Since 1977

AT L. R. Cabarles/J.M. D. Maglinao
Quiz 3 SET A OCTOBER 2019

1. How frequently must an auditor test operating Substantive tests Risk assessment
effectiveness of controls that appear to function as of details procedures
they have in past years and on which the auditor a. Yes Yes
wishes to rely in the current year? b. Yes No
a. Monthly. c. No Yes
b. At least every second audit. d. No No
c. Each audit.
d. At least every third audit. 9. Performing 100% testing is least likely possible in
which of the following?
2. Tests of controls do not ordinarily address: a. Large value but small in number accounts.
a. By whom a control was applied. b. Assertions with assessed significant risks.
b. How a control was applied. c. Testing customer credit approvals.
c. The consistency with which a control was applied. d. Use of CAATs.
d. The cost effectiveness of the way a control was
applied. 10. At times a sample may indicate in the case of a test of
details that a material misstatement does not exist
3. The objective of tests of details of classes of when in fact it does. This situation illustrates the risk
transactions performed as substantive tests is to: of
a. Comply with International Financial Reporting a. Incorrect rejection c. Over reliance
Standards. b. Incorrect acceptance d. Under reliance
b. Attain assurance about the reliability of the
information system relevant to financial reporting. 11. When using monetary-unit sampling, the recorded
c. Detecting materials misstatement at the assertion amount population is a definition of all the items in
level. the:
d. Evaluate whether management’s controls operated a. population.
effectively. b. population which the auditor has included in the
sample.
4. Which of the following steps or modifications to an c. population which contain errors.
audit program is likely to be the most appropriate if an d. sample which contain errors.
auditor assesses the level of the risk of material
misstatement for a financial statement assertion to be 12. Under classical variables sampling, if the population
relatively high? consists of 200 items and is represented by
a. Perform more intensive tests of the relevant P1,000,000 what is the probability the auditor will
internal control select for testing an account recorded at P100,000?
b. Perform more intensive substantive tests of the a. .005.
assertion b. .100.
c. Increase the planning materiality level c. .025.
d. Reduce the desired level of audit risk d. Not determinable from the facts given.

5. In assessing control risk, an auditor ordinarily selects 13. Which of the following sampling methods would be
from a variety of techniques, including: used to estimate a numerical measurement of a
a. Inquiry and analytical procedures. population, such as a peso value?
b. Reperformance and observation. a. Attributes sampling c. Variables sampling
c. Comparison and confirmation. b. Stop-or-go sampling d. Random sampling
d. Inspection and verification.
14. The auditor selected samples of 200 with recorded
6. When an auditor increases the assessed level of amount or P208,000, from population of 1,000
control risk because certain control activities were inventory items with total recorded amount of
determined to be ineffective, the auditor would most P1,040,000. After performing the necessary audit
likely increase the procedures, the auditor determined that the adjusted
a. Extent of tests of controls. amount of the samples is P196,000. Which of the
b. Level of detection risk. following illustrates ratio estimation approach to
c. Extent of tests of details. projecting sample misstatement to population?
d. Level of inherent risk. a. Average audited amount of 200 samples divided by
200, equals P980. The estimated inventory balance
7. An auditor may compensate for a weakness in internal is then calculated as P980,000 (P980 X 1,000).
control by increasing the b. The difference of P12,000 is divided by the number
a. Level of detection risk. of sample items (200) to yield an average
b. Extent of tests of controls. difference of P60. The auditor then multiplies the
c. Preliminary judgment about audit risk. average difference by the number of items in the
d. Extent of analytical procedures. population to calculate a total difference of
P60,000 (P60 X 1,000) and the difference is
8. Which of the following are considered further audit subtracted from the total recorded amount to
procedures that may be designed after assessing the obtain an estimated inventory balance of
risks of material misstatement? P980,000.

