Q1.

In the audits of the financial statements of construction contractors, the areas that normally receive
particular attention include all of the following except one:
a. Construction equipments
b. Entity's internal control
c. Operating systems and procedures
d. Project management

Q2. Areas of focus in the construction industry are:

a. Contract revenues
b. Costs, gross profit or loss
c. Related contract receivables and payables
d. All of the above
e. None of the above

Q3. Controls over _________________ are necessary to provide for adequate documentation, clerical
verification, overall review of estimated costs, and approval of all bids by the appropriate levels of
management.
a. Estimating and Bidding
b. Jobsite Accounting and Control
c. Project Administration and Contract Valuation
d. Billing Procedures

Q4. Timely and reliable progress, cost, and status reports on each contract are essential for
management to evaluate the status and profitability of each project and to identify problems at an early
stage.
a. Estimating and Bidding
b. Jobsite Accounting and Control
c. Project Administration and Contract Valuation
d. Billing Procedures

Q5. A contractor uses information on _____________ incurred to control costs, evaluate the status and
profitability of contracts, and prepare customer billings. They are also necessary in the determination of
revenue when the percentage-of-completion approach is utilized.
a. Billing Procedures
b. Contract Costs
c. Contract Revenues
d. Construction Equipment

Q6. These are necessary to provide reasonable assurance that such items are properly documented and
provide for the accumulation of related revenues and costs.
a. Contract Costs
b. Contract Revenues
c. Construction Equipment
d. Claims, Extras, and Back Charges

Q7. Statement I: A contractor's monitoring of controls over contract revenues ensures that internal
control continues to operate effectively.
 Statement II: Adequate controls to safeguard access to small equipment, such as power hand tools,
at the job site prevent loss or pilferage. Purchases of such equipment is often charged directly to a
contract.

a. False, False
b. False True
c. True, True
d. True, False

Q8. In estimating and bidding, a contractor might assign personnel to perform the following tasks except
one
a. Review the quantities of material and hours of labor in bid estimates and compare them to the
customers' specifications.
b. Compare and relate estimated material costs to published vendor price lists, price quotations,
subcontractors' bids, or other supporting documentation.
c. Compare and relate estimated labor rates to union contracts and other documentation
supporting labor rates, payroll taxes, and fringe benefits.
d. Relate billings, including retentions, to the terms of the original contract and of approved
change orders.

Q9. In Billing Procedures, a contractor might assign personnel to perform the following tasks, which one
is correct.
a. Review the quantities of material and hours of labor in bid estimates and compare them to the
customers' specifications.
b. Compare and relate estimated material costs to published vendor price lists, price quotations,
subcontractors' bids, or other supporting documentation.
c. Compare and relate estimated labor rates to union contracts and other documentation
supporting labor rates, payroll taxes, and fringe benefits.
d. Relate billings, including retentions, to the terms of the original contract and of approved
change orders.

Q10. Statement I - One of the objectives of internal audits at job sites is to determine whether personnel
at the sites are complying with the contractor's established policies and practices.
Statement II - An internal audit staff may conduct either operational or financial reviews at a
contractor's administrative offices as well as at job sites.

a. Both statements are true

b. Both statements are false
c. Statement 1 is False
d. Statement 2 is False

True or False:
1. If required by law or regulation to use a specific form of the auditor's report, the auditor must comply
with such laws.
2. The auditor should first obtain legal advice if they found out that an employee is involved in
noncompliance with relevant laws.
3. Fraud risk factors include incentives, opportunities, and rationalizations to commit fraud.
4. If the financial statements have been prepared using the going concern basis but, in the auditor's
judgment, such basis is inappropriate, the auditor should express a qualified opinion.
5. If adequate disclosure about an entity's ability to continue as a going concern for a reasonable period
of time is not made in the financial statements, the auditor should only express a qualified opinion.
6. A component is an entity for which group or component management prepares financial information
that is required by the applicable financial reporting framework to be included in the group financial
statements.
7. Fraud risk factors generally indicate the existence of fraud.
8. Contracts entered into by nonunion contractors covered by the Davis-Bacon Act require that
contractors pay for nonunion labor at the prevailing wage of union workers.
9. Revenue recognition may be accelerated if a contractor reclassifies inventory and prepaid amounts to
current job costs to satisfy working capital requirements of bonding companies.
10. If identified or suspected fraud hinders the ability of the auditor to continue to perform the audit,
they should immediately withdraw from the engagement without any further notice.

