor where inherent risk may be the greatest.
d. Affects the level of detection risk that the auditor may accept.
36.Samples to test internal control are intended to provide a basis for an auditor to conclude
whether:
a. The control activities are operating effectively.
b. The financial statements are materially misstated.
c. The risk of incorrect acceptance is too high.
d. Materiality for planning purposes is at a sufficiently low level.
37.When an auditor increases the assessed level of control risk because certain control
activities were determined to be ineffective, the auditor would most likely increase the:
a. Extent of tests of controls. c. Extent of tests of details.
b. Level of detection risk. d. Level of inherent risk.
38.The primary difference between an audit of the balance sheet and an audit of the income
statement is that the audit of the income statement deals with the verification of:
a. transactions. c. costs.
b. authorizations. d. cutoffs.
39.The responsibility for adopting sound accounting policies and maintaining adequate
internal control rests with the:
a. board of directors. c. financial statement auditor.
b. company management. d. company’s internal audit department.
40.If working papers are to have the characteristics that will ensure that they a, which of the
following is the most important?
a. Working papers must be of standard format and standard content.
b. Working papers must be properly indexed and cross- referenced to the draft audit
report.
c. Working papers must provide sufficient, competent, and useful information to
support the audit report.
d. Working papers must be arranged in logical order following the audit program
sequence.

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