ACC 301 – ASSURANCE PRINCIPLES EXAM 2

Name: Section: 48/60

Choose the letter of the correct answer.

1. Sampling results could lead the auditor to believe erroneously that the account does not
contain more peso error than can be tolerated. Which of the following corresponds to the
preceding statement?

a. risk of incorrect rejection b. projected misstatement

c. risk of incorrect acceptance d. tolerable misstatement

2. The auditor failed to recognize a deviation included in a sample intended to test controls
related to a transaction process. This failure reflects
a. statistical risk b. audit risk
c. non-sampling risk d. non-audit risk

3. Identify as to whether the following constitutes sampling or non-sampling risk, following the
same order.
 The auditor might use inappropriate procedure.
 The auditor might reach a different conclusion based on samples used from
the conclusion if it were the entire population subjected to the same audit
procedure.
 The auditor might misinterpret the audit evidence.

a. Non-sampling; sampling; non-sampling b. sampling, non-sampling, sampling

c. sampling, non-sampling, non-sampling d. non-sampling, sampling, sampling

4. A CPA who believes the occurrence rate of a certain characteristic in a population being
examined is 3% and who has established a maximum acceptable occurrence rate at 5%
should use a(an)
a. Attribute sampling plan b. Stratified sampling plan
c. Discovery sampling plan d. Variable sampling plan

5. Which of the following would increase sample size? A decrease in

a. Risk of incorrect rejection
b. Estimated population standard deviation
c. Expected frequency of errors
d. Tolerable error

6. In statistical sampling methods used in substantive testing, an auditor most likely would
stratify a population into meaningful groups if
a. Probability proportional to size sampling is used.
b. The population has highly variable recorded amounts. ?
c. The auditor’s estimated tolerable misstatement is extremely small.
d. The standard deviation of recorded amounts is relatively small.

7. Which of the following combinations results in a decrease in sample size in a sample for
attributes?
Risk of assessing
control risk too low Tolerable rate Expected population deviation rate
a. Increase Decrease Increase

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 b. Decrease Increase Decrease
c. Increase Increase Decrease
d. Increase Increase Increase

8. How would increases in tolerable misstatement and assessed level of control risk affect the
sample size in a substantive test of details?
Increase in tolerable misstatement Increase in assessed level of control risk
a. Increase sample size Increase sample size
b. Increase sample size Decrease sample size
c. Decrease sample size Increase sample size
d. Decrease sample size Decrease sample size

9. You are auditing the financial statements of a small rural municipality. The receivable
balances represent residents’ delinquent real estate taxes. Control risk is at the maximum.
To determine the existence of the accounts receivable balances at the balance sheet date.
You would most likely
a. Send a positive confirmation requests. ?
b. Send negative confirmation requests.
c. Examine evidence of subsequent cash receipts.
d. Inspect internal records such as copies of tax invoice that had been mailed to the
residents.

10. Which evidence is the most persuasive to support inventory quantities?

a. Purchase invoices held by the client.
b. Cancelled checks issued to vendors.
c. Observations of the client’s physical count.
d. A written certification from the client that the amount shown as inventory is correct.

11. An auditor selects a sample from the file of shipping documents to determine whether
invoices were prepared. This is test is performed to satisfy the objective of
a. accuracy b. completeness
c. control d. existence

12. The accuracy of perpetual inventory records may be establish, in part, by comparing
inventory perpetual records with
a. purchase requisitions b. purchase orders
c. receiving reports d. vendor payments

13. Auditors may use positive and/or negative forms of confirmation requests for accounts
receivable. An auditor most likely will use:
a. A combination of the two forms, with the positive form used for large
balances and the negative for small balances. ?
b. A combination of the two forms, with the positive form used for trade receivables and
the negative form for other receivables.
c. The positive form when the control structure related to receivables are
satisfactory, and the negative form when controls are unsatisfactory.
d. The positive form to confirm all balances regardless of size.

