CHAPTER 4

Assertions and Procedures

1. The objective of the ordinary audit of financial statements is the expression of an opinion on:
a. The fairness of the financial statements in all material respects
b. The accuracy of the financial statements.
c. The accuracy of the annual report
d. The accuracy of the statement of financial position and the statement of
comprehensive income.

2. The responsibility for the preparation of the financial statements and the accompanying
footnotes belongs to:
a. The auditor
b. The management
c. Both management and the auditor equally
d. Management for the statements and the auditor for the notes.

3. Auditors accumulate evidence to:

a. Defend themselves in the event of a lawsuit
b. Justify the conclusions they have otherwise reached.
c. Satisfy the requirements of the Securities and Exchange Commission
d. Enable them to reach conclusions about the fairness of the financial statements

4. Management representations that are embodied in the account balance, transaction class and
disclosure components of financial statements. They include existence or occurrence,
completeness, rights and obligations, valuation or allocations and presentation and
disclosures
a. Management representation letter
b. Management responsibility statement
c. Accounting policies
d. Assertions

5. Management assertions are

a. Directly related to the PFRS
b. Stated in the notes to the financial statements
c. Explicitly expressed representations about the company’s financial condition
d. Provided to the auditor in the assertions letter, but are not disclosed on the financial
statements

6. Management assertions are

a. Implied or expressed representations about classes of transactions and the related accounts
in the financial statements
b. Stated in the footnotes to the financial statements
c. Explicitly expressed representation about the financial statements
 d. Provided to the auditor in the assertions letter, but are not disclosed on the financial
statements

7. Which of the following statements is true?

a. The auditor’s objectives follow and are closely related to management assertions.
b. Management assertions follow and are closely related to the auditor’s objectives
c. The auditor’s responsibility is to find and disclose fraudulent assertions
d. Assertions about presentation and disclosure deal with whether the accounts have been
included in the financial statements as appropriate amounts

8. Which of the following statements is true?

a. The evidence which the auditor accumulates remains the same from audit to audit, but the
audit objectives vary, depending on the circumstances
b. The audit objectives remain the same from audit to audit, but he evidence varies,
depending on the circumstances
c. The circumstances may vary from audit to audit, but the evidence accumulated
remains the same
d. The audit objectives may vary from audit to audit, but the circumstances remain the same

9. Substantive procedures are designed to obtain evidence based on the representation of

client’s management as embodied in the financial statement components, EXCEPT:
a. Completeness
b. Existence
c. Valuation
d. Legality

10. Which of the following is not a management assertion?

a. Obligations classified as long-term liabilities in the statement of financial position will not
mature within one year
b. Property is recorded at historical and such cost is systematically allocated to
appropriate accounting periods
c. Finished goods inventory in the statement of financial position are available for sale
d. Net income reflects the earnings power of the enterprise

11. Which of the following is an example of an assertion made by management in an entity’s

financial statements?
a. The financial statements were prepared in an unbiased manner
b. Reported inventory balances reflect all related transactions for the period
c. Reported accounts receivable do not include any uncollectible accounts
d. The scope of the auditor’s investigation was not limited in any way by management

12. Which of the following is not one of the five broad categories of management
assertions?
 a. General or specific transaction objectives
b. Existence or occurrence
c. Valuation or allocation
d. Presentation and disclosure

13. This assertion addresses whether all transactions that should be included in the financial
statements are in fact included.
a. Occurrence
b. Completeness
c. Rights and obligations
d. Existence

14. Which of the following assertions does not relate to balances at period end?
a. Existence
b. Occurrence
c. Valuation or allocation
d. Rights and obligations

15. Which of the following statements is correct?

a. Existence relates to whether the amounts in accounts are understated
b. Completeness relates to whether balances exist
c. Existence relates whether balances are valid
d. Occurrence relates whether the amounts in accounts occurred in the proper year

16. Which of the following statement is not correct?

a. There are many ways an auditor can accumulate evidence to meet the overall audit
objectives
b. Sufficient appropriate evidence must be accumulated to meet the auditor’s
professional responsibility
c. The cost of accumulating the evidence should be minimized
d. Gathering evidence and minimizing costs are equally important considerations that affect
the approach the auditor selects

17. Assertions are representation by management that are embodied in financial statement
components. An example of an assertion about existence is whether
a. All sales transactions for the period are included in the income statement
b. Capitalized leased property in the statement of financial position represents the costs
of the company’s right to the leased asset.
c. Raw materials in the statement of financial position are available for use in production
d. Receivables in the statement of financial position are stated at amortized cost.

