Audit Theory Module 3 & 4 PDF

**Audit Module 3** **Joana Elaine V. Dugayo** **3BSA-1A** **1. Broadly defined, the subject matter of any audit consist of ** A. Operating data  B. Economic data  C. Financial statements  D. Assertions about economic actions and events  **2. Management assertions are ** A. Stated in the foo...

**Audit Module 3** **Joana Elaine V. Dugayo** **3BSA-1A** **1. Broadly defined, the subject matter of any audit consist of ** A. Operating data  B. Economic data  C. Financial statements  D. Assertions about economic actions and events  **2. Management assertions are ** A. Stated in the footnotes to the financial statements  B. Explicitly expressed representations about the financial statements C. Provided to the auditor in the assertions letter, but are not disclosed on the  financial statements  D. Implied or expressed representations about classes of transactions and the  related accounts in the financial statements  **3. If the auditor were responsible for making certain that all the assertions of management in the statements were correct ** A. Bankruptcies could no longer occur  B. Audits would be much easier to complete  C. Audits would not be economically feasible  D. Bankruptcies would be reduced to a very small number  **4. For all audits of financial statements made in accordance with PSA, the use of  analytical procedures is required to some extent ** **[In the planning stage] [As a substantive test] [In the review stage]** A. Yes No Yes  B. No Yes No  C. No Yes Yes  D. Yes No No  **5. "Unusual fluctuations" occur when ** A. significant difference are not expected but do exist  B. significant difference are expected but do not exist  C. There is material accounting error or irregularity  D. any one of the above three situations may occur  **6. Which of the following statements concerning the auditor's use of assertions is correct?** A. The auditor may combine the assertions about transactions and events with the  assertions about account balances.** ** B. In every audit engagement, the auditor should use the assertions as described in  PSA 500, i.e., the assertions should always fall into three categories: assertions  about classes of transactions and events, account balances, and presentation and  disclosure.  C. There should always be a separate assertion related to cutoff of transactions and  events.  D. The completeness assertion deals only with whether all transactions and events  that should have been recorded have been recorded.  **7. The information obtained by the auditor in arriving at the conclusions on which the  audit opinion is based is called: ** A. Audit assertions C. Audit standards  B. Audit evidence D. Audit working papers  **8. In "auditing" financial accounting data, the primary concern is with** A. Determining if fraud has occurred.  B. Determining if taxable income has been calculated correctly.  C. Analyzing the financial information to be sure that it complies with  government requirements  D. Determining whether recorded information properly reflects the economic events  that occurred during the accounting period.  **9. The major reason an independent auditor gathers evidence is to ** A. detect fraud  B. evaluate management  C. evaluate internal control  D. form an opinion on the financial statements  **10. Which of the following "decisions" are relevant to the auditor's evidence  accumulation**?  A. Number of items to examine C. Type of audit procedure to use B. Timing of audit procedures D. All of the above are relevant **11. Evidence may take which of the following forms? ** A. Observations made by auditor.  B. Written communications from company employees or outsiders.  C. Oral responses to the auditor from employees of the company under audit. D. Evidence may take any of the above forms  **12. Evidence obtained directly by the auditor will not be reliable if ** A. The client denies its veracity  B. It is provided by the client's attorney  C. The auditor lacks the qualifications to evaluate the evidence  D. It is impossible for the auditor to obtain additional corroboratory evidence **13. The strongest criticism of the reliability of audit evidence that the auditor physically  observes is that ** A. The client may conceal items from the auditor.  B. Such evidence is too costly in relation to its reliability.  C. The observation must occur at a specific time, which is often difficult to arrange. D. The auditor may not be qualified to evaluate the items which he or she is  observing. . **14. Which of the following forms of evidence is most reliable? ** A. General ledger account balances  B. Copy of month- end adjusting entries  C. Internal memo explaining the issuance of a credit memo  D. Confirmation of receivable balances received from a . **15. At what point in the audit are tests of details most appropriately designed?** A. Engagement evaluation C. Testing  B. Planning D. Any of the above  **16. The primary emphasis in most tests of details of balances is on the ** A. Balance sheet accounts C. Income statement accounts B. Cash flow statement account D. All of the above  **17. Tests of details of balances are directed to ** A. Balance sheet accounts for all cycles  B. Income statement accounts for all cycles  C. All general ledger accounts for all cycles  D. Balance sheet accounts for some cycles and income statement accounts for other cycles **18. Tests of details of balances are specific procedures intended to ** A. Prove that the trial balance is in balance  B. Identify the details of the internal control system  C. Test for monetary errors in the balances in the financial statements  D. Prove that the accounts with material balances are classified correctly **19. Which one of the following statements is true in deciding on substantive test of  transactions? ** A. The materiality of the item will not influence the choice of procedures used. B. Results obtained in the prior year's audit will not affect the procedures used this  year.  