ExtAud1 | Pre-test w/ Answer

The primary source of information to be reported about litigation, claims, and assessments is the

Independent auditor
Client’s management
Court records
Client’s lawyer

The refusal of a client’s lawyer to provide a representation on the legality of a particular act committed
by the client is ordinarily

Proper grounds to withdraw from the engagement.

Insufficient reason to modify the auditor’s report because of the lawyer’s obligation of confidentiality.
Sufficient reason to issue a “subject to” opinion.
Considered to be a scope limitation.

The auditor is concerned with fraud that causes a material misstatement in the financial statements.
There are two types of intentional misstatements that are relevant to the auditor: misstatements
resulting from fraudulent financial reporting and misstatements resulting from

Management fraud.
Employee fraud.
Misappropriation of assets.
Collusion within the entity or with third parties.

When inherent risk is high, there will need to be

A lower assessment More evidence accumulated by the auditor.

of audit risk.

A. Yes Yes
B. No No
C. No Yes
D. Yes No

An auditor intends to perform tests of control on a client’s cash disbursements procedures. If the
control procedures leave no audit trail of documentary evidence, the auditor most likely will test the
procedures by

Inquiry and analytical procedures.

Inquiry and observation.
Analytical procedures and confirmation.
Confirmation and observation.

Which of the following statements best describes assurance services?

Independent professional services that are intended to enhance the credibility of information to
meet the needs of an intended user.
Services designed to express an opinion on the fairness of historical financial statements based on the results of
an audit.
 The preparation of financial statements or the collection, classification, and summarization of other financial
information.
Services designed for the improvement of operations, resulting in better outcomes.

Which of the following statements is true concerning evidence in an assurance engagement?

● Sufficiency is the measure of the quantity of evidence.

● Appropriateness is the measure of the quality of evidence, that is, its reliability and persuasiveness.
● The reliability of evidence is influenced not by its nature but by its source.
● Obtaining more evidence may compensate for its poor quality.

What type of opinion should be expressed if the client’s management refuses to provide a
representation that the auditor considers necessary?

Qualified opinion or a disclaimer of opinion.

Qualified opinion or an adverse opinion.
Adverse opinion or a disclaimer of opinion.
Unqualified opinion.

In some assurance engagements, the evaluation or measurement of the subject matter is performed
by the responsible party, and the subject matter information is in the form of an assertion by the
responsible party that is made available to intended users. These engagements are called

Direct reporting engagements

Assertion-based engagements
Non-assurance engagements
Recurring engagements

Governmental auditing often extends beyond examinations leading to the expression of opinion on the
fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also

Accuracy
Evaluation
Compliance
Internal control

As used in PSA 560 (Subsequent Events), the term “subsequent events” refers to
I. Events occurring between the date of the financial statements and the date of the auditor’s report.
II. Facts discovered after the date of the auditor’s report.

I only.
II only.
Both I and II.
Neither I nor II.

An independent auditor discovers that a payroll supervisor of the company being audited has
misappropriated P50,000. The company’s total assets and income before tax are P70 million and P15
million, respectively. Assuming no other issues affect the report, the auditor’s report will most likely
contain a/an

Unmodified opinion
Adverse opinion.
 Disclaimer of opinion
Scope qualification

Which of the following statements is correct concerning the use of negative confirmation requests?

Unreturned negative confirmation requests rarely provide significant explicit evidence.

Unreturned negative confirmation requests indicate that alternative procedures are necessary.
Negative confirmation requests are effective when detection risk is low.
Negative confirmation requests are effective when understatements of account balances are suspected.

Fraudulent financial reporting involves intentional misstatements including omissions of amounts or

disclosures in financial statements to deceive financial statement users. It may be accomplished in a
number of ways, including

Embezzling receipts.
Stealing physical assets or intellectual property.
Using an entity’s assets for personal use.
Manipulation, falsification, or alteration of accounting records or supporting documentation from
which the financial statements are prepared.

Which of the following professionals has primary responsibility for the performance of an audit?

● The partner in charge of the engagement.

● The managing partner of the firm.
● The senior assigned to the engagement.
● The manager assigned to the engagement.

Which of the following best describes the reason why independent auditors report on financial
statements?

A management fraud may exist and it is more likely to be detected by independent auditors.
A misstatement of account balances may exist and is generally corrected as the result of the independent
auditors’ work.
Different interests may exist between the company preparing the statements and the persons
using the statements.
Poorly designed internal control may be in existence.

Audit sampling involves the

Selection of all items over a certain amount.

Application of audit procedures to less than 100% of items within a class of transactions or an
account balance such that all items have a chance of selection.
Application of audit procedures to all items that comprise a class of transactions or an account balance.
Application of audit procedures to all items over a certain amount and those that are unusual or have a history
of error.

“Error” includes

Engaging in complex transactions that are structured to misrepresent the financial position or financial
performance of the entity.
Concealing, or not disclosing, facts that could affect the amounts recorded in the financial statements.
An incorrect accounting estimate arising from oversight or misinterpretation of facts.
 Intentional misapplication of accounting policies relating to amounts, classification, manner of presentation, or
disclosure.

