CPA REVIEW SCHOOL OF THE PHILIPPINESM a n i l a

AUDITING THEORY

Chapter 1: AUDITING: INTEGRAL TO THE ECONOMY

1. The auditor’s opiniona. Enhances the credibility of the financial statements.b. Is an assurance as to the future viability of the entity.c. Is an assurance as to the efficiency with which management has conducted the affairs of the entity, but not effectiveness.d. Certifies the correctness of the financial statements.

2. In “auditing” accounting data, the concern is witha. Determining whether recorded information properly reflects the economic events that occurred during the accounting period.b. Determining if fraud has occurred.c. Determining if taxable income has been calculated correctly.d. Analyzing the financial information to be sure that it complies with government requirements.

3. A financial statement audit:a. Confirms that financial statement assertion are accurate.b. Lends credibility to the financial statements.c. Guarantees that financial statements are presented fairly.d. Assures that fraud had been detected.

4. Which of the following best describes the objective of an audit of financial statements?a. To express an opinion whether the financial statements are prepared in accordance with prescribed criteria.b. To express an assurance as to the future viability of the entity whose financial statements are being audited.c. To express an assurance about the management’s efficiency or effectiveness in conducting the operations of entity.d. To express an opinion whether the financial statements are prepared, in all material respect, in accordance with an identified financial reporting framework.

5. The best statement of the responsibility of the auditor with respect to audited financial statement is:a. The audit of the financial statements relieves management of its responsibilitiesb. The auditor’s responsibility is confined to his expression of opinion about the audited financial statements.c. The responsibility over the financial statements rests with the management and the auditor assumes responsibility with respect to the notes of financial statements.

d. The auditor is responsible only to his unqualified opinion but not for any other type of opinion.

6. Which of the following is responsible for an entity’s financial statements?a. The entity’s managementb. The entity’s internal auditorsc. The entity’s audit committeed. The entity’s board of directors

7. Which of the following is responsible for the fairness of representations made in financial statements?a. The independent auditor. b. The internal auditor.c. The client's management.d. The audit committee.

8. To make the internal audit department independent, he should report directly to thea. Board of Directors. b. Audit committee. c. Stockholders.d. Controller.

9. Which of the following best describes why an independent auditor reports on financial statements?a. Independent auditors are likely to detect fraudb. Competing interests may exist between management and the users of the statementsc. Misstated account balances are generally corrected by an independent audit.d. Ineffective internal controls may exist.

10. Which of the following is an appraisal activity established within an entity as a service to the entity?a. External auditing b. Internal auditing c. Financial auditingd. Compliance auditing

11. Because an external auditor is paid a fee by a client company, he or shea. Is absolutely independent and may conduct an auditb. May be sufficiently independent to conduct an auditc. Is never considered to be independentd. Must receive approval of the Securities and Exchange Commission before conducting an audit

12. Which statement is incorrect regarding the external auditor’s consideration of the work of internal auditing?a. The external auditor should consider the activities of internal auditing and their effect, if any, on external audit procedures.

b. The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach.c. During the course of planning the audit, the external auditor should perform a preliminary assessment of the internal audit function when it appears that internal auditing is relevant to the external audit of the financial statements in specific audit areas.d. When the external auditor intends to use specific work of internal auditing, the external auditor need not evaluate and test that work to confirm its adequacy for the external auditor's purposes.

13. Which of the following is an incorrect phrase?a. Auditing is a systematic process.b. Auditing subjectively obtains and evaluates evidence.c. Auditing evaluates evidence regarding assertions.d. Auditing communicates results to interested users.

14. A study, appraisal, or review by the BOA or its duly authorized representatives, of the quality of audit of financial statements through a review of the quality control measures instituted by anIndividual CPA, Firm or Partnership of CPAs engaged in the practice of public accountancy.a. Peer review b. Quality review c. Analytical reviewd. Administrative review

15. There is a need for assurance that all services obtained from a professional accountant are carried out to the highest standards of performance. This statement relates toa. Credibility b. Professionalism c. Quality of Servicesd. Confidence

16. A partner or employee of the firm serving as an officer or as a director on the board of an assurance client will most likely createa. Intimidation threat b. Self-review threatc. Advocacy threatd. Familiarity threat

17. Which of the following least likely create a self-review threat?a. A former officer, director or employee of the assurance client serve as a member of the assurance team.b. A director, an officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter of the assurance engagement has been a member of the assurance team or partner of the firm.c. Assisting an audit client in matters such as preparing accounting records or financial statements.d. A firm, or network firm, provides internal audit services to an audit client.

18. Indicate the normal pattern of development for a professional accountant.I. A period of work experience.II. High standard of general education.III. Specific education, training and examination in professionally relevant subjectsa. I, II, III b. II, III, I c. III, II, I d. II, I, III

19. Refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit.a. Scope of an auditb. Scope of a review c. Audit programd. Scope limitation

20. An audit of the financial statements of Camden Corporation is being conducted by an external auditor. The external auditor is expected toa. Express an opinion as to the fairness of Camden's financial statements.b. Express an opinion as to the attractiveness of Camden for investment purposes.c. Certify to the correctness of Camden's financial statements.d. Critique the wisdom and legality of Camden's business decisions.

Chapter 2: FRAUD

1. When planning and performing audit procedures and evaluating and reporting the results thereof, the auditor shoulda. Search for errors that would have a material effect and for fraud that would have either material or immaterial effect on the financial statements.b. Consider the risk of misstatements in the financial statements resulting from fraud or error.c. Search for fraud that would have a material effect and for errors that would have either material or immaterial effect on the financial statements.d. Consider the risk of material misstatements in the financial statements resulting from fraud or error.

2. The term “fraud” refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Which statement is correct regarding fraud?a. Auditors make legal determinations of whether fraud has actually occurred.b. Misstatement of the financial statements may not be the objective of some frauds.c. Fraud involving one or more members of management or those charged with governance is referred to as “employee fraud”.d. Fraud involving only employees of the entity is referred to as “management fraud”.