C. Some procedures are commonly employed on every audit regardless of the circumstances.  D. All procedures are dependent on the adequacy ofthe controls and the results ofthe  tests of controls.  **20. Most auditors prefer to replace tests of details with analytical procedures whenever  possible because** **A. The tests of details are more expensive ** B. The analytical procedure are more reliable  C. The analytical procedures are more persuasive  D. The tests of details are more difficult to interpret  **Audit Theory -- Module 4** **1. The auditor's judgment as to whether the financial statements are presented fairly, in all material respects, is made in the context of** a\. Philippine Standards on Auditing. b\. applicable financial reporting framework. c\. the professional ethical requirements. d\. generally accepted auditing standards **2. The auditing profession recognizes the need for uniformity in reporting as a means of** a\. defending against lawsuits b\. standardizing the policies of various CPA firms c\. upgrading the communications skills of auditors d\. promoting credibility of the report in the global marketplace **3. Auditing standards require that the audit report must be titled. This is done in order to** a indicate that the auditor is a CPA b distinguish the report from the report that might be issued by others. c identify the financial statements audited d emphasize that the report is not a guarantee as to the fair presentation of the financial statements. **4. An auditor has been engaged by the ACE Company to audit the financial statements of CRC Corporation in conjunction with a loan commitment. The report would most likely be addressed to** a\. The shareholders, CRC Corporation b\. The board of directors, XYZ Corporation c\. To whom it may concern d\. ACE Company **5. The auditor may address the report to all of the following, except:** a\. the client company b\. the president or the chief executive officer of client company c\. the board of directors of client company d\. the stockholders of client company **6. The audit report is normally addressed to the:** Board of Directors Stockholders Audit Committee a\. No Yes No b\. Yes Yes No c\. Yes Yes Yes d\. Yes No Yes **7. The element of the auditor's report that identifies the financial statement audited is the** a\. title b\. introductory paragraph c\. management's responsibility for the financial statements paragraph d\. opinion paragraph **8. The introductory paragraph of the auditor's report should** a\. identify the name of the entity for whom the report is prepared. b\. state that the management is responsible for the preparation and fair presentation of the financial statements. c\. state the auditor's responsibility to express an opinion on the financial statements. d\. refer to the summary of significant accounting policies and explanatory notes. **9. The responsibility of the management for the preparation and fair presentation of the financial statements includes all of the following except:** a\. designing, implementing and maintaining internal control that prevents collusion among employees. b\. selecting appropriate accounting policies. c\. applying appropriate policies. d\. making accounting estimates that are reasonable in the circumstances. **10. The auditor's report does not** a\. state that the auditor's responsibility is to express an opinion on the financial statements. b\. state that the audit was conducted in accordance with an identified financial reporting framework. c\. state that the auditor obtained sufficient appropriate evidence to provide a basis for the auditor's opinion. d\. indicate the name of the entity whose financial statements have been audited. **11. If the independent auditor expresses an unqualified opinion on the financial statements, the readers of the audit report can assume that** a\. The independent auditor did not find error or fraud that could materially affect the financial statements. b\. The company is financially sound. c\. All material disagreements between the management and external auditor regarding acceptability of accounting policies and the methods of their application were resolved to the auditor's satisfaction. d\. The auditor is responsible for the fair presentation of the financial statements. **12. The appropriate date for the audit report is the one on which the** a\. client's fiscal year ended b\. auditor has completed all the essential audit procedures c\. auditor and client entered into a contract d\. auditor types and delivers the report to client. **13. The date of the auditor's report normally coincide with the date C** a\. the audit report is issued. b\. the financial statements are issued c\. the management approves the financial statements. d\. the client engaged the services of the auditor. **14. The date of the audit report is important because** a\. The user has a right to expect that the auditor has performed certain procedures to detect subsequent events that would materially affect the financial statements through the date of the report b\. The auditor bills time to the client up to and including the audit report date, and the statement to the client should reflect this date c\. PSAs require all audits to be performed on a timely basis d\. It should coincide with the date of the financial statements **15. The audit report should be dated** a\. Earlier than the date management approves the financial statement b\. Later than the date of issuance of the financial statements c\. Earlier than the date of the issuance of the audit report. d\. Later than the balance sheet date. **16. The most common type of audit report contains a(n)** a\. adverse opinion b\. disclaimer of opinion c\. qualified opinion d\. unqualified opinion **17. The three main types of audit reports other than the Unqualified Report are the** a\. adverse opinion, disclaimer of opinion, and qualified opinion b\. adverse opinion, reports on unaudited financial statements, and disclaimer of opinion c\. disclaimer of opinion, the qualified opinion, and reports on unaudited financial statements. d\. Special audit reports, reports on unaudited financial statements, and adverse opinions. **18. Which of the following is not one of the basic elements of the auditor's report?