AUD311 Enabling Assessment Module 3 PDF

BAUDT-311 - Enabling Assessment - Module 3 (SET A) 1st Sem SY 2023-2024 Name:__________________________ Multiple Choice. Shade your choice in the answer sheet provided. Indicate your set on the top right portion of the answer sheet. 1. Which of the ff. procedures would an auditor least likely...

BAUDT-311 - Enabling Assessment - Module 3 (SET A) 1st Sem SY 2023-2024 Name:__________________________ Multiple Choice. Shade your choice in the answer sheet provided. Indicate your set on the top right portion of the answer sheet. 1. Which of the ff. procedures would an auditor least likely perform in planning a financial statement audit? a. Reading the current year’s interim financial statement. b. Coordinating the assistance of entity personnel in data preparation c. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity. d. Selecting a sample of vendor’s invoices for comparison to receiving reports. 2. Roy, CPA, is considering audit risk at the financial statement level in planning the audit of Toxic Waste Disposal (TWD) Company’s financial statements for the years ended December 31, 2021. TWD is a privately owned entity that contracts with municipal governments to remove environmental wastes. Its chief executive officer, JR, controls the majority of the board of directors. Audit risk at the financial statement level is influenced by the risk of material misstatements, which may be indicated by a combination of factors related to management, the industry and the entity. Based only on the information above, which of the following would most likely decrease audit risk? a. The accounting department experiences a high rate of turnover of key personnel. b. This was the first year TWD operated at a profit since 2015 because the municipalities received increased funding for environmental purposes. c. TWD’s board of directors is controlled by JR, the majority stockholder, who also acts as the CEO. d. The internal auditor reports to the controller and the controller reports to JR. 3. Refer to previous Question. Based only on the information above, which of the following would most likely increase audit risk? a. TWD’s bank has a loan officer who regularly meets TWD;s CEO and controller to monitor TWD’s financial performance. b. TWD’s employees are paid biweekly. c. An initial public offering of TWD’s stock is planned for late 2023. d. Roy has audited TWD for five years. 4. Which of the following is most correct concerning the understanding of internal control needed by auditors to plan the audit? a. The auditors must understand the control environment, but not the accounting system or the control procedures. b. The auditors must understand the control environment, the accounting system and not the control procedures. c. The auditors must understand the control environment, the accounting system and must use judgment as to control procedures which must be considered. d. The auditors must understand the control environment, the accounting system and all control procedures. 5. Which of the following would be of least interest to the auditors in considering internal control? a. Procedures that are concerned with the decision processes leading to management’s authorization of transactions. b. Procedures restricting access to assets. c. Procedures related to recording transactions. d. Policies concerning the reconciliation of accounting records to existing assets. 6. Which of the following is not one of the three main reasons why the auditor should properly plan engagements? a. To help keep audit costs reasonable b. To avoid misunderstandings with the client c. To enable the auditor to obtain sufficient competent evidence d. To enable proper on the job training of employees 7. Which of the following most accurately summarizes what is meant by the term “material misstatement”? a. Fraud and direct effect illegal acts b. Fraud involving senior management and material fraud c. Material error, material fraud, and certain illegal acts d. Material error and material illegal acts 8. Which of the following is not a type of evidence that would be used for both obtaining an understanding of the control structure and testing of controls? a. Inquiries b. Inspection c. Observation d. Reperformance 9. This type of evidence can be gathered with every type of audit test a. Inquiries of client personnel b. Inspection of documents and records c. Observation of application of policies and procedures d. Reperformance of procedures 10. Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? a. The audit program b. The auditor’s judgment c. Philippine Standards on Auditing d. The auditor’s working papers 11. After performing a study and evaluation of the client’s system of internal control, an auditor has concluded that the system is well designed and is functioning as anticipated. Under these circumstances the auditor would most likely a. Cease to perform further substantive tests b. Not increase the extent of predetermined substantive tests c. Increase the extent of anticipated analytical review procedures d. Perform all compliance tests to the extent outlined in the preplanned audit program 12. In the context of an audit of financial statements substantive tests are audit procedures that a. May be eliminated under certain conditions b. Are designed to discover significant subsequent events c. May be either test of transactions, direct tests of financial balances or analytical tests d. Will increase proportionately with the auditor’s reliance on internal control 13. Each of the following might, in itself, form