18. “That investment in equity securities are stated at fair value” is a management assertion
as to
a. Existence
 b. Completeness
c. Valuation
d. Rights and obligations

19. “That the company has rights over all its property and equipment” is a management
assertion as to
a. Existence
b. Completeness
c. Valuation
d. Rights and obligations

20. In auditing intangible assets, an auditor most likely would review or re-compute
amortization and determine whether amortization period is reasonable in support
management’s financial statement assertion of
a. Existence
b. Completeness
c. Valuation
d. Rights and obligations

21. Which of the following most likely would give the most assurance concerning the
valuation assertions of accounts receivable?
a. Tracing amounts in the subsidiary ledger to details on shipping documents
b. Comparing receivables turnover ratios to industry statistics for reasonableness
c. Inquiring about receivables pledged under loan agreement
d. Assessing the allowance for credit losses account for reasonableness

22. Which of the following statement is not correct?

a. It would be a violation of the completeness assertions if management would record a sale
that did not take place
b. The completeness assertion deals with matters opposite from those of the
existence/occurrence assertion
c. The completeness assertion is concerned with possibility of omitting items from the
financial statements that should have been included.
d. The existence/occurrence assertion is concerned with inclusion of amount that should not
have been

23. The financial statement assertions of existence and completeness emphasize opposite audit
concerns
a. Existence deals with potential overstatement and completeness deals with
understatement
b. Existence deals with potential understatement and completeness deals with
overstatement
c. Existence and completeness may each deal with overstatements or understatements, but not in
the same transaction
 d. Existence always deals with overstatements but completeness may deal with either over or
understatements

24. Which of the following statements is not true?

a. An example of a completeness assertion would be that note payable in the statement of
financial position includes all such obligations of the entity
b. An example of an existence/occurrence assertion would be that sales in the income
statement represent exchanges of goods or services that actually took place
c. An example of a rights/obligations assertion would be that amounts capitalized for leases
in the statement of financial position represent the cost of the entity’s rights to leased
property
d. An example of a presentation/disclosure assertion would be that investment property is
reported at fair value

25. An auditor most likely would inspect loan agreements under which an entity’s inventories are
pledged to support management’s financial statement assertion of
a. Presentation and disclosure
b. Valuation or allocation
c. Existence or occurrence
d. Completeness

26. Confirmation of accounts receivable is a procedure that would most likely to obtain
evidence concerning management’s assertion of
a. Presentation and disclosure
b. Valuation or allocation
c. Existence or occurrence
d. Completeness

27. In testing for cut-off, the objective is to determine

a. Whether all of the current period’s transactions are recorded
b. That no transactions from the prior period are included in the current period’s
balances
c. That no transactions of the current period have been delayed and recorded in the
subsequent period
d. Whether transactions are recorded in the proper period

28. An auditor most likely would make inquiries of production and sales personnel
concerning possible obsolete or slow-moving inventory to support management’s
financial statement assertion of
a. Presentation and disclosure
b. Valuation or allocation
c. Existence or occurrence
d. Completeness
29. During an audit of an entity’s stockholders’ equity, the auditor determines whether there are
restrictions on retained earnings resulting from loan agreement. This audit procedure most likely
is intended to verify management’s assertions of
a. Presentation and disclosure
b. Valuation or allocation
c. Existence or occurrence
d. Completeness

30. Computation of receivable and inventory turnover satisfies the audit objective of
a. Presentation and disclosure
b. Valuation or allocation
c. Existence or occurrence
d. Completeness

31. An auditor would most likely review an entity’s periodic accounting for the numeral
sequence of shipping documents and invoices to support management’s assertion of
a. Presentation and disclosure
b. Valuation or allocation
c. Existence or occurrence
d. Completeness