3. Which of the following illustrates a perceived opportunity to commit fraud?a. Individuals are living beyond their means.b. Management is under pressure, from sources outside or inside the entity, to achieve an expected (and perhaps unrealistic) earnings target.c. An individual believes internal control could be circumvented because the individual is in a position of trust or has knowledge of specific weaknesses in the internal control system.d. All of the above.

4. Auditing standards require that auditors be aware of relevant factors relating to fraudulent reporting. Which of the following statements is false concerning fraudulent reporting?a. Fraud frequently involves a pressure or an incentive to commit fraud and a perceived opportunity to do so.b. Two types of fraud relevant to the auditor include material misstatements arising from fraudulent financial reporting and material misstatements arising from misappropriation of assets.c. Fraud involves actions of management but excludes the actions of employees or third parties.d. An audit rarely involves the authentication of documentation; thus, fraud may go undetected by the auditor.

5. Which of the following is an example of fraudulent financial reporting?a. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold.b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses.c. An employee steals inventory, and the “shrinkage” is recorded in cost of goods sold.d. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

6. Fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users. Fraudulent financial reporting least likely involvea. Deception such as manipulation, falsification, or alteration of accounting records or supporting documents from which the financial statements are prepared.b. Misrepresentation in, or intentional omission from, the financial statements of events, transactions or other significant information.c. Intentional misapplication of accounting principles relating to measurement, recognition, classification, presentation, or disclosure.d. Embezzling receipts, stealing physical or intangible assets, or causing an entity to pay for goods and services not received.

7. The types of intentional misstatements that are relevant to the auditor’s consideration of fraud includeI. Misstatements resulting from fraudulent financial reportingII. Misstatements resulting from misappropriation of assetsa. I and II b. I only c. II only d. Neither I nor II

8. Which of the following statements describes why a properly designed and executed audit may not detect a material fraud?a. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.b. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material fraud.c. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.d. The auditor did not consider factors influencing audit risk for account balances that have pervasive effects on the financial statements taken as a whole.

9. Which of the following inquiries are auditors required to make of management regarding fraud?a. Whether management has ever intentionally violated the securities law.

b. Whether management has any knowledge of fraud that has been perpetrated on or within the entity.c. Management’s attitudes toward its employees.d. Auditors are not required to make inquiries of management relating to fraud.

10. The subsequent discovery of a material misstatement of the financial statements resulting from fraud or error, in and of itself, indicates:

a b c d• a failure to obtain reasonable assurance Yes Yes Yes No• inadequate planning, performance or judgment Yes No No No• the absence of professional competence and due care Yes Yes No No• a failure to comply with PSAs Yes No No No

11. In general, material fraud perpetrated by which of the following are most difficult to detect?a. Cashier. b. Keypunch operator. c. Internal auditor.d. Controller.

12. The regular examination of financial statements is not primarily designed to disclose fraud and other irregularities although their discovery may result. Normal audit procedures are more likely to detect a fraud arising froma. Forgeries on company checks.b. Failure to record cash receipts for services rendered.c. Theft of inventories.d. Collusion on the part of several employees.

13. The following are examples of error, excepta. A mistake in gathering or processing data from which financial statements are prepared.b. An incorrect accounting estimate arising from oversight or misinterpretation of facts.c. A mistake in the application of accounting principles relating to measurement, recognition, classification, presentation, or disclosure.d. Misrepresentation in the financial statements of events, transactions or other significant information.

14. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements?a. Turnover of senior accounting personnel is low.b. Insiders recently purchased additional shares of the entity’s stock.c. Management places substantial emphasis on meeting earnings projection.d. The rate of change in the entity’s industry is slow.

15. Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity’s financial statements?a. Management places little emphasis on meeting earnings projections.b. The board of directors makes all major financing decisions.

c. Reportable conditions previously communicated to management are not corrected.d. Transactions selected for testing are not supported by proper documentation.

16. Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity’s financial statements?a. Accounts receivable confirmation requests yield significantly fewer responses than expected.b. Audit trails of computer-generated transactions exist only for a short-time.c. The chief financial officer does not sign the management representation letter until the last day of the auditor’s fieldwork.d. Management consults with other accountants about significant accounting matters.

17. When fraud has been identified, CPA responsibility consists ofa. Report the matter to the police. b. He is not at all responsible. c. He should have prevented it.d. Determination of its extent.

18. Which of the following is correct concerning the required documentation in the working papers of the performance of the assessment of the risk of material misstatement due to fraud?a. All risk factors considered should be documented and the response to each documented.b. Those risk factors identified and the auditor’s response to them should be documented.c. The major categories of risk factors must be identified, but the particular responses to risk factors identified need not be documented.d. No specific documentation is required.

19. When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an understanding of the nature of the act toa. Evaluate the effect on the financial statements.b. Determine the reliability of management’s representation.c. Consider whether other similar acts may have occurred.d. Recommend remedial actions to the audit committee.

20. Which of the following statements concerning illegal acts by clients is correct?a. An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial statements is the same as that for errors and irregularities.b. An audit in accordance with GAAS normally includes audit procedures specifically designed to detect illegal acts that have an indirect but material effect on the financial statements.c. An auditor considers illegal acts from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from financial statement assertions.d. An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on the financial statements.

Chapter 3: INTERNAL CONTROL OVER FINANCIAL REPORTING

1. In an audit of financial statements, an auditor’s primary consideration regarding control is whether ita. Reflects management’s philosophy and operating style.b. Affects management’s financial statement assertions.c. Provides adequate safeguards over access to assets.d. Enhances management’s decision-making processes.

2. Which of the following is correct about internal control?a. Accounting and internal control systems provide management with conclusive evidence that objectives are reached.b. One of the inherent limitations of accounting and internal control systems is the possibility that the procedures may become inadequate due to changes in conditions, and compliance with procedures may deteriorate.c. Most internal controls tend to be directed at non-routine transactions.d. Management does not consider costs of the accounting and internal control systems.