True: 1, 3, 6, 8, 9
False: 2, 4, 5, 7, 10

Enumeration:
11 - 13. Fraud risk factors
- Incentives
- Opportunities
- Rationalization

14 - 18. Key estimates in the construction industry

- Cost to complete
- Contract penalties and incentives
- Profit from change orders
- Revenue from claims
- Allocation of equipment costs
- Stage of completion
- Accounts receivable allowance
- Assumptions regarding impairments of long-lived assets
- Assumptions regarding deferred tax valuation allowances and effective tax rates

19 - 20. Two types of misstatements relevant to the consideration of fraud

- Fraudulent financial reporting
- Misappropriation of assets
MCQ

1. WHICH OF THE FOLLOWING IS NOT A BENEFIT OF PLANNING THE AUDIT?

- Helping the auditor properly organize and manage the audit engagement so that it is performed in an
effective and efficient manner
- Assisting in the selection of engagement team members with appropriate levels of capabilities and
competence to respond to anticipated risks and allocating team member responsibilities
- Facilitating the direction and supervision of engagement team members and the review of their work
- Relevant industry, regulatory, and other external factors, including the applicable financial reporting
framework

2. THE FOLLOWING ARE THE OBJECTIVES OF THE AUDITOR'S COMMUNICATION WITH THOSE CHARGED
WITH GOVERNANCE, EXCEPT.

- obtain from those charged with governance information relevant to the audit.
- provide those charged with governance with timely observations arising from the audit that are
significant and relevant to their responsibility to oversee the financial reporting process.
- promote effective two-way communication between the auditor and those charged with governance.
- to help the auditor identify and devote appropriate attention to important areas of the audit

3. THE FOLLOWING ARE MATTERS THAT CONTRIBUTE TO EFFECTIVE TWO-WAY COMMUNICATION,

EXCEPT.

- process for taking action and reporting back on matters communicated by the auditor
- form in which communications will be made.
- person(s) on the audit team and among those charged with governance who will communicate
regarding particular matters.
- the size, operating structure, control environment, and legal structure of the entity being audited.

4. WHICH OF THE FOLLOWING IS NOT A FACTOR THAT MAY BE RELEVANT TO THE TIMING OF
COMMUNICATIONS?

- the size, operating structure, control environment, and legal structure of the entity being audited.
- any legal obligation to communicate certain matters within a specified timeframe.
- whether the auditor is auditing both general purpose and special purpose financial statements.
- planning matters early in the audit engagement and, for an initial engagement, as part of the terms of
the engagement.

5. IF THE TWO-WAY COMMUNICATION BETWEEN THE AUDITOR AND THOSE CHARGED WITH
GOVERNANCE IS NOT ADEQUATE AND THE SITUATION CANNOT BE RESOLVED, THE AUDITOR MAY TAKE
ACTIONS SUCH AS THE FOLLOWING, EXCEPT.
- Modifying the auditor's opinion on the basis of a scope limitation
- Obtaining legal advice about the consequences of different courses of action
- Withdrawing from the engagement when withdrawal is possible under applicable law or regulation
- Determining the nature and extent of risk assessment procedures

6. THE FOLLOWING ARE MATTERS RELATED TO SIGNIFICANT FINDINGS OR ISSUES IN THE AUDIT THAT
THE AUDITOR SHOULD COMMUNICATE WITH THOSE CHARGED WITH GOVERNANCE, EXCEPT.