32. In determining whether transaction have been recorded, the direction of test would be from
a. General ledger
b. Source documents
c. Trial balance
d. General journal

33. In testing the existence assertion for an asset, an auditor ordinarily works from the
a. Financial statements to potentially unrecorded items
b. Potentially unrecorded items to the financial statements
c. Supporting evidence to accounting records
d. Accounting records to supporting evidence

34. When the auditor examines the client’s documents and records to substantive
information on the financial statements, it is commonly referred to as
a. Inquiry
b. Confirmation
c. Vouching
d. Physical examination

35. When the auditor uses tracing as an audit procedure for tests of transactions, the auditor is
primarily concerned with which audit objective?
a. Occurrence
 b. Completeness
c. Cut-off
d. Classification

36. When the auditor used the audit procedure vouching, the auditor is primarily concerned with
which of the following audit objectives when testing classes of transactions?
a. Occurrence
b. Completeness
c. Authorization
d. Classification

37. Which of the following is an example of vouching?

a. Trace inventory purchases from the acquisitions journal to supporting invoices
b. Trace selected sales invoices to the sales journal
c. Trace details of the employees paychecks to the payroll journal
d. All of the above are examples of vouching

38. A document which the auditor receives from the client, but which was prepared by
someone outside the client’s organization is a(n)
a. Confirmation
b. Internal document
c. External document
d. Inquiry

39. Confirmations are most likely to be used to verify

a. Individual transactions between organizations, such as sales transactions
b. Bank balances and accounts receivables
c. Fixed asset additions
d. All three of the above

40. In performing your audit for a privately-held firm your inquiries have yielded that one of the
company's owner's primary motivations is to pay the least amount of income tax that is possible.
Based on this observation which audit objective for ending inventory would the auditor be most
concerned about ascertaining?
a. Completeness
b. Accuracy
c. Rights and obligations
d. Existence

41. After the auditor has completed all audit procedures, it is necessary to combine the formation
obtained to reach an overall conclusion as to whether the financial statements are fairly
presented. This is a highly subjective process that relies heavily on
a. The generally accepted auditing standards.
b. The Code of Ethics for Professional Accountants
 c. The PFRS
d. The auditor’s professional judgement

42. Which of the following audit procedures is used extensively throughout the audit and often
is complementary to performing other audit procedures?
a. Inspection
b. Observation
c. Inquiry
d. Confirmation

43. Which statement is incorrect about making inquiries as audit procedure?

a. Responses to inquiries may provide the auditor with information not previously
possessed or with corroborative audit evidence.
b. Responses to inquiries might provide information that differs significantly from other
information that the auditor has obtained.
c. Responses to inquiries may provide a basis for the auditor to modify or perform
additional audit procedures.
d. Inquiry alone is sufficient to test the operating effectiveness of controls.

44. Observation
a. Consists of looking at a process or procedure being performed by others.
b. Consists of seeking information of knowledgeable persons both financial and non-
financial, throughout the entity or outside the entity.
c. Is the process of obtaining a representation of information or of an existing condition
directly from a third party.
d. Is the auditor's independent execution of procedures or controls that were originally
performed as part of the entity's internal control

45. This consists of checking the mathematical accuracy of documents or records.

a. Reperformance
b. Recalculation
c. Confirmation
d. Inspection

46. Even with the most effectively designed internal control, the auditor must obtain audit
evidence, beyond testing the controls, for every:
a. Transaction
b. Financial statement account
c. Material financial statement account
d. Financial statement account that will be relied upon by third parties

47. The sequence of steps in gathering evidence as the basis of the auditor's opinion is
a. Substantive tests, documentation of internal, and tests of controls
b. Documentation of internal control, tests of controls, and substantive tests
 c. Documentation of internal control, substantive tests, and tests of controls
d. Tests of controls, documentation of internal control, and substantive tests

48. An audit process is a well-defined methodology for organizing an audit to ensure that
a. The evidence gathered is both sufficient and competent
b. All appropriate audit objectives are specified
c. All appropriate audit objectives are met.
d. All of the above

49. If the auditor were responsible for making certain that all the assertions of management in the
statements were correct.
a. Bankruptcies could no longer occur
b. Bankruptcies would be reduced to a very a small number
c. Audits would be easier to complete
d. Audits would not be economically feasible