3. Corporate directors, management, external auditors, and internal auditors all play important roles in creating a proper control environment. Top management is primarily responsible fora. Establishing a proper environment and specifying overall internal control.b. Reviewing the reliability and integrity of financial information and the means used to collect and report such information.c. Ensuring that external and internal auditors adequately monitor the control environment.d. Implementing and monitoring controls designed by the board of directors.

4. 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.

5. Effective internal controla. Eliminates risk and potential loss to the organization.b. Cannot be circumvented by management.c. Is unaffected by changing circumstances and conditions encountered by the organization.d. Reduces the need for management to review exception reports on a day-to-day basis.

6. Which of the following statements about internal control is correct?a. Properly maintained internal controls reasonably assure that collusion among employees cannot occur.b. Establishing and maintaining internal control is the internal auditor’s responsibility.c. Exceptionally strong control allows the auditor to eliminate substantive tests.

d. The cost-benefit relationship should be considered in designing internal control.

7. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk thata. Tests of controls may fail to identify controls relevant to assertions.b. Material misstatements may exist in the financial statements.c. Specified controls requiring segregation of duties may be circumvented by collusion.d. Entity policies may be overridden by senior management.

8. A proper understanding of the client’s internal control is an integral part of the audit planning process. The results of the understandinga. Must be reported to the shareholders and the SEC.b. Bear no relationship to the extent of substantive testing to be performed.c. Are not reported to client management.d. May be used as the basis for withdrawing from an audit engagement.

9. An entity should consider the cost of a control in relationship to the risk. Which of the following controls best reflects this philosophy for a large peso investment in heavy machine tools?a. Conducting a weekly physical inventory.b. Placing security guards at every entrance 24 hours a day.c. Imprinting a controlled identification number on each tool.d. Having all dispositions approved by the vice president of sales.

10. Audit evidence concerning segregation of duties ordinarily is best obtained bya. Performing tests of transactions that corroborate management’s financial statement assertionsb. Observing the employees as they apply specific controls.c. Obtaining a flowchart of activities performed by available personnel.d. Developing audit objectives that reduce control risk.

11. Which of the following statements about preliminary assessment of control risks is correct?a. After obtaining an understanding of the accounting and internal control systems, the auditors should make a preliminary assessment of control risks, at the assertion level, for all accounts or transaction classes.b. The preliminary assessment of control risk can be done only after completing tests of controls.c. The preliminary assessment of control risk for a financial assertion is normally low, unless the auditor is able to identify weaknesses that may indicate ineffectiveness of accounting and internal control system.d. The auditor ordinarily assesses control risk at high level for some or all assertions when it is not cost efficient to do tests of controls.

12. Which of the following statements concerning control risk is correct?a. When control risk is at the maximum level, an auditor is required to document the basis for that assessment.b. Control risk may be assessed sufficiently low to eliminate substantive testing for significant transaction classes.

c. When assessing control risk, an auditor should not consider evidence obtained in prior audits about the operation of controls.d. Assessing control risk and obtaining an understanding of an entity’s internal control may be performed concurrently.

13. Based on a consideration of internal control completed at an interim date, the auditor assessed control risk at a low level and performed interim substantive tests. The records and procedures would most likely be tested again at year-end ifa. Tests of controls were not performed by the internal auditor during the remaining period.b. Internal control provides a basis for limiting the extent of substantive testing.c. The auditor used non-statistical sampling during the interim period testing of controls.d. Inquiries and observations lead the auditor to believe that conditions have changed.

14. Although substantive tests may support the accuracy of underlying records, these tests frequently provide no affirmative evidence of segregation of duties becausea. Substantive tests rarely guarantee the accuracy of the records if only a person who performs incompatible functions.b. The records may be accurate even though they are maintained by a person who performs incompatible functions.c. Substantive tests relate to the entire period under audit, but tests of controls ordinarily are confined to the period during which the auditor is on the client’s premises.d. Many computerized procedures leave no audit trail of who performed them, so substantive tests may necessarily be limited to inquiries and observation of office personnel.

15. After obtaining an understanding of internal control and assessing control risk, an auditor decided not to perform additional tests of controls. The auditor most likely concluded that thea. Additional evidence to support a further reduction in control risk was not cost-beneficial to obtain.b. Assessed level of inherent risk exceeded the assessed level of control risk.c. Internal control was properly designed and justifiably may be relied on.d. Evidence obtainable through tests of controls would not support an increased assessment of control risk.

16. The objective of tests of details of transactions performed as tests of controls is toa. Monitor the design and use of entity documents such as pre-numbered shipping formb. Determine whether controls have been placed in operation.c. Detect material misstatements in the account balances of the financial statements.d. Evaluate whether controls operated effectively.

17. An auditor wishes to perform tests of controls on a client’s cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures bya. Confirmation and observation. b. Observation and inquiry.c. Analytical procedures and confirmation.d. Inquiry and analytical procedures.

18. Which of the following types of evidence would an auditor most likely examine to determine whether controls are operating as designed?a. Confirmations of receivables verifying account balances.b. Letters of representations corroborating inventory pricing.c. Attorneys’ responses to the auditor’s inquiries.d. Client records documenting the use of computer programs.

19. Which of the following procedures concerning accounts receivable is an auditor most likely to perform to obtain evidential matter in support of an assessed level of control risk below the maximum level?a. Sending confirmation requests to an entity’s principal customers to verify the existence of accounts receivable.b. Inspecting an entity’s analysis of accounts receivable for unusual balances.c. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts receivable.d. Observing an entity’s employee prepare the schedule of past due accounts receivable.

20. Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation on an internal control procedure?a. Confirmation with outside partiesb. Observation of client personnel c. Re--computation of account balanced. Inquiry of client personnel

Chapter 4: PROFESSIONAL LIABILITY AND THE NEED FOR QUALITY AUDITOR JUDGMENTS AND ETHICAL DECISIONS

1. In which of the following statements about a public accounting firm’s action is scienter or its equivalent absent?

a. Reckless disregard for the truthb. Actual knowledge of fraudc. Intent to gain monetarily by concealing fraudd. Performance of substandard auditing procedures

2. The leading precedent-setting auditing case in the third party liability isa. Escott et al. v Bar Chris Construction Corpb. Hochfelder Ernst & Ernstc. Ultramares Corporation v Touched. United States v Simon

3. Mead Corp. orally engaged Dex & Co., CPAs, to audit its financial statements. The management of Mead informed Dex that it suspected that the accounts receivable were materially overstated. Although the financial statements audited by Dex did, in fact, include a materially overstated accounts receivable balance, Dex issued an unqualified opinion. Mead relied on the financial statements in deciding to obtain a loan from City Bank to expand its operations. City relied on the financial statements in making the loan to Mead. As a result of the overstated accounts receivable balance, Mead has defaulted on the loan and has incurred a substantial loss. If Mead sues Dex for negligence in failing to discover the overstatement, Dex's best defense would be thata. No engagement letter had been signed by Dex.b. The audit was performed by Dex in accordance with generally accepted auditing standards.c. Dex was not in privity of contract with Mead.d. Dex did not perform the audit recklessly or with an intent to deceive.

4. As a consequence of failure to adhere to generally accepted auditing standards in the course of an audit of the Lamp Corp., Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company's controller. As a matter of common law, to what extent would Harrison be liable to the Lamp Corp. for losses attributable to the theft?a. No liability since the ordinary examination cannot be relied on to detect defalcations.b. No liability because privity of contract is lacking.c. Liable for losses attributable to her or his negligence.d. Liable only if it could be proved that he or she was grossly negligent.

5. Martin Corporation orally engaged Humm & Dawson to audit its year-end financial statements. The engagement was to be completed within two months after the close of Martin's fiscal year for a fixed fee of P250,000. Under these circumstances, what obligation is assumed by Humm & Dawson?a. None. The contract is unenforceable since it is not in writing.b. An implied promise to exercise reasonable standards of competence and care.c. An implied obligation to take extraordinary steps to discover all defalcations.d. The obligation of an insurer of its work, which is liable without fault.

6. The role of persons entrusted with the supervision, control and direction of an entitya. Governance c. Governmentb. Board of directors d. Management

7. Which statement is correct regarding “audit matters of governance interest”?a. These are matters that arise from the audit of financial statements and, in the opinion of the auditor, are either important or relevant to those charged with governance in overseeing the financial reporting and disclosure process.b. These include only those matters that have come to the attention of the auditor as a result of the performance of the audit.c. The auditor is required, in an audit in accordance with PSAs, to design procedures for the specific purpose of identifying these matters.d. The auditor is not required to communicate these matters with those charged with governance of an entity.

8. An auditor’s overall objective in a financial statement audit is toa. Determine that all individual accounts and footnotes are fairly presented.b. Employ the audit risk model.c. Express an opinion on the fair presentation of the financial statements in accordance

with generally accepted accounting principles.d. Detect all errors and fraud.

9. The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with thea. Partner assigned to the audit engagement. c. Auditor in-charge of field work.b. Management of the company. d. Securities and Exchange Commission.

10. Reasonable assurance means:

a. Gathering of all available corroborating evidence for the auditor to conclude that there are no material misstatements in the financial statements, taken as a whole.b. Gathering of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements, taken as a whole.c. Gathering of the audit evidence necessary for the auditor to conclude that the financial statements, taken as a whole, are free from any misstatements.d. Gathering of the audit evidence necessary for the auditor to conclude that the financial statements are free of material unintentional misstatements.

11. 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. c. generally accepted auditing standards.b. the auditor’s judgment. d. the auditor’s working papers.

12. If the auditor suspects that members of senior management, including members of the board of directors, are involved in noncompliance to laws as regulations, and he believes his report may not be acted upon, he would:a. Do nothing.b. Issue a disclaimer of opinion.c. Consider seeking legal advice.d. Make special investigation in order to fully determine the extent of client’s noncompliance.

13. Which of the following best describes a trend in litigation involving CPAs?a. A CPA cannot render an opinion on a company unless the CPA has audited all

affiliates of that company.b. A CPA may successfully assert as a defense that the CPA had no motive to be part of a fraud.c. A CPA may be exposed to criminal as well as civil liability.d. A CPA is primarily responsible for a client’s footnotes in an annual report filed with the SEC.

14. Which one of the following, if present, would support a finding of constructive fraud on the part of a CPA?a. Privity of contract. c. Intent to deceive.b. Reckless disregard. d. Ordinary negligence.

15. The limitation of auditor liability under contract law is known asa. Privity of contract. c. Contributory liability.b. Statutory liability. d. Common law liability

16. The auditor's defense of contributory negligence is most likely to prevail whena. Third party injury has been minimal.b. The auditor fails to detect fraud resulting from management override of the control structure.c. The client is privately held as contrasted with a public company.d. Undetected errors have resulted in materially misleading financial statements.

17. The factor that distinguishes constructive fraud from actual fraud isa. Materiality c. Quality of internal control.b. Type of error or irregularity d. Intent.

18. Fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users. Fraudulent financial reporting least likely involvea. Deception such as manipulation, falsification, or alteration of accounting records or

supporting documents from which the financial statements are prepared.b. Misrepresentation in, or intentional omission from, the financial statements of events,

transactions or other significant information.c. Intentional misapplication of accounting principles relating to measurement,

recognition, classification, presentation, or disclosure.d. Embezzling receipts, stealing physical or intangible assets, or causing an entity to pay

for goods and services not received.

