AUDITING THEORY

SELF-TEST 1

1. In "auditing" financial accounting data, the primary concern is with:

a. 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.

2. Any service that requires a CPA firm to issue a report about the reliability of an assertion that is made
by another party is a(n):
a. accounting and bookkeeping service.
b. attestation service.
c. assurance service.
d. tax service.

3. Three common types of attestation services are:

a. audits, reviews, and verifications.
b. reviews, verifications, and attestations regarding internal controls.
c. audits, verifications, and attestations regarding internal controls.
d. audits, reviews, and attestations regarding internal controls.

4. The single feature that most clearly distinguishes auditing, attestation, and assurance is
a. Type of service
b. Training required to perform the service
c. Scope of services
d. CPA’s approach to the service

5. The primary goal of the CPA in performing the attest function is to

a. Detect fraud
b. Examine individual transactions so that the auditor may certify as to their validity
c. Determine whether the client's assertions are fairly stated
d. Assure the consistent application of correct accounting procedures

6. Which of the following best describes the operational audit?

a. It requires the constant review by internal auditors of the administrative controls as they relate to
operations of the company
b. It concentrates on implementing financial and accounting control in a newly organized company
c. It attempts and is designed to verify the fair presentation of a company's results of operations
d. It concentrates on seeking out aspects of operations in which waste would be reduced by the introduction
of controls

7. Which of the following is not a distinguishing feature of risk-based auditing?

a. Identifying areas posing the highest risk of financial statement errors
b. Analysis of internal control
c. Collecting and evaluating evidence
d. Concentrating audit resources in those areas presenting the highest risk of financial statement errors

8. Which of the following statements is not a distinction between independent auditing and internal auditing?
a. Independent auditors represent third party users external to the auditee entity, whereas internal auditors
report directly to management
b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are
concerned almost exclusively with validity
c. Internal auditors are employees of the auditee, whereas independent auditors are independent contractors
d. The internal auditor's span of coverage goes beyond financial auditing to encompass operational and
performance auditing

9. In assessing audit risk, the CPA needs to do all of the following, except:
a. Gather audit evidence in support of recorded transactions
b. Obtain an understanding of the client's system of internal control
c. Understand the economic substance of significant transactions completed by the client
d. Understand the entity and the industry in which it operates
AUDITING THEORY SELF-TEST 1 Compiled by Vhin

10. Which one of the following is more difficult to evaluate objectively?

a. Presentation of financial statements in accordance with generally accepted accounting principles
b. Compliance with government regulations
c. Efficiency and effectiveness of operations
d. All three of the above are equally difficult

11. In order to provide reasonable assurance the audit must be performed with an attitude of professional
skepticism. Which of the following is most correct regarding the "attitude" of professional skepticism?
a. auditors should assume that management is dishonest
b. auditors should assume that management is neither dishonest nor honest
c. auditors should assume that management is honest and mistakes are unintentional
d. auditors should assume that management is incumbent in preparing financial statements

12. Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial
statements?
a. The auditor commonly examines a sample, rather than the entire population of transactions
b. Accounting presentations contain complex estimates which involve uncertainty
c. Fraudulently prepared financial statements are often difficult to detect
d. Auditors believe that reasonable assurance is sufficient in the vast majority of cases

13. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements,
whether caused by errors or fraud, that are not ________ are detected.
a. important to the financial statements
b. statistically significant to the financial statements
c. material to the financial statements
d. identified by the client

14. The concept of reasonable assurance indicates that the auditor is:
a. not a guarantor of the correctness of the financial statements
b. not responsible for the fairness of the financial statements
c. responsible only for issuing an opinion on the financial statements
d. responsible for finding all misstatements

15. The auditor has considerable responsibility for notifying users as to whether or not the statements are properly
stated. This imposes upon the auditor a duty to:
a. be a guarantor of the fairness in the statements
b. provide reasonable assurance that material misstatements will be detected
c. be an insurer of the fairness in the statements
d. be equally responsible with management for the preparation of the financial statements