50. Investigation of new clients and re-evaluation of existing ones is an essential part of
deciding
a. Inherent risk
b. Whether to accept engagement
c. Statistical risk
d. Financial risk

51. Which of the following is the correct order of steps in the audit process?
a. Perform tests of control
b. Develop an overall strategy for the expected conduct and scope of the audit
c. Obtain client's written representation
d. Prepare an engagement letter
e. Perform substantive tests

a. D,A,B,E,C c. D,B,C,AE,
b. D,B,A,E,C d. D,B,E,A,C

52. Which of the following would an auditor least likely perform as part of the auditor's
preliminary engagement activities?
a. Perform procedures regarding the continuance of the client relationship and the specific
audit engagement.
b. Evaluate compliance with ethical requirements, including independence.
c. Establish an understanding of the terms of the engagement.
d. Obtain understanding of the legal and regulatory framework applicable to the entity

53. Which of the following is not one of the reasons why auditor perform preliminary
engagement activities?
 a. To ensure that the auditor maintains the necessary independence and ability to perform
the engagement
b. To help ensure that there are no issues with management integrity that may affect the
auditor’s willingness to continue the engagement
c. To ensure that there is no misunderstanding with the client as to the terms of the
engagement
d. To ensure that sufficient appropriate evidence will be obtained to support the auditor's opinion
on the financial statements.

54. Which of the following is not normally performed in the preplanning or pre-engagement phase?
a. Deciding whether to accept or reject an audit engagement
b. Inquiring from predecessor auditor
c. Preparing an engagement letter
d. Making a preliminary estimate of materiality

55. In making a decision to accept or continue with a client, the auditor should consider:
a. b. c. d.
Its competence Yes Yes No Yes
Its independence Yes No Yes No
Its ability to serve the client properly Yes Yes Yes Yes
The integrity of client’s management Yes Yes No Yes

56. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. A preliminary understanding of the prospective client's industry and business.
b. The prospective client signature to the engagement letter
c. An understanding of the prospective client's control environment.
d. A representation letter from the prospective client.

57. Preliminary knowledge about the client's business and industry must be obtained prior to the
acceptance of the engagement primarily to
a. Determine the degree of knowledge and expertise required by the engagement.
b. Determine the integrity of management
c. Determine whether the firm is independent with the client.
d. Gather evidence about the fairness of the financial statements.

58. A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit
client would most likely include
a. Inquiry of management as to whether disagreements between the predecessor auditor
and the prospective client were resolved satisfactorily
b. Consideration of whether sufficient competent evidential matter may be obtained to afford
a reasonable basis for an opinion
c. Inquiry of third parties, such as the prospective client's bankers and attorneys, about
information regarding the prospective client and its management.
 d. Consideration of whether the internal control structure is sufficiently effective to permit a
reduction in the required substantive tests.

59. Prior to the acceptance of an audit engagement with a client who has terminated the services
of the predecessor auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a
complete report of the circumstance leading to the termination with the understanding that all
information disclosed will be kept confidential.
b. Accept the engagement without contacting the predecessor auditor since the CPA can include
audit procedures to verify the reasons given by the client for the termination.
c. Not communicate with the predecessor auditor because tor because this would in effect be
asking the auditor to violate the confidential relationship between the auditor and client.
d. Advise the client of the intention to contact the predecessor auditor and request
permission for the contact

60. The purpose of the requirement in having communication between the predecessor and
successor auditors is to
a. Allow the predecessor to disclose information which would otherwise be confidential.
b. Help the successor auditor evaluate whether to accept the engagement.
c. Help the client by facilitating the change of auditors.
d. Ensure the predecessor collects all unpaid fees prior to a change in auditor.

61. Jem, CPA, has been retained to audit the financial statements of ZVP Co. ZVP's predecessor
auditor was Moshe, CPA, who has been notified by ZVP that Moshe's services have been
terminated. Under these circumstances, which party should initiate the communication between
Jem and Moshe?
a. Jem, the successor auditor
b. Moshe, the predecessor auditor
c. ZVP's controller.
d. The chairman of ZVP's board of directors

62. In an audit, communication between the predecessor and successor auditor should be
a. Authorized in an engagement letter
b. Acknowledged in a representation letter
c. Either written or oral
d. Done with or without the client's permission

63. 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 auditor.
d. The predecessor believes that the client lacks integrity.