19. In performing MAS engagements, CPAs should not take any positions that mighta. Constitute advice and assistanceb. Provide technical assistance in implementationc. Result in new organizational policies and proceduresd. Impair their objectivity

20. An audit independence issue might be raised by the auditor’s participation in management advisory services engagements. Which of the following statements is most consistent with the profession’s attitude toward this issue?a. Information obtained as a result of a management advisory services engagement is

confidential to that specific engagement and should not influence performance of the attest function.

b. The decision as to loss of independence must be made by the client based upon the facts of the particular case.

c. The auditor should not make management decisions for an audit client.d. The auditor who is asked to review management decisions is also competent to make

these decisions and can do so without loss of independence.

Chapter 5: PROFESSIONAL AUDITING STANDARDS AND THE AUDIT FORMULATION PROCESS

1. When planning and performing audit procedures and evaluating and reporting the results thereof, the auditor shoulda. Search for errors that would have a material effect and for fraud that would have either material or immaterial effect on the financial statements.b. Consider the risk of misstatements in the financial statements resulting from fraud or error.c. Search for fraud that would have a material effect and for errors that would have either material or immaterial effect on the financial statements.d. Consider the risk of material misstatements in the financial statements resulting from fraud or error.

2. Generally Accepted Auditing Standards (GAAS) and Philippine Standards on Auditing (PSA) should be looked upon by practitioners as:a. Ideals to work towards, but which are not achievableb. Maximum standards which denote excellent work.c. Minimum standards of performance which must be achieved on each audit engagement.d. Benchmark to be used on all audits, reviews, and compilations.

3. Which of the following best describes what is meant by Generally Accepted Auditing Standards?a. Pronouncements issued by the Auditing Standards and Practices Council.b. Procedure to be used to gather evidence to support financial statements.c. Rules acknowledged by the accounting profession because of their universal compliance.d. Measures of the quality of the auditor’s performance

4. A CPA should comply with applicable generally accepted auditing standards on every engagementa. Without exceptionb. Except in examinations that result in a qualified reportc. Except in engagements where the CPA is associated with unaudited financial statements.d. Except in examinations of interim financial statements.

5. The general standards stress the importance ofa. The personal qualities which the auditor should haveb. Evidence accumulation

c. Communicating the auditor’s finding to the readerd. All of the above

6. The Audit Standard which requires “adequate technical training and proficiency” is normally interpreted as requiring the auditor to havea. Formal education in auditing and accountingb. Adequate practical experience for the work being performedc. Continuing professional educationd. All of the above

7. Which of the following is not required by the Generally Accepted Auditing Standards that states that due professional care is to be exercised in the performance of the audit?a. Observance of the standards of field work and reportingb. Critical review of the audit work performed at every level of supervisionc. Degree of skill commonly possessed by others in the profession.d. Responsibility for losses because of errors of judgment

8. The first general standard requires that the audit of financial statements be performed by a person or persons having adequate technical training anda. Independence with respect to the financial statements and supplementary disclosures.b. Exercising professional care as judged by peer reviewers.c. Proficiency as an auditor, which likely has been acquired from previous experience.d. Objectivity as an auditor, as verified by proper supervision.

9. Which of the following is mandatory if the auditor is to comply with generally accepted auditing standards?a. Possession by the auditor of adequate technical training.b. Use of analytical review on audit engagements.c. Use of statistical sampling whenever feasible on an audit engagement.d. Confirmation by the auditor of material accounts receivable balances.

10. The third general standards states that due care is to be exercised in the performance of the examination. This standard should be interpreted to mean that a CPA who undertakes an engagement assumes a duty to perform.a. With reasonable diligence and without fault or error.b. As a professional who will assume responsibility for losses consequent upon error of judgment.c. To the satisfaction of the client and third parties who may rely upon it.d. As a professional possessing the degree of skill commonly possessed by others in the field.

11. The third general standard states due care is to be exercised in the performance of an audit.This standard is generally interpreted to requirea. Objective review of the adequacy of the technical training and proficiency of firm personnelb. Critical review of work done at every level of supervisionc. Thorough review of the existing internal control structured. Periodic review of a CPA firm’s quality control procedures.

12. The first standard of fieldwork, which states that the work is to be adequately planned, and assistants, if any, are to be properly supervised, recognizes thata. Early appointment of the auditor is advantageous both to the auditor and to the client.b. Acceptance of an audit engagement after the close of the client's fiscal year is generally not permissible.c. Appointment of the auditor subsequent to the physical count of inventories requires a disclaimer of opinion.d. Performance of substantial parts of the engagement is necessary at interim dates.

13. The fourth standard of reporting requires the auditor’s report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to preventa. An auditor from expressing different opinions on each of the basic financial statements.b. Restrictions on the scope of the examination, whether imposed by the client or by the inability to obtain evidence.c. Misinterpretations regarding the degree of responsibility the auditor is assumingd. An auditor from reporting on one basic financial statement and not the others.

14. What is the overriding reason why the auditor considers the professional competence of assistants whom the work will be delegated?a. All the audit assistants assigned to an engagement must be independent in appearance.b. To have reasonable assurance that such work will be performed with due care by the audit assistant.c. To lessen the working paper preparation.d. To eliminate audit risk.

15. A basic objective of a CPA firm is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided througha. A system of peer review.b. Continuing professional education.c. A system of quality controls.d. Compliance with generally accepted reporting standards.

16. The examination by CPAs of a CPA firm’s auditing practices to ascertain compliance with its quality control systema. Compliance audit c. Peer reviewb. Examination d. Quality control audit

17. The firm is to be staffed by personnel who have attained and maintained the technical standards and professional competence required to enable them to fulfill their responsibilities with due care is the objective of what quality control policy?a. Professional Requirements c. Assignmentb. Skills and Competence d. Delegation

18. In connection with the element of professional development, a CPA firm’s system of quality control should ordinarily provide that all personnela. Have the knowledge required to enable them to fulfill responsibilities assigned.b. Possess judgment, motivation, and adequate experience.c. Seek assistance from persons having appropriate levels of knowledge, judgment, and authority.d. Demonstrate compliance with peer review directives.