** a\. Title b\. Date of the report c\. Client's address d\. Auditor's signature **19. How are management's responsibility and the auditor's responsibility represented in the** **standard auditor's report?** **Management's Responsibility Auditor's Responsibility** a\. Explicitly Explicitly b\. Implicitly Implicitly c\. Implicitly Explicitly d\. Explicitly Implicitly **Matters that affect the Unqualified Opinion** **20. The adverse opinion report will be issued by the independent auditor when he/she** a\. Suspects that client has not followed the identified financial reporting framework.. b\. Suspects that client's financial statements are not in conformity with PSAs. c\. Has knowledge that the financial statements are not in conformity with an identified financial reporting framework d\. Has knowledge that PSAs were not followed. **21. A disclaimer is issued whenever the auditor** a\. Has been unable to satisfy him/herself that the overall financial statements are presented fairly. b\. Believes that the overall financial statements are not presented fairly. c\. Believes that some material part(s) of the financial statements are not presented fairly. d\. Has determined that the financial statements are presented fairly. **22. Both disclaimers and adverse opinions are used** a\. Only when the condition is highly material b\. Irregardless of the auditor's independence c\. Whether the condition is material or not. d\. Irregardless of client's choice of a non-GAAP accounting method. **23. The auditor may disagree with management about matters such as the acceptability of accounting policies selected, the methods of their application, or the adequacy of disclosures in the financial statements. If such disagreements are significant to the financial statements, the auditor's report may contain** Qualified opinion Adverse opinion Disclaimer of opinion a\. YES YES YES b\. YES NO YES c\. NO YES YES d\. YES NO NO **24. Which of the following does not properly describe a scope limitation?** a\. the auditor is unable to perform necessary audit procedures. b\. the client's accounting records are inadequate. c\. the auditor is unable to gather sufficient appropriate evidence. d\. the client refuses to disclose essential information in the notes to financial statements. **25. An auditor's report includes the following statement: "The financial statements do not present fairly the financial position, result of operations, or cash flows in conformity with generally accepted accounting principles."** This report was most likely issued in connection with financial statements that are a\. Inconsistent b\. Based on prospective financial information c\. Misleading d\. Affected by a material uncertainty **26. When a scope limitation has precluded the auditor from obtaining sufficient appropriate** **evidential matter, the report would most likely contain** a\. An unqualified opinion with an emphasis of a matter paragraph b\. Either a qualified opinion or an adverse opinion c\. Either a disclaimer of opinion or a qualified opinion d\. Either an adverse opinion or a disclaimer of opinion **27. Under which of the following circumstances is a disclaimer of opinion inappropriate?** a\. The auditor is engaged after fiscal year end and is unable to observe physical inventories or apply alternative procedures to verify their balances b\. The auditor is unable to determine the amounts associated with fraud committed by the client's management c\. The financial statements fail to contain adequate disclosure concerning related party transactions d\. The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry **28. When management does not amend the financial statements in circumstances where the auditor believes they need to be amended and the auditor\'s report has not been released to the entity, the auditor should express** a.Qualified or adverse opinion b\. Qualified or disclaimer of opinion c.Unqualified opinion with explanatory paragraph d\. Unqualified opinion. **29. An auditor may reasonably issue a qualified opinion for** **Inadequate Disclosure Scope Limitation** a\. Yes Yes b\. No Yes c\. Yes No d\. No No **30. In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?** a\. The auditor did not observe the entity\'s physical inventory and is unable to become satisfied as to its balance by other auditing procedures. b\. The financial statements fail to disclose information that is required by financial reporting standards. c\. The auditor is asked to report only on the entity\'s balance sheet and not on the other basic financial statements. d\. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity\'s ability to continue as a going concern. **31. Von, CPA, was engaged to audit the financial statements of Coleen Company after its fiscal year had ended. Von neither observed the inventory count nor confirmed the receivables by direct communication with debtors, but was satisfied concerning both after applying alternative procedures. Von's auditor's report most likely contained a (an)** a\. Qualified opinion b\. Unqualified opinion c\. Disclaimer of opinion d\. Unqualified opinion with an emphasis of a matter paragraph. **32. An auditor has been asked to report on the balance sheet of Ryan Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditor** a\. May accept the engagement because such engagements merely involve limited reporting objectives b\. May accept the engagement but should disclaim an opinion because of an inability to apply the procedures considered necessary c\. Should refuse the engagement because there is a client-imposed scope limitation d\. Should refuse the engagement because such engagement is tantamount to piecemeal opinion. **33. The auditor would most likely issue a disclaimer of opinion because of** a\. Inadequacy of the accounting records b\. Inadequate disclosure of material information. c\. A client-imposed scope limitation. d\. The qualification of an opinion by the other auditor of subsidiary where there is a division of responsibility. **34. The management of a client believes that the statement of cash flow is not a useful document and refuses to include one in the annual report to stockholders. As a result, the auditor\'s opinion should be** a\. qualified due to inadequate disclosure b\. qualified due to a scopes limitation c\. adverse d\. unqualified **35. When the financial statements contain a departure from generally accepted accounting principles, the effect of which is material, the auditor should** a\. Qualify the opinion and explain the effect of the departure from GAAP in a separate paragraph b\. Qualify the opinion and describe the departure from GAAP within the opinion paragraph c\. Disclaim an opinion and explain the effect of the departure from GAAP in a separate paragraph d\. Disclaim an opinion and describe the departure from GAAP within the opinion paragraph **36. When an auditor expresses an adverse opinion, the opinion paragraph should include** a\. The principal effects of the departure from generally accepted accounting principles b\. A direct reference to a separate paragraph disclosing the basis for the opinion c\. The substantive reasons for the financial statements being misleading d\. A description of the uncertainty or scope limitation that prevents an unqualified opinion **37. An auditor decides to express a qualified opinion on an entity\'s financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor\'s report should state that the qualification on pertains to** a\. A client-imposed scope limitation. b\. A departure from generally accepted auditing standards. c\. The possible effects on the financial statements. d\. Inadequate disclosure of necessary information. **38. Which of the following statements is incorrect about the auditor's responsibility when the auditor expresses an opinion that is other than unqualified?** a\. a clear description of all the substantive reasons should be included in the report b\. unless impracticable, a quantification of the possible effect(s) on the financial statements should be indicated in the report. c\. the information would ordinarily be set out in a separate explanatory paragraph following the opinion or disclaimer of opinion. d\. the information may include a reference to a more extensive discussion, if any, in the notes to financial statements. **39. An auditor\'s opinion reads as follows:** **\"In our opinion, except for the above-mentioned limitation on the scope of our audit..,\"** **This is an example of a(n)** a\. review opinion c. emphasis on a matter b\. qualified opinion d. unacceptable reporting practice **40. Inadequacy of disclosures in the notes to financial statements normally requires the auditor to express a qualified opinion on the client's financial statements. When this occurs, the auditor should disclose the substantive reasons for expressing a qualified opinion in an explanatory paragraph** a\. Preceding the paragraph that describes the auditor's responsibility b\. Following the opinion paragraph c\. Within the notes to the financial statements d\. Preceding the opinion paragraph **41. An auditor should disclose the substantive reasons for expressing an adverse opinion in an explanatory paragraph** a\. Preceding the management's responsibility paragraph b\. Preceding the opinion paragraph c\. Following the opinion paragraph d\. Within the notes to the financial statements **42. When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate explanatory paragraph and modify the** **Introductory paragraph Management responsibility paragraph Auditor's Responsibility paragraph Opinion Paragraph** a\. Yes No No Yes b\. Yes Yes No No c\. No Yes Yes Yes d\. No No No Yes **43. When the auditor expresses an opinion that is other than unqualified, a clear description of all the substantive reasons should be included in the report and, unless practicable a quantification of possible effects on the financial statements. This information would ordinarily be set out in** a\. the opinion paragraph of the auditor's report b\. the paragraph that describes the auditor's responsibility. c\. a separate paragraph preceding the opinion paragraph. d\. a separate paragraph following the opinion paragraph. **Matters that do not affect the Unqualified Opinion** 4**4. Which of the following statements is not correct about "emphasis of a matter paragraph"?** a\. The addition of such paragraph is not to be construed as a modification of the auditor's report. b\. The addition of such paragraph does not affect the auditor's opinion. c\. The paragraph would preferably be presented after the opinion paragraph. d\. The paragraph is normally used by the auditor to highlight certain items in the financialstatements. **45. Which of the following circumstances will not affect the auditor's opinion?** a\. a limitation on the scope of the auditor's work imposed by the client b\. a limitation on the scope of the auditor's work imposed by the circumstances. c\. Disagreement with management about matters such as acceptability of the accounting policies or the methods of their application. d\. Significant uncertainties affecting the financial statements. **46. Three of the following conditions would, by itself, require the auditor to issue a report other than the Unqualified Report. Which one would not require such a departure?