64. Arnel, CPA, is succeeding Von, CPA, on the audit engagement of Jin Corporation. Amel plans
to consult Von and to review Von's prior year working papers. Arnel may do so if
a. Von and Jin consent
b. Jin consents
c. Von consents
d. Von and Arnel consent

65. Upon discovering material misstatements in a client's financial statements that the client would
not revise, the auditor withdrew from the engagement. If asked by the successor auditor about
the termination of the engagement, the predecessor auditor should
a. State that he found material misstatements that the client would not revise
b. Suggest that the successor auditor ask the client
c. Suggest that the successor auditor obtain the client's permission to discuss the reasons
d. Indicate that a misunderstanding occurred

66. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. A detailed understanding of the prospective client's industry and business
b. A letter of representation from the prospective management.
c. An understanding of the prospective client's control environment
d. The prospective client's consent to make inquiries of the predecessor auditor, if any.

67. Before accepting an audit engagement, a successor auditor should make specific inquiries
of the predecessor auditor regarding
a. Disagreements the predecessor had with the client concerning auditing procedures and
accounting principles
b. The predecessor's evaluation of matters of continuing accounting significance
c. The degree of cooperation the predecessor received concerning the inquiry of the client's
lawyer.
d. The predecessor's assessments of inherent risk and judgments about materiality.

68. Before accepting an audit engagement, a successor auditor should make specific inquiries
of the predecessor auditor regarding the predecessor's
a. Opinion of any subsequent events occurring since the predecessor's audit report was issued
b. Understanding as to the reasons for the change of auditors
c. Awareness of the consistency in the application of PFRS between periods
d. Evaluation of all matters of continuing accounting significance
 69. A successor auditor most likely would make specific inquiries of the predecessor auditor
regarding
a. Specialized accounting principles of the client's industry
b. The competency of the cienť's internal audit staff.
c. The uncertainty inherent in applying sampling procedure
d. Disagreements with management as to auditing procedures

70. Which of the following should an accounting auditor obtain from the predecessor auditor to
accepting an audit engagement
a. Analysis of statement of financial position accounts
b. Analysis of income statement account
c. All matters of continuing accounting significance
d. Facts that might bear on the integrity of management

71. What information should a successor auditor obtain during the inquiry of the predecessor audit
prior to acceptance of the audit?
I. Facts that bear on the integrity of management
II. Whether statistical or non-statistical sampling was used to gather evidence
III. Disagreement with management concerning auditing procedures
IV. The effect of the client’s internal audit function on the scope of the independent auditor’s
examination
a. I and II
b. I and III
c. I and IV
d. III and IV

72. A successor auditor should request the new client to authorize the predecessor auditor to
allow a review of the predecessor’s
Engagement letter Working Paper
A. Yes Yes
b. Yes No
C. No Yes
D. No No

73. Which of the following factors most likely would cause an auditor not to accept a new audit
engagement?
a. An inadequate understanding of the entity’s interval control structure
b. The close proximity to the end of the entity’s fiscal year
c. Concluding that the entity’s management probably lacks integrity
d. An inability to perform preliminary analytical procedures before assessing control risk

74. Which of the following factors most likely would influence an auditor’s determination of the
auditability of the entity’s financial statements
a. The complexity of the accounting system
 b. The existence of related party transaction
c. The adequacy of the accounting records
d. The operating effectiveness of control procedures

75. In auditing the financial statements of Star Corp., Land discovered information leading Land to
believe that Star’s prior year’s financial statements, which are audited by Jell, require substantial
revisions. Under these circumstances, Land should
a. Notify Star’s audit committee and stockholders that the prior year’s financial statements
cannot be relied on
b. Request Star to reissue the prior year’s financial statements with the appropriate
revisions
c. Notify Jell about the information and make inquiries about the integrity of Star’s
management
d. Request Star to arrange a meeting among the three parties to resolve the matter