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EXCEL PROFESSIONAL SERVICES, INC.

c. The ratio of the sum of the sample’s audited amounts

to the sum of the sample’s recorded amounts would 23. Which of the following is most likely to be a response to
have been 0.94 (P196,000 / P208,000). The auditor the auditor's assessment that the risk of material
would multiply the total recorded amount for the misstatement due to fraud for the existence of inventory
population by this ratio (0.94) to obtain an estimate is high?
of the inventory balance of P978,000 (P1,040,000 X a. Observe test counts of inventory at certain locations
0.94). on an unannounced basis.
d. None of the above. b. Perform analytical procedures rather than taking test
counts.
15. It involves the application of audit procedures to less than c. Request that inventories be counted prior to year-
100 percent of items within a population of audit end.
relevance such that all sampling units have a chance of d. Request that inventory counts at the various locations
selection. be counted on different dates so as to allow the same
a. Analytical procedures c. Substantive testing auditor to be present at every count.
b. Audit sampling d. Tests of controls
24. Audits of financial statements are designed to obtain
16. Which of the following is true? reasonable assurance of detecting material misstatements
a. The risk of incorrect acceptance is not relevant when due to
auditors use non-statistical sampling methods. a. b. c. d.
b. The risk of incorrect acceptance varies inversely with Errors Yes Yes Yes No
audit risk. Fraudulent financial Yes Yes No Yes
c. Sample size varies inversely with the risk of incorrect reporting
acceptance. Misappropriation of assets Yes No Yes No
d. The acceptable risk of incorrect acceptance is not Direct-effect illegal acts Yes No Yes No
related to inherent risk.
25. If the auditor suspects that members of senior
17. The individual items constituting a population. management, including members of the board of
a. Audit sampling c. Audit population directors, are involved in noncompliance to laws as
b. Sampling units d. Stratification regulations, and he believes his report may not be acted
upon, he would:
18. Represents the entire set of data from which a sample is a. Do nothing.
selected and about which the auditor wishes to draw b. Issue a disclaimer of opinion.
conclusions. c. Consider seeking legal advice.
a. Audit sampling c. Population d. Make special investigation in order to fully determine
b. Sampling units d. Stratification the extent of client’s noncompliance.

19. A sample selection procedure in which an auditor chooses 26. The key elements of the fraud triangle include all of the
a random starting point in a population and then selects following except
every nth item thereafter (where k is some number) is a. Pressure c. Opportunity
most likely to characterize which of the following sampling b. Materiality d. Rationalization
plans?
a. Simple random sampling 27. Given that an audit in accordance with generally accepted
b. Stratified sampling auditing standards is influenced by the possibility of
c. Systematic sampling material errors and fraud, the auditor should conduct the
d. Haphazard sampling audit with an attitude of
a. Professional responsiveness.
20. Which of the following factors is generally not considered b. Conservative advocacy.
in determining the sample size for a test of controls? c. Objective judgment.
a. Population size. d. Professional skepticism.
b. Tolerable rate.
c. Risk of assessing control risk too low. 28. Which of the following statements is most correct
d. Expected population deviation rate. regarding errors and fraud?
a. An error is unintentional, whereas fraud is intentional.
21. Which of the following statements best describes an b. Frauds occur more often than errors in financial
auditor’s responsibility to detect errors and fraud? statements.
a. An auditor should design an audit to provide c. Errors are always fraud and frauds are always errors.
reasonable assurance of detecting errors and fraud d. Auditors have more responsibility for finding fraud
that are material to the financial statements. than errors.
b. An auditor is responsible to detect material errors, but
has no responsibility to detect fraud that is concealed 29. Fraudulent financial reporting is most likely to be
through employee collusion or management override committed by whom?
of internal control. a. Line employees of the company.
c. An auditor has no responsibility to detect errors and b. Outside members of the company’s board of directors.
fraud unless analytical procedures or tests of c. Company management.
transactions identify conditions causing a reasonably d. The company’s auditors.
prudent auditor to suspect that the financial
statements were materially misstated. 30. Which of the following conditions identified during
d. An auditor has no responsibility to detect errors and fieldwork of an audit is most likely to affect the auditor's
fraud because an auditor is not an insurer and an assessment of the risk of misstatement due to fraud?
audit does not constitute a guarantee. a. Checks for significant amounts outstanding at year-
end.
22. Which of the following is most likely to be presumed to b. Computer generated documents.
represent fraud risk on an audit? c. Missing documents.
a. Capitalization of repairs and maintenance into the d. Year-end adjusting journal entries.
property, plant, and equipment asset account.
b. Improper revenue recognition. - end -
c. Improper interest expense accrual.
d. Introduction of significant new products.

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