- The auditor's views about qualitative aspects of the entity's significant accounting practices, including
accounting policies, accounting estimates, and financial statement disclosures. When applicable, the
auditor should
-Significant difficulties, if any, encountered during the audit.
- Disagreements with management, if any
- the auditor's views about significant matters that were the subject of management's consultations with
other accountants on accounting or auditing matters when the auditor is aware that such consultation
has occurred.

7. In the case when not all of those charged with governance are involved in management, the auditor
should also communicate the following, except.

- material, corrected misstatements that were brought to the attention of management as a result of
audit procedures.
- significant findings or issues, if any, arising from the audit that were discussed, or the subject of
correspondence, with management.
- written representations the auditor is requesting
- Other findings or issues, if any, arising from the audit that are, in the auditor's professional judgment,
significant and relevant to those charged with governance regarding their responsibility to oversee the
financial reporting process.

8. IN ORDER TO UNDERSTAND THE ENTITY AND ITS ENVIRONMENT, THE AUDITOR SHOULD OBTAIN AN
UNDERSTANDING OF THE FOLLOWING, EXCEPT.

-Relevant industry, regulatory, and other external factors, including the applicable financial reporting
framework
-The nature of the entity, including
-The entity's objectives and strategies and those related business risks that may result in risks of
material misstatement
-determining the nature, timing, and extent of further audit procedures.
9. IN ACCORDANCE WITH PARAGRAPH .06 OF AU-C SECTION 315, RISK ASSESSMENT PROCEDURES
SHOULD INCLUDE THE FOLLOWING, EXCEPT.

- inquiries of management and others within the entity who, in the auditor's professional judgment,
may have information that is likely to assist in identifying risks of material misstatement due to fraud or
error.
- analytical procedures.
- observation and inspection
- The measurement and review of the entity's financial performance

10. Risk assessment procedures to obtain audit evidence about the design and implementation of
relevant controls INCLUDE?

- inquiring of entity personnel.

- observing the application of specific controls.
- inspecting documents and reports.
- tracing transactions through the information system relevant to financial reporting.
- ALL OF THE ABOVE

11. UNDER RISK ASSESSMENT PROCESS, THE AUDITOR SHOULD OBTAIN AN UNDERSTANDING OF
WHETHER THE ENTITY HAS A PROCESS FOR?

- IDENTIFYING BUSINESS RISKS RELEVANT TO FINANCIAL REPORTING OBJECTIVES

- ESTIMATING THE SIGNIFICANCE OF THE RISKS
- ASSESSING THE LIKELIHOOD OF THEIR OCCURRENCE
- DECIDING ABOUT ACTIONS TO ADDRESS THOSE RISKS.
- ALL OF THE ABOVE

12. UNDER THE INFORMATION SYSTEM, INCLUDING THE RELATED BUSINESS PROCESSES RELEVANT TO
FINANCIAL REPORTING AND COMMUNICATION. THE AUDITOR SHOULD OBTAIN AN UNDERSTANDING
OF THE INFORMATION SYSTEM, INCLUDING THE RELATED BUSINESS PROCESSES RELEVANT TO
FINANCIAL REPORTING, INCLUDING THE FOLLOWING AREAS, EXCEPT.

-The classes of transactions in the entity's operations that are significant to the financial statements
-How the information system captures events and conditions, other than transactions, that are
significant to the financial statements
-The financial reporting process used to prepare the entity's financial statements, including significant
accounting estimates and disclosures
- the strengths in the control environment elements collectively provide an appropriate foundation for
the other components of internal control and whether those other components are not undermined by
deficiencies in the control environment.

13. PARAGRAPH .26 OF AU-C SECTION 315 STATES THAT THE AUDITOR SHOULD IDENTIFY AND ASSESS
THE RISKS OF MATERIAL MISSTATEMENT AT THE FINANCIAL STATEMENT LEVEL AND AT THE RELEVANT
ASSERTION LEVEL RELATED TO CLASSES OF TRANSACTIONS, ACCOUNT BALANCES, AND DISCLOSURES.
FOR THIS PURPOSE, THE AUDITOR SHOULD EXECUTE THE FOLLOWING, EXCEPT.