14. Which of the following is most likely to be an example of fraud?

a. Defalcations occurring due to invalid electronic approvals.
b. Mistakes in the application of accounting principles.
c. Mistakes in processing data.
d. Unreasonable accounting estimates arising from oversight.

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15. Which of the following is an example of misappropriation of assets?
a. An altered document.
b. An unrecorded transaction.
c. Unauthorized credit card use. ?
d. Misapplication of an accounting principle.

16. Which of the following is a substantive test that an auditor most likely would perform to verify
the existence and valuation of recorded accounts payable?
a. Investigating the open purchase order file to ascertain that prenumbered purchase
orders are used and accounted for
b. Receiving the client’s mail, unopened, for a reasonable period of time after year-end
to search for unrecorded vendor’s invoices
c. Vouching selected entries in the accounts payable subsidiary ledger to
purchase orders and receiving reports
d. Confirming accounts payable balances with known suppliers who have zero
balances

17. Which of the following statements concerning evidential matter is true?

a. A client’s accounting data cannot be considered sufficient evidence
to the support the FS
b. Competent evidence supporting management’s assertions should be convincing
rather than merely persuasive
c. Effective internal control contributes little to the reliability of the evidence created
within the entity
d. The cost of obtaining evidence is not an important consideration to an auditor in
deciding what evidence should be obtained

18. Which of the following most likely would be detected by an auditor’s review of a client’s
sales cut-off?
a. Lapping of the year-end receivables
b. Excessive sales discounts
c. Unauthorized goods returned for credit
d. Unrecorded sales for the year

19. A purpose of a management representation letter is to reduce

a. Audit risk to an aggregate level of misstatement that could be considered
material
b. The scope of an auditor’s procedures concerning related-party transactions and
subsequent events
c. The possibility of a misunderstanding concerning management’s
responsibility for the financial statements
d. An auditor’s responsibility to detect material misstatement only to the extent that
the letter is relied on

20. When auditing related party transactions, an auditor places primary emphasis on
a. Ascertaining the rights and obligations of the related parties
b. Evaluating the disclosure of the related party transactions
c. Confirming the existence of the related parties
d. Verifying the valuation of the related party transactions

21. Which of the following factors or conditions is an auditor least likely to plan an audit to
discover?
a. Financial pressures affecting employees
b. High turn over of senior management ?
c. Inadequate monitoring of significant controls
d. Inability to generate positive cash flows from operations

22. Audit evidence can come in different forms with different degrees of persuasiveness. Which
of the following is the least persuasive type of evidence?
a. Bank statements obtained from the client
b. Test counts of inventory made by the auditor

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 c. Pre-numbered purchase order forms
d. Correspondence from the client’s attorney about litigation

23. An auditor’s working papers serve mainly to

a. Provide the principal support for the auditor’s report
b. Satisfy the auditor’s responsibilities concerning the code of professional conduct
c. Monitor the effectiveness of the CPA firm’s quality control procedures
d. Document the level of independence maintained by the auditor

24. An auditor should test bank transfers for the last part of the audit period and first part of the
subsequent period to detect whether
a. Cash balance were overstated because of kiting
b. The cash receipt journal was held open for a few days after year end
c. The last checks recorded before year end were actually made by year end ?
d. Any unusual payments to or receipts from related parties occurred

25. The accumulation of source documents and records that allows the organization to trace
accounting entries back to their initiation is the
a. Substantiation record
b. Outsourcing code
c. Initiation procedure
d. Audit trail ?

26. The current file of the auditor’s working papers ordinarily should include
a. A flowchart of the internal control procedures
b. Organization charts
c. A copy of the FS
d. Copies of the bond and note indentures

27. The permanent (continuing) file of an auditor’s working papers most likely would
include copies of the
a. lead schedules c. bank statements
b. attorney’s letters d. debt agreements

28. The audit workpaper that reflects the major components of an amount reported in the
financial statements is the
a. Interbank transfer schedule
b. Carryforward schedule
c. Supporting schedule
d. Lead schedule ?