19. Within the context of quality control, the primary purpose of continuing professional education and training activities, is to enable a CPA firm to provide personnel within the firm with:a. Technical training that assures proficiency as an auditor.b. Professional education that is required in order to perform with due professional care.c. Knowledge required to fulfill assigned responsibilities and to progress within the firm.d. Knowledge required in order to perform a peer review.

20. It involves informing assistants of their responsibilities and the objectives of the procedures they have to perform:a. Supervision c. Directingb. Monitoring d. Consultation

Chapter 6: A FRAMEWORK FOR AUDIT EVIDENCE (IAS 500)Audit Evidence/PSA 500(rev) – Audit Evidence

1. Which statement is incorrect regarding audit evidence? a. Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based. b. Audit evidence includes the information contained in the accounting records underlying the financial statements and other information. c. Audit evidence is cumulative in nature. d. Auditors are expected to address all information that may exist.

2. Accounting records least likely include a. The records of initial entries and supporting records. b. The general and subsidiary ledgers. c. Work sheets and spreadsheets supporting cost allocations. d. Comparable data about competitors (benchmarking)

3. Other information that the auditor may use as audit evidence least likely includesa. Minutes of meetings. b. Confirmations from third parties. c. Information obtained by the auditor from such audit procedures as inquiry, observation, and inspection. d. Adjustments to the financial statements that are not reflected in formal journal entries.

4. Which statement is correct regarding the sufficiency and appropriateness of audit evidence? a. Sufficiency is the measure of the quality of audit evidence. b. Appropriateness is the measure of the quantity of audit evidence; that is, its relevance and

its reliability in providing support for, or detecting misstatements in, the classes of transactions, account balances, and disclosures and related assertions.

c. The quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, the more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be required).

d. Merely obtaining more audit evidence may compensate for its poor quality

5. Which of the following statements is incorrect regarding relevance of audit evidence? a. A given set of audit procedures may provide audit evidence that is relevant to certain

assertions, but not others. b. The auditor often obtains audit evidence from different sources or of a different nature that is relevant to the same assertion. c. Obtaining audit evidence relating to a particular assertion is a substitute for obtaining audit evidence regarding another assertion. d. None of the above.

6. Which of the following generalizations in assessing the reliability of audit evidence is incorrect?

a. Audit evidence is more reliable when it is obtained from independent sources outside the entity.

b. Audit evidence that is generated internally is not affected by the effectiveness of the controls imposed by the entity. c. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference. d. Audit evidence is more reliable when it exists in documentary form.

7. Which statement is incorrect regarding audit evidence? a. The auditor should obtain sufficient appropriate audit evidence to be able to draw

reasonable conclusions on which to base the audit opinion. b. Accounting records alone do not provide sufficient audit evidence. Page 2 of 6 AT-5913 c. The auditor uses professional judgment and exercises professional skepticism in evaluating the quantity and quality of audit evidence, and thus its sufficiency and appropriateness, to support the audit opinion. d. The matter of difficulty or expense involved is a valid basis for omitting an audit procedure for which there is no alternative

8. The auditor obtains audit evidence to draw reasonable conclusions on which to base the audit opinion by performing audit procedures to:

a. Obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels. b. Test the operating effectiveness of controls in preventing, or detecting and correcting,

material misstatements at the assertion level. c. Detect material misstatements at the assertion level. d. All of the above.

9. The competence of evidence available to an auditor is least likely to be affected by a. The relevance of such evidence to the financial statement assertion being investigated. b. The relationship of the preparer of such evidence to the entity being audited. c. The timeliness of such audit evidence. d. The sampling method employed by the auditor to obtain a sample of such evidence

10. Which of the following procedures would provide the most reliable audit evidence? a. Inquiries of the client’s internal audit staff held in private. b. Inspection of prenumbered client purchase orders filed in the vouchers payable department. c. Analytical procedures performed by the auditor on the entity’s trial balance. d. Inspection of bank statements obtained directly from the client’s financial institution.

11. The most reliable form of documentary evidence are those documents that are a. Prenumbered b. Internally generatedc. Easily duplicated d. Authorized by a responsible official

12. Which of the following presumptions does not relate to the competence of audit evidence? a. The more effective internal control, the more assurance it provides about the accounting

data and financial statements. b. An auditor’s opinion, to be economically useful, is formed within a reasonable time and

based on evidence obtained at a reasonable cost. c. Evidence obtained from independent sources outside the entity is more reliable than

evidence secured solely within the entity. d. The independent auditor’s direct personal knowledge, obtained through observation and

inspection, is more persuasive than information obtained indirectly.

13. You have been assigned to audit the maintenance department of an organization. Which of the following is likely to produce the least reliable audit evidence?

a. Notes on discussions with mechanics in the maintenance operation. b. A schedule comparing actual maintenance expenses with budgeted expenses and those of

the prior period and disclosing important differences. c. A narrative covering review of user reports on maintenance service. d. An analysis of changes in certain maintenance department ratios

14. This consists of checking the mathematical accuracy of documents or records. a. Reperformance b. Recalculation c. Confirmation d. Inspection

15. Which of the following audit procedures is used extensively throughout the audit and often is complementary to performing other audit procedures?

a. Inspection b. Observation c. Inquiry d. Confirmation

16. Which statement is incorrect regarding Inquiry? a. Responses to inquiries may provide the auditor with information not previously possessed

or with corroborative audit evidence. b. Responses to inquiries might provide information that differs significantly from other

information that the auditor has obtained. c. Responses to inquiries may provide a basis for the auditor to modify or perform additional

audit procedures. d. Inquiry alone is sufficient to test the operating effectiveness of controls.