16. The auditor's best defense when existing material misstatements in the financial statements are not uncovered in
the audit is:
a. the client is guilty of contributory negligence.
b. the client is guilty of fraudulent misrepresentation
c. the audit was conducted in accordance with auditing standards
d. the financial statements are the client's responsibility

17. Which of the following statements is usually true?

a. It is easier for the auditor to uncover fraud than errors
b. It is easier for the auditor to uncover indirect-effect illegal acts than fraud
c. The auditor's responsibility for detecting direct-effect illegal acts is similar to the responsibility to detect
fraud
d. The auditor's responsibility for detecting indirect-effect illegal acts is similar to the responsibility to detect
fraud

18. In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is:
a. greater for management fraud because managers are inherently more deceptive than employees
b. greater for management fraud because of management's ability to override existing internal controls
c. greater for employee fraud because of the higher crime rate among blue collar workers
d. greater for employee fraud because of the larger number of employees in the organization
AUDITING THEORY SELF-TEST 1 Compiled by Vhin

19. An independent audit is important to readers of financial statements because it

a. Provides a measure of management's stewardship function
b. Measures and communicates the financial data included in financial statements
c. Objectively examines and reports on management's financial statements
d. Reports on the accuracy of information in the financial statements

20. If an auditor conducted an audit in accordance with auditing standards, which of the following would the auditor
likely detect?
a. unrecorded transactions
b. errors in postings of recorded transactions
c. counterfeit signatures on paid checks
d. fraud involving collusion

21. Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?
a. The auditor is responsible for the failure to detect fraud only when such failure clearly results from non-
performance of audit procedures specifically described in the engagement letter
b. The auditor may extend auditing procedures to actively search for evidence of fraud where the
examination indicates that fraud may exist
c. The auditor is required to provide reasonable assurance that the financial statements are free of both
material errors and fraud
d. The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued

22. An auditor should recognize that the application of auditing procedures may produce evidence indicating the
possibility of errors or fraud and therefore should:
a. plan and perform the engagement with an attitude of professional skepticism
b. not rely on internal controls that are designed to prevent or detect errors or fraud
c. design audit tests to detect unrecorded transactions
d. extend the work to audit most recorded transactions and records of an entity

23. Which of the following statements is true regarding the distinction between general audit objectives and specific
audit objectives for each account balance?
a. The specific audit objectives are applicable to every account balance on the financial statements
b. The general audit objectives are applicable to every account balance on the financial statements
c. The general audit objectives are stated in terms tailored to the engagement
d. For any given class of transactions, usually only one audit objective must be met to conclude the
transactions are properly recorded

24. Which of the following best describes what is meant by generally accepted auditing standards?
a. Pronouncements issued by the Auditing and Assurance Standards Council (AASC)
b. Procedures 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

25. Which of the following factors is most important concerning an auditor's responsibility to detect errors and fraud?
a. The susceptibility of the accounting records to intentional manipulations, alterations, and the
misapplication of accounting principles
b. The probability that unreasonable accounting estimates result from unintentional bias or intentional
attempts to misstate the financial statements
c. The possibility that management fraud, defalcations, and misappropriation of assets may indicate the
existence of illegal acts
d. The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material
misstatements

26. A CPA, while performing an audit, strives to achieve independence in appearance in order to
a. Become independent in fact
b. Maintain public confidence in the profession
c. Comply with the generally accepted standards of field work
d. Reduce risk and liability
AUDITING THEORY SELF-TEST 1 Compiled by Vhin

27. Which of the following is not required by the generally accepted auditing standard that states that due professional
care is to be exercised in the performance of the examination?
a. Observance of the standards of field work and reporting
b. Critical review of the audit work performed at every level of supervision
c. Degree of skill commonly possessed by others in the profession
d. Responsibility for losses because of errors of judgment

28. The third general standard states that due care is to be exercised in the performance of the examination. This
standard means that a CPA who undertakes an engagement assumes a duty to perform each audit
a. As a professional possessing the degree of skill commonly possessed by others in the field
b. In conformity with generally accepted accounting principles
c. With reasonable diligence and without fault or error
d. To the satisfaction of governmental agencies and investors who rely upon the audit