** a\. Client company's financial statements show a significant net loss for each of the last three years, including the current fiscal period. b\. The financial statements have not been prepared in accordance with generally accepted accounting principles. c\. The auditor is not independent during the fiscal period under audit. d\. The scope of the auditor's examination has been restricted, although the cause of the restriction was not the client's fault. **47. What is the purpose of the following paragraph in an audit report on financial statements:** **"\...\....we draw attention to note X in the financial statements which discusses that the company is a subsidiary of another Company"** a.A standard reporting requirement. b\. Emphasis of a matter c.Qualification of an opinion d\. An inappropriate reporting. **48. An auditor who concludes, that an uncertainty is not adequately disclosed in. the financial statements should issue a:** a\. Disclaimer of opinion. b\. Unqualified report with an explanatory paragraph. c\. Special report. d\. Qualified report. **49. An auditor may wish to emphasize a matter included in the financial statements by adding a separate paragraph to the audit report. In this case the following paragraphs of the audit report should be modified:** a\. Introductory paragraph b\. Auditor's responsibility paragraph c\. Opinion paragraph d\. None **50. \`When the auditor concludes that there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, the auditor should** a\. issue either qualified or adverse opinion b\. consider the adequacy of disclosure in the notes to financial statements c\. report to the audit committee the need to adjust management estimates d\. re-issue the prior years audit report and add explanatory paragraph that specifically refers to "substantial doubt" and "going concern" **51. The independent auditor has concluded that a substantial doubt remains about a client's ability to continue in existence, but the client's financial statements have properly disclosed all of its solvency problems. The auditor would probably issue a (an)** a\. Unqualified opinion with an appropriate explanatory paragraph. b\. "Except for" qualified opinion. c\. Standard unqualified opinion. d\. Adverse opinion. **52. 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** a\. Qualified or adverse opinion b\. Unqualified opinion with explanatory paragraph c\. Disclaimer of opinion d\. Unqualified opinion. **53. The auditor should consider adding a separate paragraph to the standard unqualified report when** a\. The auditor is prevented from completing a procedure required by PSA. b\. The financial statements fail to disclose information required by GAAP c\. The auditor decides to make reference to the report of another auditor d\. An uncertainty arises about the entity\'s continued existence **54. An auditor concludes that there is substantial doubt about an entity\'s ability to continue as a going concern for a reasonable period of time. If the entity\'s disclosures concerning this matter are adequate, the audit report may include a(n):** Adverse opinion Qualified opinion a\. Yes Yes b\. No Yes c\. No No d\. Yes No **55. When management prepares financial statements on the basis of a going concern and the auditor believes the company may not continue as a going concern the auditor should issue** a\. qualified opinion b\. unqualified opinion with an explanatory paragraph c\. disclaimer of opinion d\. adverse opinion **56. The consistency standard does not apply to an accounting change that results from a change in** a\. Accounting principle b\. Accounting estimate c\. The reporting entity d\. Accounting principle inseparable from a change in accounting estimate **57. Which of the following requires recognition in the auditor's opinion as to consistency?** **a. The correction of an error in the prior year's financial statements resulting from a mathematical mistake in capitalizing interest** b\. The change from the cost method to the equity method of accounting for investments in common stock c\. A change in the estimate of provisions for warranty cost d\. A change in depreciation method which has no effect on current year's financial statements but is certain to affect future years **58. Which of the following should have a consistency paragraph in the auditor\'s report whether or not the item is fully disclosed in the financial statements?** a\. A change in accounting estimate b\. A change from an unacceptable accounting principle to a generally accepted one c\. Correction of an error not involving a change in accounting principle d\. A change in classification **59. When there is a significant change in accounting principle, an auditor\'s report should refer to the lack of consistency in:** a\. The scope paragraph b\. An explanatory paragraph between the second paragraph and the opinion paragraph c\. The opinion paragraph d\. An explanatory paragraph following the opinion paragraph **60. Below are lists of accounting changes affecting consistency and comparability. All items are material. Which list does not contain a change requiring recognition in the audit report?** a\. Correction of an error in an accounting principle; change in accounting estimate; a reclassification b\. Reclassification; a substantially different transaction; an accounting change having no material effect on the financial statements in the current year but having a substantial effect in subsequent years c\. Substantially different transactions; certain changes in the presentation of cash flows; a change in reporting entity d\. Correction of an error not involving an accounting principle; change in accounting estimate; a change in reporting entity