17. Assertion about account balances at period end which means assets, liabilities, and equity interests are included in the financial statements at appropriate amounts is

a. Existence b. Rights and obligationsc. Completeness d. Valuation and allocation

18. The auditor is not always required to perform a. Risk assessment procedures.b. Test of controls. c. Substantive procedures. d. Both a and c

19. Why does an auditor document audit evidence? a. To comply with the requirements of gathering all available evidence. b. To provide client reference for all account balances and correcting entries. c. To support audit opinion and to provide evidence that the audit was carried out in

accordance with PSA. d. To document all records of misstatements noted in the financial statements.

20. Working papers that record the procedures used by the auditor to gather evidence should be a. Considered the primary support for the financial statements being audited. b. Viewed as the connecting link between the books of accounts and the financial

statements. c. Designed to meet the circumstances of the particular engagement. d. Destroyed when the audited entity ceases to be a client.

Chapter 7: AUDIT PLANNING

1. The development of a general strategy and a detailed approach for the expected nature, timing, and extent of audit refers to:a. Supervisionb. Audit proceduresc. Directing d. Planning

2. The auditor should consider the nature, extent, and timing of the work to be performed and should prepare a written audit program for every audit. Which audit standard is most closely related to this requirement?a. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.b. In all matters relating to the assignment, an independent mental attitude is to be maintained by the auditor(s).c. Due professional care is to be exercised in the planning and performance of the audit and preparation of the report.d. The work is to be adequately planned and assistants, if any, are to be properly supervised.

3. Which of the following would a successor auditor normally perform after acceptance of an audit client?a. Inquiry of predecessor auditor regarding the client.b. Review the SEC filings of the client.c. Inquiry of bankers regarding the client.d. Review of predecessor auditor working papers.

4. The following are related to the auditor’s responsibility to assess the ability of the company to continue as a going concern?I. The auditor should consider the appropriateness of the management’s use of the going concern assumption in the preparation of the financial statements.II. The auditor is to consider whether there are material uncertainties about the entity’s ability to continue as a going concern that needs to be disclosed in the financial statements.III. The absence of any reference to going concern uncertainty in the auditor’s report is viewed as a guarantee as to the entity’s ability to continue as a going concern.Which of the foregoing inappropriately describe(s) the auditor’s responsibility?a. I only b. I and II only c. II only d. III only.

5. Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?a. A flowchart or narrative of the information system describing the recording and classification of transactions for financial reporting.b. An audit program setting forth in detail the procedures necessary to accomplish the engagement’s objectives.c. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel.d. An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved.

6. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?a. Inquiring of the client’s legal counsel concerning pending litigation.b. Comparing the financial statements to anticipated results.c. Examining computer generated exception reports to verify the effectiveness of internal controls.d. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities

7. Incremental risk is the increased risk that errors may not be detected at the balance sheet date because:a. Audit procedures were performed at an interim dateb. Inherent risk was assessed too low.c. Analytical procedures were not performed.d. Detection risk was set too high a level.

8. Audit plan should A B C DA. Precede action Yes No Yes NoB. Be fixed Yes No No YesC. Be cost beneficial Yes Yes Yes Yes

9. Which of the following least likely affect the form and content of the overall audit plan?a. Complexity of the audit engagement.b. Methodology and technology used by the auditor.c. The entity’s form of business organization.d. The size of the entity.

10. The audit program should contain the following, except:a. Audit objectiveb. Time budget for the various audit areasc. Set of planned audit proceduresd. The combined assessed level of inherent and control risk

11. Which of the following factors is inappropriately relevant to the management’s assessment of the going concern assumption?a. The degree of uncertainty associated with the outcome of an event or condition decreases significantly the further into the future of judgment being made about the outcome of an event or condition.b. Any judgment about the future is based on information available at the time at which the judgment is made.c. The size and complexity of the entity, and the nature and conditions of its business affect the judgment regarding the outcome of events or conditions.d. Subsequent events can contradict a judgment which was reasonable at the time it was made.

12. The management denied the auditor’s request that the management has to extend its assessment of its going concern ability. However, the auditor’s other procedures are sufficient to assess the appropriateness of management use of the going concern assumption in the preparation of the financial statements. The auditor should issue:a. Unqualified opinion b. Unqualified opinion with explanatory paragraph c. Adverse opiniond. Disclaimer of opinion

13. To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely woulda. Perform tests of details of transactions and balances.b. Review prior-year working papers and the permanent file for the client.c. Read specialized industry journals.d. Reevaluate client’s internal control environment.

14. Analytical procedures used in planning an audit should focus ona. Reducing the scope of tests of controls and substantive tests.b. Providing assurance that potential material misstatements will be identified.c. Enhancing the auditor’s understanding of the client’s business.d. Assessing the adequacy of the available evidential matter.

15. Analytical procedures, which means the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviate from predicted amounts, are not required to be applieda. At the planning stage of the audit b. Overall review stage of the audit c. As substantive proceduresd. None of the above

16. Which of the following statements is correct concerning analytical procedures?a. Analytical procedures usually involve comparisons of ratios developed from recorded amounts to assertions developed by management.b. Analytical procedures used in planning an audit generally use data aggregated at a high level.c. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk.d. Analytical procedures are more efficient, but not more effective, than tests of details and transactions.

17. Which of the following is an effective audit planning and control procedures that helps prevent misunderstandings and inefficient use of audit personnel?a. Make copies, for inclusion in the working papers, of those client supporting documents examined by the auditor.b. 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 auditor prepare and post any necessary adjusting or reclassification entries prior to final closing.

18. Which of the following is an aspect of scheduling and controlling the audit engagement?a. Including in the audit program a column for estimated and actual time.b. Performing audit work only after the client’s books of account have been closed for the period under examination.c. Writing a conclusion in individual working papers indicating how the results of the audit will affect the auditor’s report.d. Including in the engagement letter an estimate of the minimum and maximum audit fee.

19. Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation?a. Discrete phases of planning, interim, and year-end field work.b. Increased effort to search for evidence of management fraud.c. Performance of audit tests on a continuous basis.d. Increased emphasis on the completeness assertion.

20. Which of the following statements is not correct about materiality?a. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.c. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements.

Chapter 8: SPECIALIZED AUDIT TOOLS: SAMPLING AND GAS Related PSA: PSA 530

1. The entire set of data about which the auditor wishes to draw conclusions is called a. Population. b. Sample.c. Sampling frame. d. Sampling unit.

2. Which of the following constitutes audit sampling? a. Selecting and examining specific items to determine whether or not a particular procedure

is being performed. b. Examining items to obtain information about matters such as the client’s business, the

nature of transactions, accounting and internal control systems. c. Examining items whose values exceed a certain amount so as to verify a large proportion

of the total amount of an account balance or class of transactions. d. Applying audit procedures to less than 100% of items within an account balance or class

of transactions such that all sampling units have a chance of selection.

3. Audit sampling is not involved in the following, except a. Performing a walkthrough test. b. Performing analytical procedures c. Selecting the sample without following a structured technique. d. Testing controls that leave no audit trail.

4. The following situations will likely lead the auditor to use 100% testing, except a. When the population constitutes a small number of large value items. b. When both inherent and control risks are high and other means do not provide sufficient

appropriate audit evidence c. When the repetitive nature of a calculation or other process performed by a computer

information system makes a 100% examination cost effective. d. When testing controls that leave audit trail.

5. Which of the following is true about sampling and non-sampling risks? a. Sampling risk can be reduced by increasing sample size. b. Sampling risk cannot be eliminated. c. Non-sampling risk can be eliminated by proper engagement planning, supervision, and

review. d. Non-sampling risk arises from the possibility that the auditor’s conclusion, based on a

sample may be different from the conclusion reached if the entire population were subjected to the same audit procedure.

6. Which statement is incorrect about sampling risk? a. Sampling risk arises from the possibility that the auditor’s conclusion, based on a sample may be different from the conclusion reached if the entire population were subjected to the same audit procedure. b. Risk of assessing control risk too low and risk of incorrect acceptance affects audit effectiveness as it would usually lead to additional work to establish that initial conclusions were incorrect. c. The mathematical complements of sampling risks are termed confidence levels. d. Risk of assessing control risk too high is the risk that the auditor will conclude, in the case

of a test of control, that control risk is higher than it actually is.

7. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to

a. Minimize the failure to detect errors and frauds. b. Eliminate nonsampling risk. c. Reduce the level of audit risk and materiality to a relatively low amount. d. Measure the sufficiency of the evidential matter obtained.

8. Each time an auditor draws a conclusion based on evidence from a sample, an additional risk, sampling risk, is introduced. An example of sampling risk is

a. Projecting the results of sampling beyond the population tested. b. Properly applying an improper audit procedure to sample data. c. Improperly applying a proper audit procedure to sample data. d. Drawing an erroneous conclusion from sample data.

9. Which of the following best illustrates the concept of sampling risk? a. A randomly chosen sample may not be representative of the population as a whole on the

characteristic of interest. b. An auditor may select audit procedures that are not appropriate to achieve the specific

objective. c. An auditor may fail to recognize errors in the documents examined for the chosen sample. d. The documents related to the chosen sample may not be available for inspection.

10. Which of the following statements is not correct? a. It is acceptable for auditor to use statistical sampling methods. b. It is acceptable for auditor to use non-statistical sampling methods. Page 9 of 14 AT-5912 c. The primary benefit of statistical sampling methods is the quantification of sampling risk. d. An advantage of using statistical sampling is that the cost/benefit ratio is always positive.

11. A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a

a. Representative sampleb. Statistical sample c. Random sample d. Judgment sample

12. The process which requires the calculation of an interval and then selects the items based on the size of the interval is

a. Statistical samplingb. Random selection c. Systematic selection d. Computerized selection

13. When the 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 selectionb. Random selection c. Systematic selection d. Haphazard selection

14. Which of the following statistical selection techniques is least desirable for use by an auditor?

a. Systematic selectionb. Stratified selection c. Block selection d. Sequential selection

15. For which of the following audit tests would an auditor most likely use attribute sampling? a. Making an independent estimate of the amount of a FIFO inventory. b. Examining invoices in support of the valuation of fixed asset additions. c. Selecting accounts receivable for confirmation of account balances. d. Inspecting employee time cards for proper approval by supervisors.

16. An auditor plans to test a sample of 20 checks for counter signatures as prescribed by the client’s control procedures. One of the checks in the chosen sample of 20 cannot be found. The auditor should consider the reasons for this limitation and

a. Evaluate the results as if the sample size had been 19. b. Treat the missing check as a deviation for the purpose of evaluating the sample. c. Treat the missing check in the same manner as the majority of the other 19 checks, i.e.,

countersigned or not. d. Choose another check to replace the missing check in the sample.

17. When using statistical sampling for tests of controls, an auditor’s evaluation would include a statistical conclusion about whether:

a. Deviations in the population are within an acceptable range. b. Monetary precision exceeds a predetermined amount. c. The population’s total monetary value is not in error by more than a predetermined amount. d. Population characteristics occur at least once in the population.

18. An auditor, planning an attribute sample from a large number of invoices, intends to estimate the actual rate of deviations. Which factor below is the most important for the auditor to consider?

a. Audit objective b. Desired confidence levelc. Population size d. Population variance

19. “Whenever a sample is taken, there is a risk that the quantitative conclusions about the population will be incorrect.”

a. This is always true. b. This is always true unless 100 percent of the population is tested. c. This is true for statistical sampling, but not for non-statistical sampling. d. This is true for non-statistical sampling but not for statistical sampling.

20. As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to

a. Find smaller misstatements.b. Find larger misstatements. c. Increase the tolerable misstatement in the accounts. d. Decrease the risk of assessing control risk too low.