- identify risks throughout the process of obtaining an understanding of the entity and its environment,
including relevant controls that relate to the risks, by considering the classes of transactions, account
balances, and disclosures in the financial statements.
- assess the identified risks and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions.
- relate the identified risks to what can go wrong at the relevant assertion level, taking account of
relevant controls that the auditor intends to test
- consider the likelihood of misstatement, including the possibility of multiple misstatements, and
whether the potential misstatement is of a magnitude that could result in a material misstatement.
- The activities performed or to be performed by the internal audit function

14. IN EXERCISING PROFESSIONAL JUDGMENT ABOUT WHICH RISKS ARE SIGNIFICANT RISKS, THE
AUDITOR SHOULD CONSIDER THE FOLLOWING, EXCEPT.

- the complexity of transactions

- whether the risk involves significant transactions with related parties
- the degree of subjectivity in the measurement of financial information related to the risk, especially
those measurements involving a wide range of measurement uncertainty
- The nature of the internal audit function's responsibilities and how the internal audit function fits in
the entity's organizational structure

15. IN RELATION TO CONTROL ACTIVITIES, WHICH OF THE FOLLOWING IS FALSE?

-The auditor should obtain an understanding of control activities relevant to the audit, which are those
control activities the auditor judges necessary to understand in order to assess the risks of material
misstatement at the assertion level and design further audit procedures responsive to assessed risks.
-An audit does not require an understanding of all the control activities related to each significant class
of transactions, account balance, and disclosure in the financial statements or to every assertion
relevant to them.
-Control activities that are relevant to the audit are those that are required to be treated as such, being
control activities that relate to significant risks and those that relate to risks for which substantive
procedures alone do not provide sufficient appropriate audit evidence or considered to be relevant in
the professional judgment of the auditor.
-The auditor should obtain an understanding of the minor activities that the entity uses to monitor
internal control over financial reporting, including those related to those control activities relevant to
the audit, and how the entity initiates remedial actions to deficiencies in its controls.

16. IN RELATION TO FURTHER AUDIT PROCEDURES, WHICH OF THE FOLLOWING STATEMENT IS FALSE?

- The auditor should design and perform further audit procedures whose nature, timing, and extent are
based on, and are responsive to, the assessed risks of material misstatement at the relevant assertion
level.
- an auditor may determine that performing only substantive procedures is appropriate for particular
assertions, and therefore, the auditor excludes the effect of controls from the relevant risk assessment.
- The auditor should design and perform tests of controls to obtain sufficient appropriate audit evidence
about the operating effectiveness of relevant controls if the auditor's assessment of risks of material
misstatement at the relevant assertion level includes an expectation that the controls are operating
effectively
- the auditor may determine that in addition to the substantive procedures that are required for all
relevant assertions, in accordance with paragraph .20 of AU-C section 320, an effective response to the
assessed risk of material misstatement for a particular assertion can be achieved only by also performing
tests of controls.

17. IN RELATION TO FURTHER AUDIT PROCEDURES, THE FOLLOWING IS TRUE, EXCEPT?

- Tests of the operating effectiveness of controls are performed only on those controls that the auditor
has determined are suitably designed to prevent, or detect and correct, a material misstatement in a
relevant assertion.
- Testing the operating effectiveness of controls is different from obtaining an understanding of and
evaluating the design and implementation of controls.
- in designing and performing tests of controls, the auditor should determine whether the controls to be
tested depend upon other controls and, if so, whether it is necessary to obtain audit evidence
supporting the operating effectiveness of those indirect controls.