29. The permanent file section of the working papers that is kept for each audit client most likely contains
a. Review notes pertaining to questions and comments regarding the audit work performed
b. A schedule of time spent on the engagement by each individual auditor
c. Correspondence with the client's legal counsel concerning pending litigation
d. Narrative descriptions of the client's internal control policies and procedures

30. Of the following procedures, which is not considered part of “obtaining an understanding of the client’s
environment?”
a. Examining trade publications to gain a better understanding of the client's industry
b. Confirming customer accounts receivable for existence and valuation
c. Touring the client's manufacturing and warehousing facilities to gain a clearer understanding of
operations
d. Studying the internal controls over cash receipts and disbursements

31. Which of the following would best be described as an assurance service?

a. Preparing a report representing a client's position during BIR audit
b. Working with a client to develop a more efficient method of processing financial transactions
c. Offering an opinion concerning the accuracy of statements made on a client's web site relating to the
client's online privacy policies
d. Assisting a client in identifying potential sources of capital for potential acquisitions

32. Before accepting an engagement to audit a new client, an auditor is required to

a. Make inquiries of the predecessor auditor
b. Tell the client whether or not the auditor is willing to issue a "clean" opinion
c. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit
plan
d. Become a member of the client's board of directors

33. Which of the following is true with respect to the auditor's report?
a. The report indicates that the client's financial statements were audited in accordance with generally
accepted accounting standards
b. The report indicates that the client's financial statements were audited in accordance with applicable
auditing standards
c. The report indicates that the client's financial statements were audited in accordance with the auditor's
best judgment
d. The report indicates that the client's financial statements were audited in accordance with statements
issued by the IASB

34. Which of the following best describes the concept of risk assessment on which auditors can provide independent
assurance?
a. The risk that financial statements are misstated because of fraud
b. The risk that financial statements are misstated because of error or fraud
c. Whether management has systems in place to evaluate and effectively manage the entity's business risks
d. Developing client acceptance and continuance practices that minimize the likelihood of lawsuits against
the auditor
AUDITING THEORY SELF-TEST 1 Compiled by Vhin

35. 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 projections
d. The rate of change in the entity's industry is slow

36. Engagement risk can be eliminated by

a. Establishing policies for client acceptance and continuance
b. Lowering audit risk
c. Lowering materiality
d. Engagement risk cannot be eliminated

37. The achieved (actual) level of audit risk

a. Can always be accurately assessed by the auditor
b. Should be greater than or equal to acceptable audit risk
c. Can never be known with certainty
d. Is the same for all audit clients

38. The risk of material misstatement differs from detection risk in that it
a. Arises from the misapplication of auditing procedures
b. Exists independently of the actions of the auditor
c. Can be changed at the auditor's discretion
d. May be assessed in either quantitative or qualitative terms

39. All of the following are inherent risk factors that are pervasive to the financial statements except
a. Highly complex significant transactions
b. Non-routine transactions
c. Classes of transactions are not processed systematically
d. Supplies inventory is difficult to count

40. On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of
material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the
same as the planned audit risk level, the auditor would
a. Decrease detection risk
b. Increase detection risk
c. Increase materiality levels
d. Decrease amount of substantive testing

41. Which of the following is not an important consideration in an auditor's evaluation of an entity's business risk?
a. The specific business risks an entity faces that may result in financial statement errors and fraud
b. Business risk factors that impact the ability of the entity to be profitable and survive
c. Audit standards include many entity business risk factors that identify circumstances that increase the
likelihood of material misstatements
d. Audit standards require the auditor to evaluate the entity's business risk in order to provide suggestions to
improve the entity's profitability

42. Roger, CPA has requested permission to communicate with predecessor auditor in order to review certain
workpapers for high risk accounts for a new audit client. The new audit clients refusal to allow this
communication to occur would impact Rodgers decision concerning:
a. the auditor's ability to design audit tests
b. possible scope exception due to lack of access
c. integrity of management concerning possible accounting misstatements
d. violation of the GAAP rules concerning consistency and comparability of financial information