a valid basis for an auditor to decide to omit a test except the a. Relative risk involved b. Relationship between the cost of obtaining evidence and its usefulness c. Difficulty and expense involved in testing a particular item d. Degree of reliance on the relevant internal controls 14. An auditor evaluates the existing system of internal control in order to a. Determine the extent of substantive tests which must be performed b. Determine the extent of compliance test which must be performed c. Ascertain whether irregularities are probable d. Ascertain whether any employees have incompatible functions 15. Reasons to evaluate internal control would not include a. Basis for planning the audit b. Determine the nature, timing and extent of audit procedures c. Basis for the type of opinion to be rendered d. Formulating constructive suggestions for improvement 16. Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel? a. Arrange to make copies, for inclusion in the working papers, of those client supporting documents examined by the auditors b. Arrange to provide the client with copies of the audit programs to be used during the audit c. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing and other information d. Arrange to have the auditors prepare and post any unnecessary adjusting or reclassification entries prior to final closing 17. Which of the following is not considered among the benefits of audit planning? a. Audit planning helps coordinate the work to be done by auditors of components and other parties such as experts, specialists, etc. b. Audit planning ensures that the audit is properly organized, managed and performed in an effective and efficient manner. c. Audit planning aids in ensuring the examination of financial statements can be performed without problems and difficulties. d. Audit planning helps ensure that appropriate attention is devoted to important areas of the audit. 18. As the audit progresses and additional information about the client is obtained, the acceptable level of audit risk a. May be modified b. May not be reduced because it would become statistically invalid, but it may be increased  c. May not be increased because it would become statistically invalid, but may be reduced d. May not be modified 19. Which of the following is not a consideration when the auditor is attempting to assess the inherent risk? a. Nature of client’s business b. Existence of related parties c. Frequency and intensity of top management’s review of the accounting transactions and records d. Susceptibility to defalcation 20. Which of the following is an example of the concept of inherent risk? a. Humans make more errors than computers, therefore a manual accounting system is riskier than a computerized system b. Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on the financial statements is reduced c. Loans receivable for a finance company are less likely to be collectible than those of a bank d. Audits with larger sample sizes are less risky than those with smaller sample sizes 21. An auditor searching for related party transactions should obtain an understanding of each subsidiary’s relationship to the total entity because a. This may permit the audit of intercompany account balances to be performed as of concurrent dates. b. This may reveal whether particular transactions would have taken place if the parties had not been related. c. The business structure may be deliberately designed to obscure related party transactions. d. Intercompany transactions may have been consummated on terms equivalent to arm’s-length transactions. 22. After determining that a related party transaction has, in fact, occurred an auditor should a. Obtain an understanding of the business purpose of the transaction. b. Substantiate that the transaction was consummated on terms equivalent to an arm’s-length transaction. c. Add a separate paragraph to the auditor’s report to explain the transaction. d. Perform analytical procedures to verify whether similar transactions occurred, but were not recorded. 23. In connection with the planning phase of an audit engagement, which of the following statements is always correct? a. Final staffing decisions must be made prior to completion of the planning stage b. Observation of inventory count should be performed at year-end c. A portion of the audit of a continuing audit client can be performed at interim dates d. An engagement should not be accepted after the client’s financial year end 24. PSA313 (Identifying and assessing risks of material misstatement through understanding the entity and its environment) requires the auditor to perform risk assessment procedures at a. The financial statement level only b. The assertion level only  c. The financial statement level and the assertion for classes of transactions, account balances and disclosures d. Either the financial statement or assertion level 25. The auditor’s risk assessment procedures a. By themselves, do not provide sufficient appropriate audit evidence on which to base the audit opinion. b. Should not consider information obtained from the auditor’s previous experience with the entity. c. Are designed to detect material misstatements at the assertion level for classes of transactions, account balances and disclosures. d. Are designed to test the effectiveness of the entity’s controls 26. The auditor should obtain an understanding of the entity’s objectives and strategies, and those business risks that may result in risks of material misstatement. Which of the following statements concerning the entity’s business risk