- When performing tests of controls, the auditor should not obtain audit evidence about the operating
effectiveness of the controls

18. IN RELATION TO AUDIT DOCUMENTATION, WHICH OF THE FOLLOWING STATEMENT IS FALSE?

-Audit documentation should be prepared on a timely basis and be sufficient to enable an experienced
auditor, having no previous connection with the audit, to understand the nature, timing, extent and
result of the procedures performed, the audit evidence obtained and the significant finding or issues
which arose, the conclusions reached thereon and the significant professional judgments made in
reaching those conclusions.
-In documenting the nature, timing, and extent of audit procedures performed, the auditor should
record the identifying characteristics of the specific items or matters tested, who performed the work
and the date such work was completed, and who reviewed the audit work performed and the date and
extent of such review.
-With respect to construction contracts and agreements used in audit procedures related to the
inspection of significant contracts or agreements, the auditor should include abstracts or copies of those
contracts or agreements in the audit documentation.
-The objective of the auditor is to prepare documentation that provides a sufficient and appropriate
record of the basis for the auditor's report and evidence that the audit was planned and performed in
accordance with IFRIC and applicable legal and regulatory requirements.

19. IN RELATION TO AUDIT DOCUMENTATION, THE FOLLOWING ARE TRUE, EXCEPT?

-Audit documentation is the property of the auditor, and some states recognize this right of ownership
in their statutes. The auditor may make available to the entity at the auditor's discretion copies of the
audit documentation, provided such disclosure does not undermine the effectiveness and integrity of
the audit process.
-Audit documentation requirements contained in other Statements on Auditing Standards can be found
in the "Application and Other Explanatory Material" section of AU-C section 230.
-Paragraph .41 of AU-C section 700, Forming an Opinion and Reporting on Financial Statements, states
that the auditor's report should not be dated earlier than the date on which the auditor has obtained
sufficient appropriate audit evidence on which to base the auditor's opinion on the financial statements.
-The auditor should assemble the audit documentation in an audit file and complete the administrative
process of assembling the final audit file on a timely basis, no later than 90 days following the report
release date.

20. IN RELATION TO IDENTIFYING AND EVALUATING CONTROL DEFICIENCIES, WHICH OF THE

FOLLOWING STATEMENT IS FALSE?

- The auditor is required to obtain an understanding of internal control relevant to the audit when
identifying and assessing the risks of material misstatement.
- The auditor should determine whether, on the basis of the audit work performed, the auditor has
identified one or more deficiencies in internal control.
- The auditor should communicate in writing to those charged with governance on a timely basis
significant deficiencies and material weaknesses identified during the audit, including those that were
remediated during the audit.
- The auditor should issue a written communication stating that no significant deficiencies were
identified during the audit.
ENUM:
THE FIVE INTERRELATED COMPONENTS OF INTERNAL CONTROL
1. The control environment
2. The entity's risk assessment process
3. The information system, including the related business processes relevant to financial reporting
and communication
4. Control activities
5. Monitoring of controls

True or False:

1. Contract receivables do have a direct correlation to revenue recognized on the completed contract or
percentage-of-completion method.
2. The higher the risk of material misstatement, the more likely it is that the auditor may decide it is more
effective to perform substantive procedures at an earlier date rather than nearer to, or at, the period end.
3. Under the percentage-of-completion method, profit recognition is deferred until the contract is
substantially completed.
4. The cost incurred to date on uncompleted contracts is not reflected in the determination of current
income unless a loss on the contract is anticipated.
5. When the lack of dependable estimates or inherent hazards cause forecasts to be doubtful, the
percentage-of-completion method is preferable.
6. Unbilled receivables arise when revenues have been recorded due to the performance of contract work
being performed, but the amount cannot be billed under the terms of the contract until a later date.
7. To determine if there are any additional significant aged receivable balances, the auditor may elect to
review management's receivables aging schedules.T
8. The two primary areas of auditing of contract costs are accumulated costs to date and estimated cost to
complete.
9. The amounts billable by a subcontractor under the terms of a contract is the amount that should be
recorded in accounts receivable.
10. The auditor's consideration of the proper allocation of costs to individual contracts is crucial to
mitigate a possible significant fraud risk.

True: 4, 6, 7, 8, 10
False: 1, 2, 3, 5, 9