Which of the following circumstances may create advocacy threat for a professional accountant in
public practice?

A firm issuing an assurance report on the effectiveness of the operation of financial systems after designing or
implementing the systems.
The firm promoting shares in an audit client.
A firm being threatened with dismissal from a client engagement.
A firm being concerned about the possibility of losing a significant client.

Operational audits generally have been conducted by internal and COA auditors, but may be performed
by certified public accountants. A primary purpose of an operational audit is to provide

A measure of management performance in meeting organizational goals.

The results of internal examinations of financial and accounting matters to a company’s top-level management.
Aid to the independent auditor, who is conducting the examination of the financial statements.
A means of assurance that internal accounting controls are functioning as planned.

The threat that a professional accountant will be deterred from acting objectively because of actual or
perceived pressures from the client is known as

Intimidation threat
Familiarity threat.
Self-interest threat.
Advocacy threat.

Which of the following will not create self-interest threat for a professional accountant in public
practice?

The possibility of losing a significant client.

Direct financial interest in the assurance client.
Undue dependence on total fees from a client.
Preparing the original data used to generate records that are the subject matter of the assurance
engagement.

Which of the following is not one of the three primary objectives of effective internal control?

Reliability of financial reporting.

Assurance of elimination of business risk.
Efficiency and effectiveness of operations.
Compliance with laws and regulations.

The auditor is required to maintain professional skepticism throughout the audit. Which of the
following statements concerning professional skepticism is false?

Maintaining professional skepticism throughout the audit reduces the risk of using inappropriate assumptions in
determining the nature, timing, and extent of the audit procedures and evaluating the results thereof.
Professional skepticism is necessary to the critical assessment of audit evidence.
Professional skepticism is an attitude that includes questioning contradictory audit evidence obtained.
 A belief that management and those charged with governance are honest and have integrity
relieves the auditor of the need to maintain professional skepticism.

Which part of the Code establishes the fundamental principles of professional ethics for professional
accountants and provides a conceptual framework that professional accountants shall apply to identify
threats to compliance with the fundamental principles, evaluate the significance of the threats
identified, and apply safeguards, when necessary, to eliminate the threats or reduce them to an
acceptable level?

Part A
Part B
Part C
Part D

Which of the following terms is used in the standard to describe the effects on the financial statements
of misstatements or the possible effects on the financial statements, if any, that are undetected due to
an inability to obtain sufficient appropriate audit evidence?

Persuasive
Material
Pervasive
Extensive

In an assurance engagement, the outcome of the evaluation or measurement of a subject matter

against criteria is called

Subject matter
Assurance
Subject matter information
Conclusion

What type of assurance engagement is involved when the practitioner expresses a positive form of
conclusion?

Limited assurance engagement

Reasonable assurance engagement
Absolute assurance engagement
Positive assurance engagement

Assurance engagement risk is the risk

That the practitioner expresses an inappropriate conclusion when the subject matter information is
materially misstated.
Of expressing an inappropriate conclusion when the subject matter information is not materially misstated.
Through loss from litigation, adverse publicity, or other events arising in connection with a subject matter
reported on.
Of expressing an inappropriate conclusion when the subject matter information is either materially misstated or
not materially misstated.

Which of the following conditions are generally present when misstatements due to fraud occur?
I. Incentive or pressure.
II. Perceived opportunity.
III. Rationalization.

I and II only.
II and III only.
I and III only.
I, II, and III.

Which of the following types of audit evidence is the most persuasive?

Prenumbered purchase order forms.

Client worksheets supporting cost allocations.
Bank statements obtained from the client.
Client representation letter.

Which of the following shall be issued to examinees who pass the CPA licensure examination?

Certificate of registration and death certificate.

Professional identification card and warrant of arrest.
Certificate of registration and professional identification card.
Warrant of arrest and death certificate.

An auditor selected items for test counts while observing a client’s physical inventory. The auditor
then traced the test counts to the client’s inventory listing. This procedure most likely obtained
evidence concerning management’s assertion of

Rights and obligations

Existence
Completeness
Valuation

What type of assurance engagement is involved when the practitioner expresses a negative form of
conclusion?

Reasonable assurance engagement

Negative assurance engagement
Assertion-based assurance engagement
Limited assurance engagement

The overall objectives of the auditor in conducting an audit of financial statements are
I. To obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether caused by fraud or error.
II. To report on the financial statements.
III. To obtain conclusive rather than persuasive evidence.
IV. To detect all misstatements, whether due to fraud or error.

II and IV only
I and II only
I, II, and III only
I, II, III, and IV

36-40. In your own words, what is auditing? What is the difference between an accountant and an
auditor? Explain briefly.
41-45. What is the difference between an internal auditor and an external auditor? Explain briefly.

46-50. What are the four types of audit opinions? Explain each one briefly.