29. The current file of an auditor’s working papers most likely would include copy of the
a. bank reconciliation c. articles of incorporation
b. pension plan contract d. flowchart of the internal control activities

30. An audit working paper that shows the detailed evidence and procedures regarding the
balance in the accumulated depreciation account in the year under audit will be found in the
a. Current file of working papers ?
b. Permanent files of working papers
c. Other information working papers in the current file
d. Planning memorandum in the current file

31. Analytical procedures [Dapat letter c answer]

a. Are intended to detect material misstatements in financial statement accounts
b. Are concerned with how internal control policies or procedures are applied
c. Are evaluations of financial information made by a study of plausible
relationships among both financial and non-financial data
d. Are procedures that lend hindsight to amounts and information disclosed in FS as of
balance sheet date

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32. When applying analytical procedures, an auditor could develop an independent expectation
of an acct. balance to compare to
a. Management’s unaudited balance
b. Management’s unaudited balance adjusted for trends in the industry
c. The prior-year audited balance
d. The prior-year audited balance adjusted for trends in the industry ?

33. One reason why an auditor makes an analytical review of the client’s operations is to identify
a. Improper separation of accounting and other financial duties
b. Weakness of a material nature in the system of internal accounting control
c. Unusual transactions
d. Non-compliance with prescribed control procedures

34. For all audits of financial statements made in accordance with GAAS, the use of analytical
procedures is required to some extent
In planning stage As a substantive tests In the review stage
a. Yes No Yes
b. No Yes No
c. No Yes Yes
d. Yes No No

35. 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. Professional ethical requirements
d. Generally accepted auditing standards

36. 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 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

37. In forming an opinion on the financial statements

a. The auditor should evaluate the conclusions drawn form the audit evidence
obtained during the course of the audit. ?
b. The auditor evaluates whether there is a reasonable assurance about whether the
financial statements are free from material misstatements.
c. The auditor evaluates whether sufficiently appropriate audit evidence has been
obtained to eliminate the risk of material misstatements.
d. The auditor verifies that all errors that misstate the financial statements have been
corrected by the client.

38. In evaluating whether the financial statements have been prepared and presented in
accordance with the specific requirements of the applicable financial reporting framework for
particular classes of transactions, account balances, and disclosures, the auditor should
consider
a. That the accounting estimates made by the management are reasonable in the
circumstances.
b. That the information presented in the financial statements, including the accounting
policies, is relevant, reliable, comparable, and understandable.
c. That the accounting policies selected and applied are consistent with the financial
reporting framework.
d. All of the choices given are to be considered.

39. According to PSA 700, the following are the elements of the standard audit report, except

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 a. addressee
b. Introductory paragraph
c. Explanatory paragraph ?
d. Auditor’s address

40. Auditing standards require that the audit report must be titled. This is done in order to
a. Distinguish the audit report from a compilation or review report.
b. Indicate that the auditor is a CPA.
c. Identify the financial statements audited
d. Emphasize that the report is not a guarantee as to the fair presentation of the
financial statements.

41. The auditor may address the report to all, except

a. The client company.
b. The president of the chief executive officer of a client company.
c. The board of directors of a client company
d. The stockholders of a client company

42. The purpose of the introductory/opinion paragraph in the standard unqualified report is to
a. Identify the name of the entity whose financial statements have been audited.
b. Identify the title of each of the financial statements which were audited,
including the dates and periods covered by the report.
c. Refer to the summary of accounting policies and explanatory notes
d. All the above

43. The element of the auditor’s report that identifies the financial statement audited is the
a. Title
b. Introductory/opinion paragraph
c. Management’s responsibility for the financial statements paragraph
d. Opinion paragraph

44. How are management’s responsibility and the auditor’s responsibility represented in the
standard audit report?
Management’s Auditor’s
responsibility responsibility
a. Explicitly Explicitly
b. Implicitly Implicitly
c. Implicitly Explicitly
d. Explicitly Implicitly