43. Which of the following statements is true regarding communications between predecessor and successor auditors?
a. The burden of initiating the communication rests with the predecessor
b. The predecessor's response can be limited to stating that no information will be provided
c. The predecessor should communicate with the successor only if the client is public
d. There must be communication between the predecessor and successor if the successor is to accept the
engagement
AUDITING THEORY SELF-TEST 1 Compiled by Vhin

44. The predecessor auditor is required to respond to the request of the successor auditor for information, but the
response can be limited to stating that no information will be provided when:
a. the predecessor auditor has poor relations with the successor auditor
b. the client is dissatisfied with the predecessor's work
c. there are actual or potential legal problems between the client and the predecessor
d. the predecessor believes that the client lacks integrity

45. Which of the following best expresses the requirement to establish with the client an understanding of the
responsibilities the auditor and company is taking for the audit engagement?
a. Management's assertion that they will provide the auditor with a risk assessment as to material
misstatements due to errors or fraud in the company's financial statements
b. Auditors assert that their primary responsibility is to plan and perform the audit in order to provide
reasonable assurance as to the detection of material misstatement due to error or fraud
c. Auditors assert that the primary audit goal is audit efficiency
d. Management asserts there are no material misstatements in the financials

46. The audit team gathers information about a new client's business and industry in order to obtain:
a. an understanding of how economic events and transactions have an effect on the company's financial
statements
b. an understanding of the clients internal control system for financial reporting
c. information regarding whether the company is engaging in financial statement fraud
d. information about engagement risk

47. The auditor is studying internal control policies and procedures within the sales, shipping, and billing subset of
the revenue cycle. Which of the following conditions suggests a need for additional testing of controls?
a. Internal control is found to be weak with regard to shipping and billing
b. Internal control over sales, billing, and shipping appears strong, but 80% of sales revenue is attributable to
three major customers
c. Internal control over billing and shipping is thought to be strong and the auditor considers additional
testing of selected controls will result in a major reduction in substantive testing
d. Internal control over the recording of sales is found to be weak and the sales are evenly divided among a
large number of customers

48. A secondary objective of the auditor's study and evaluation of internal control is that the study and evaluation
provide
a. A basis for constructive suggestions concerning improvements in internal control
b. A basis for reducing the auditor's assessed level of control risk below the maximum level
c. An assurance that the records and documents have been maintained in accordance with existing
company policies and procedures
d. A basis for determination of the resultant extent of the tests to which auditing procedures are to be
restricted

49. The independent auditor should acquire an understanding of the internal audit function as it relates to the
independent auditor's study and evaluation of internal control because
a. The understanding of the internal audit function is an important substantive test to be performed by the
independent auditor
b. The work performed by internal auditors may be a factor in determining the nature, timing, and extent of
the independent auditor's procedures
c. The procedures performed by the internal audit staff may eliminate the independent auditor's need for an
extensive study and evaluation of internal control
d. The audit programs, working papers, and reports of internal auditors can often be used as a substitute for
the work of the independent auditor's staff

50. After studying and evaluating a client's existing internal control, an auditor has concluded that the policies and
procedures are well designed and functioning as intended. Under these circumstances, the auditor would most
likely
a. Perform further control tests to the extent outlined in the audit program
b. Determine the control policies and procedures that should prevent or detect errors and fraud
c. Set detection risk at a higher level than would be set under conditions of weak internal control
d. Set detection risk at a lower level than would be set under conditions of weak internal control
AUDITING THEORY SELF-TEST 1 Compiled by Vhin

ANSWER KEYS

1 A 26 B
2 B 27 D
3 D 28 A
4 C 29 D
5 C 30 B
6 D 31 C
7 C 32 A
8 B 33 B
9 A 34 C
10 C 35 C
11 B 36 D
12 D 37 C
13 C 38 B
14 A 39 D
15 B 40 A
16 C 41 D
17 C 42 C
18 B 43 D
19 C 44 C
20 B 45 B
21 C 46 A
22 A 47 C
23 B 48 A
24 D 49 B
25 D 50 C