is incorrect? a. Business risk is broader than the risk of material misstatement of the financial statements, though it includes the latter. b. An understanding of the business risks facing the entity increases the likelihood of identifying risks of material misstatement. c. The auditor has a responsibility to identify or assess all business risks d. Business risk may arise from the development of new products or services that may fall. 27. Which of the following statements concerning audit risk and its components in incorrect? a. Regardless of the assessed levels of inherent and control risks, the auditor should always perform some substantive procedures for material account balances and classes of transactions b. The higher the assessment of inherent and control risks, the more evidence the auditor should obtain from the performance of substantive procedures c. The assessed level of inherent risk need not be considered in determining the nature, timing, and extent of substantive procedures required to reduce audit risk to an acceptably low level d. After obtaining an understanding of the accounting and internal control systems, the auditor should make a preliminary assessment of control risk, at the assertion level, for each material account balance or class of transactions 28. The statements below describe the interrelationship of audit risk components. Which is false? a. There is an inverse relationship between detection risk and the combined level of inherent and control risks b. When inherent and control risks are high, the acceptable level of detection risk needs to be low to reduce audit risk to an acceptably low level c. When the inherent and control risks are low, an auditor can accept a higher detection risk and still reduce audit risk to an acceptably low level d. The assessed level of inherent and control risks can be sufficiently low to eliminate the need for the auditor to perform any substantive procedures 29. An entity’s internal control system contains manual elements and often contains automated elements. Manual elements in internal control may be less relatable than automated elements because a. Manual control elements can be more easily bypassed, ignored or overridden and they are also more prone to simple errors and mistakes b. Manual control elements facilitate the additional analysis of information  c. Consistency of application of manual control elements can always be assumed d. Manual control elements include reliance on systems or programs that are inaccurately processing data, processing inaccurate data or both 30. Audit evidence is information used to draw reasonable conclusions on which to base the auditor’s opinion. Audit evidence is obtained by performing: I. Risk assessment procedures and II. Further audit procedures a. I only b. II only c. neither I or II d. Both I and II 31. Which of the following would least likely affect the appropriateness of evidence available to an auditor? a. The sampling method employed by the auditor to obtain a sample of such evidence. b. The relevance of such evidence to the financial statement assertion being verified c. The relationship of the prepare of such evidence to the entity being audited d. The timeliness of such evidence 32. Which of the following audit procedures consists of looking at a process or procedure being performed by others? a. Observation b. Inspection of records and documents c. Inspection of tangible assets d. Inquiry 33. Which of the following events most likely indicates the existence of related parties? a. Making a loan without scheduled terms for repayment of the funds b. Discussing merger terms with a company that is a major competitor c. Selling real estate at a price that differs significantly from its book value d. Borrowing a large sum of money at a variable rate of interest 34. The actual operation of an internal control system may be most objectively evaluated by a. Completing an internal control questionnaire and flowchart to the accounting system in the year under audit b. Review of the previous year’s audit documentation to update the report of internal control evaluation c. Selection of items processed by the system and determination of the presence or absence of errors and compliance deviations d. Substantive tests of account balances based on the auditor’s assessment of internal control strength 35. The ultimate risk against which the auditor requires reasonable protection is a combination of two separate risks. The first of these is that material errors will occur in the accounting process by which the financial statements are developed, and the second is that a. A company’s system of internal control is not adequate to detect errors and irregularities b. Those errors that occur will not be detected in the auditor’s examination c. Management may possess an attitude that lacks integrity d. Evidential matter is not competent enough for the auditor to form an opinion based on reasonable assurance 36. In planning an audit, the auditor considers audit risk. Audit risk is the a. Susceptibility of an assertion to material misstatement assuming that there are no related controls b. Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the client’s internal control c. Risk that the auditor’s verifying account balances will not detect a material misstatement that in fact exists d. Risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated 37. Which of the following best describe the interrelated components of internal control? a. Organizational structure, management philosophy, and planning b. Control environment, risk assessment, control activities, information and communication systems and monitoring c. Risk assessment, backup facilities, responsibility accounting and natural laws d. Legal environment of the firm, management philosophy and organizational structure 38. Documentary evidence is one of the principal types of corroborating information used by an auditor to substantiate an opinion. Which one of the following examples of documentary evidence would be the most reliable? a. Time tickets b. Material requisition slips c. Copies of sales invoices d. Bank statements 39. An auditor should be able to collect and evaluate documentary evidence. When evaluating and interpreting evidence, the auditor must be concerned about drawing unwarranted conclusions. An example of a valid conclusion is a. Correct inventory valuation determined from observation of physical inventory counts b. Proper accounts payable cutoff at year end determined from a review of raw material requisitions c. Existence of a company car determined from the examination of a paid invoice d. Client ownership determined from outside inquiries about consigned goods 40. The effect of a satisfactory internal audit function upon the work of the independent auditor will most likely be a. A reduction in the scope of audit procedures necessary by the independent auditor b. A substitution of the work of the internal auditor for the work of the independent auditor c. A substitution of the internal auditor’s opinion of the financial statements in place of the independent auditor’s opinion d. An acceptance of the financial statements as a fair representation of financial position and results of operations 41. The most reliable form of documentary evidence are those documents that are a. Prenumbered b. Internally generated c. Issued sequentially d. Authorized by a responsible official 42. What is the independent auditor’s principal purpose for obtaining an understanding of internal control and assessing control risk? a. To comply with PSAs b. To obtain a measure of assurance of management’s efficiency c. To maintain a state of independence in mental attitude during the audit d. To determine the nature, timing and extent of subsequent audit work 43. On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned. To achieve an audit risk level that is substantially the same as the planned audit risk level, the auditor would a. Increase inherent risk b. Increase materiality levels c. Decrease substantive testing d. Decrease planned detection risk 44. In performing an audit of financial statements, the auditor should obtain a sufficient knowledge of a client’s business and industry to a. Develop an attitude of professional skepticism concerning management’s financial statement assertions b. Make constructive suggestions concerning improvements to the client’s internal control c. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated d. Understand the events and transactions that may have an effect on the client’s financial statements 45. Which of the following statements best describes the auditor’s responsibility to detect conditions relating to financial stress of employees or adverse relationships between a company and its employees? a. The auditor is required to plan the audit to detect these conditions on all audits b. These conditions relate to fraudulent financial reporting, and an auditor is required to plan the audit to detect these conditions whenever they may result in misstatements c. The auditor is not required to plan the audit to discover these conditions, but should consider them if he or she becomes aware of them during the audit d. The auditor is required to plan the audit to detect these conditions whenever they may result in misstatements 46. Most audits of a company are done annually by the same CPA firm. Except for initial engagements, the auditor begins the audit with a great deal of information about the client’s internal control structure developed in prior years. Because systems and controls usually do not change frequently, a. The auditor can skip the evaluation of this area on repeat engagements b. This information can be updated and carried forward to the current year’s audit c. It eases the burden on the auditor’s requirement to do a complete study of controls this year d. It is sufficient for the auditor to just inquire of client personnel 47. Which of the following statements best describes why an auditor makes a preliminary estimate of materiality? a. An estimate is required by the generally accepted auditing standards b. The estimate provides a basis for evaluating likely misstatements c. The estimate helps the auditor plan the appropriate evidence to accumulate d. Estimating materiality early helps the auditor avoid legal liability 48. Business risk is: a. Broader than the risk of material misstatement of the financial statements b. Narrower than the risk of material misstatement of the financial statements c. As broad as the risk of material misstatement of the financial statements d. Not considered at all during the audit of historical financial statements 49. S1: The auditor need not identify or assess all business risks, only those risks relevant to the engagement need to be considered. S2: Business risks usually do have financial consequences a. True, False b. False, True c. True, True d. False, False 50. Which of the following is not one of the detailed objectives that an internal control structure must meet to prevent errors in the journals and records? a. Validity b. Materiality c. Authorization d. Posting and summarization