MULTIPLE CHOICE QUESTIONS

1. Which of the following would an auditor most likely use in determining the auditor’s
preliminary judgment about materiality for the financial statements as a whole? A. The
anticipated sample size of the planned substantive tests.
B. The entity’s year-to-date financial results and position.
C. The results of the internal control questionnaire.
D. The contents of the management representation letter.

2. The auditor is required to determine three different levels of materiality: (1) materiality for
the financial statements as a whole, (2) performance materiality, and (3)
A. Overall materiality C. General materiality
B. Planning materiality D. Specific materiality

3. What materiality level would be considered by the auditor to determine whether the
proposed adjustments are significant or not?
A. Overall materiality C. Specific materiality
B. Scoping materiality D. Performance materiality

4. Which of the following factors are normally considered by the auditor in determining the
appropriate benchmark for the purpose of calculating overall materiality? I. Components of
the entity’s financial statements II. Laws and regulations
III. Nature of the entity
A. I and II only C. II and III only
B. I and III only D. I, II, and III

5. In considering materiality for planning purposes, the auditor believes that misstatements
aggregating P60,000 would have material effect on an entity’s income statement, but that
misstatements would have to aggregate P40,000 to materially affect the statement of
financial position. Ordinarily, it would be appropriate to design auditing procedures that
would be expected to detect misstatements that aggregate:
A. P40,000 C. P60,000
B. P50,000 D. P100,000

6. 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 circumstanced 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.

7. Which of the following statements concerning materiality thresholds in incorrect?

A. Materiality thresholds may change between the planning and review stages of the audit.
These changes may be due to quantitative and/or qualitative factors.
B. The smallest aggregate level of errors or fraud that could be considered material to any
of the financial statements is referred to as a materiality threshold.
C. In general, the more misstatements the auditor expects, the higher should be the
aggregate materiality threshold.
D. Aggregate materiality thresholds are a function of the auditor’s preliminary judgment
concerning audit risk.

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8. The concepts of audit risk and materiality are interrelated and must be considered together
by the auditor. Which of the following is true?
A. Audit risk is the risk that the auditor may unknowingly express a modified opinion when,
in fact, the financial statements are fairly stated.
B. The phrase in the auditor’s report “present fairly, in all material respects, in accordance
with Philippine Financial Reporting Standards” indicates the auditor’s belief that the
financial statements as a whole are not materially misstated.
C. If misstatements are not important individually but are important in the aggregate, the
concept of materiality does not apply.
D. Material fraud but not material errors cause financial statements to be materially
misstated.

9. In evaluating the fair presentation of the financial statements, the auditor should assess
whether the aggregate of uncorrected misstatements that have been identified during the
audit is material. The aggregate of uncorrected misstatements comprises
I. Specific misstatements identified by the auditor including the net effect of uncorrected
misstatements identified during the audit of previous period.
II. The auditor’s best estimate of other misstatements which cannot be specifically identified.
A. I only. C. Both I and II.
B. II only. D. Neither I nor II.

10. A client decides not to correct misstatements communicated by the auditor that collectively
are not material and wants the auditor to issue the report based on the uncorrected
numbers. Which of the following statements is correct regarding the financial statement
presentation?
A. The financial statements are free from material misstatement, and no disclosure is
required in the notes to the financial statements.
B. The financial statements are not in accordance with the applicable financial reporting
framework.
C. The financial statements contain uncorrected misstatements that should result in a
qualified opinion.
D. The financial statements are free of material misstatement, but the disclosure of the
proposed adjustments is required in the notes to the financial statements.

11. A basic premise underlying the application of analytical procedures is that

A. The study of financial ratios is an acceptable alternative to the investigation of unusual
fluctuations
B. Statistical tests of financial information may lead to the discovery of material errors in
the financial statements
C. Plausible relationships among data may reasonably be expected to exist and continue in
the absence of known conditions to the contrary
D. These procedures cannot replace tests of balances and transactions

12. For audits of financial statements made in accordance with PSAs, the use of analytical
procedures is required to some extent
In the As a In the
Planning Stage Substantive Test Review Stage
A. Yes Yes Yes
B. Yes No Yes
C. No Yes Yes
D. Yes Yes No

13. Which of the following would not be considered an analytical procedure?

A. Estimating payroll expense by multiplying the number of employees by the average
hourly wage rate and the total hours worked.

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B. Projecting an error rate by comparing the results of a statistical sample with the actual
population characteristics.
C. Computing accounts receivable turnover by dividing credit sales by the average net
receivables.
D. Developing the expected sales based on the sales trend of the prior five years.

14. Analytical procedures used in planning an audit should focus on

A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential misstatements will be identified.
C. Enhancing the auditor’s understanding of the client’s business.
D. Assuming the adequacy of the available evidential matter.

15. The objective of performing analytical procedures as risk assessment procedures in an audit
is to identify
A. Unusual transactions and events.
B. Noncompliance with laws and regulations that went undetected because of internal
control weaknesses.
C. Relate party transactions.
D. Recorded transactions that were properly authorized.

16. Which of the following statements concerning analytical procedures is true?

A. Analytical procedures may be omitted entirely for some financial statement audits.
B. Analytical procedures used in planning the audit should not use nonfinancial information.
C. Analytical procedures usually are effective and efficient for tests of controls.
D. Analytical procedures alone may provide the appropriate level of assurance for some
assertions.

17. Analytical procedures may be classified as being primarily

A. Tests of controls. C. Tests of ratios.
B. Substantive tests. D. Tests of details of balances.

18. Which of the following items tend to be the most predictable for purposes of analytical
procedures applied as substantive tests? A. Relationships involving balance sheet accounts
B. Transactions subject to management discretions
C. Relationships involving income statement accounts
D. Data subject to audit testing in the prior period

19. The primary objective of analytical procedures used in the overall review stage of an audit is
to
A. Obtain evidence from details testing to corroborate particular assertions.
B. Identify areas that represent specific risks relevant to the audit.
C. Assist the auditor in assessing the validity of the conclusions reached.
D. Satisfy doubts when questions arise about a client’s ability to continue in existence.

20. Analytical procedures in the overall review should be:

A. Applied to every item on the financial statements
B. Performed by the partner or manager on the engagement
C. Based on financial statement data before all audit adjustment and reclassifications have
been recognized
D. Performed only when material misstatement is expected

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