45. If an auditor is satisfied that there is only a remote likelihood of a loss resulting from the
resolution of a matter involving an uncertainty, the auditor should express a(n)
a. Unqualified opinion
b. Unqualified opinion with a separate explanatory paragraph
c. Qualified opinion or disclaimer of opinion, depending upon the materiality of the loss
d. Qualified opinion or disclaimer of opinion, depending whether the uncertainty is
adequately disclosed

46. When the auditor concurs with a change in accounting principle that materially affects the
comparability of FS, the auditor should
Refer to the change in an
Concur Explicitly with the Express Qualified Explanatory Paragraph
Change Opinion
a. No No Yes
b. Yes No Yes
c. Yes Yes No
d. No Yes No

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47. An auditor concludes that there is a material uncertainty 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. Yes No
c. No Yes
d. No No

48. If a publicly held company issues financial statements that purport to present its financial
position and results of operations but omits the statement of cash flows, the auditor will
ordinarily express a(n)
e. Disclaimer of opinion.
f. Qualified opinion.
g. Review report.
h. Unqualified opinion with a separate explanatory paragraph.

49. An auditor may express a qualified opinion under which of the following circumstances?
Lack of Sufficient Evidential Restrictions on the scope of the
Matter audit
a. Yes Yes
b. Yes No
c. No Yes
d. No No

50. An auditor may reasonably issue an “except for’ qualified opinion for (an)
Scope Limitation Unjustified accounting
change
a. Yes No
b. No Yes
c. Yes Yes
d. No No

51. Which of the following procedures would a CPA ordinarily perform during audit planning?

a. Obtain understanding of the client’s business and industry

b. Review the client’s bank reconciliation
c. Obtain client’s representation letter
d. Review and evaluate client’s internal control

52. If an auditor establishes a relatively high level for materiality, then the auditor will:

a. Accumulate more evidence than if a lower level had been set.

b. Accumulate less evidence than if a lower level had been set.
c. Accumulate approximately the same evidence as would be the case were materiality
lower.
d. Accumulate an undetermined amount of evidence.

53. Which of the following statements is not correct?

a. Materiality is a relative rather than an absolute concept.

b. The most important base used as the criterion for deciding materiality is total
assets.
c. Qualitative factors as well as quantitative factors affect materiality.
d. Given equal peso amounts, frauds are usually considered more important than
errors.

54. The risk that financial statements are likely to be misstated materially without regard to the
effectiveness of internal control is the:
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 a. Inherent risk
b. Audit risk
c. Client risk
d. Control risk

55. Which of the following is not one of the components of an entity’s internal control?

a. Control risk
b. Control activities
c. Information and communication
d. The control environment

56. Obtaining knowledge about whether the control is implemented can best be obtained by

a. Inquiry of client’s personnel.

b. Reading procedures manual.
c. Tracing transactions through the information system relevant to financial
reporting.
d. Performing tests of control.

57. Which of the following statements is incorrect about walk-through tests?

a. It involves tracing a few transactions through the accounting systems.

b. This procedure may form part tests of control.
c. The nature and extent of walk-through tests performed by the auditor are such
that they alone would provide sufficient appropriate audit evidence to support
a low assessment of control risk.
d. This procedure is performed to determine whether the controls are being
implemented.

58. Tests of controls do not include:

a. Reperformance of internal control procedures

b. Inquiries about, and observation of, internal controls which leave no audit trail.
c. Inspection of documentary support for transactions evidencing authorization
d. Analytical procedures involving comparison of operating expenses with
budgeted amounts.

59. Audit evidence concerning proper segregation of duties normally is best obtained by:

a. Direct personal observation of the employee who applies control procedures.

b. Making inquiries of co-workers about the employee who applies control procedures.
c. Preparation of a flowchart of duties performed and available personnel.
d. Inspection of third-party documents containing the initials of who applied control
procedures.

60. Auditing standards require the auditor to obtain an understanding of the client’s internal
control structure

a. For every audit.

b. For first time audits.
c. Sufficient to find any frauds which may exist.
d. Whenever it would be