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Auditing and Assurance Concepts and Applications

The basic principles of auditing are confidentiality, integrity, objectivity, and independence, skills and competence, work performed by others.

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Which statement is incorrect regarding the nature of tests of controls?

  • A material misstatement detected by the auditor’s procedures that was not identified by the entity ordinarily is indicative of the existence of a material weakness in internal control.
  • As the planned level of assurance increases, the auditor seeks more reliable audit evidence.
  • The absence of misstatements detected by a substantive procedure provides audit evidence that controls related to the assertion being tested are effective.
  • Those controls subject to testing by performing inquiry combined with inspection or reperformance ordinarily provide more assurance than those controls for which the audit evidence consists solely of inquiry and observation.

It involves establishing the overall audit strategy for the engagement and developing an audit plan in order to reduce audit risk to an acceptably low level.

  • field work
  • planning
  • organizing
  • reporting

Analytical procedures, which means the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviate from predicted amounts, are not required to be applied

  • As substantive procedures
  • At the planning stage of the audit
  • Overall review stage of the audit
  • None of the above

A successor auditor most likely would make specific inquiries of the predecessor auditor regarding

  • Disagreements with management as to auditing procedures.
  • The competency of the client’s internal audit staff.
  • The uncertainty inherent in applying sampling procedures.
  • Specialized accounting principles of the client’s industry.

An internal control that is working effectively

  • cannot be circumvented by management
  • eliminates risk and potential loss to the entity
  • reduces the need for management the review exception reports on a day-to-day basis
  • is unaffected by changing circumstances and conditions encountered by the entity

The primary purpose of the auditor's consideration of internal control is to provide a basis for

  • constructive suggestions to clients concerning deficiencies in internal control.
  • determining whether procedures and records that are concerned with the safeguarding of assets are reliable.
  • determining the nature, timing and extent of audit tests to be applied.
  • the expression of an opinion.

When a CPA is the auditor of a parent entity and also the auditor of its subsidiary, branch or division (component), which of the following are least likely to be included in the engagement letter?

  • number of reports to be prepared during the peak audit season
  • legal requirements
  • who appoints the auditor of the component
  • whether a separate audit report is to be issued on the component

The form and content of the audit engagement letters may vary for each client, but they would generally include reference to except:

  • unrestricted access to whatever records, documentation and other information requested in connection with the audit.
  • management's responsibility for all the financial statements
  • the form of any reports or any communication of results of engagement.
  • the scope of the audit, excluding reference to applicable legislation, regulations, or pronouncements of professional bodies to which the auditor adheres.

Engagement letters are widely used in practice for

  • related services only
  • assurance engagements only
  • audits only
  • professional engagements of all types

In an audit of financial statements, an auditor's primary consideration regarding a control is whether it:

  • provides adequate safeguards over access to assets.
  • reflects management's philosophy and operating style.
  • enhances management's decision-making processes.
  • affects management's financial statement assertions.

The assessment of the risks of material misstatement at the financial statement level is affected by the auditor’s understanding of the control environment. Weaknesses in the control environment ordinarily will lead the auditor to

  • Have more confidence in internal control and the reliability of audit evidence generated internally within the entity.
  • Modify the nature of audit procedures to obtain more persuasive audit evidence.
  • Conduct some audit procedures at an interim date rather than at period end.
  • Decrease the number of locations to be included in the audit scope.

The auditor should plan the audit work so that the audit will be performed in an effective manner. The extent of planning will vary according to any of the following, except:

  • the nature and complexity of the audit engagement
  • size of the audit client
  • auditor's experience with the entity and knowledge of the business
  • the assessed level of control risk

If permission from client to discuss its affairs with the proposed auditor is denied by the client, the predecessor auditor should:

  • Keep silent of the denial.
  • Disclose adequately to proposed auditor all noncompliance made by the client.
  • Disclose the fact that the permission to disclose is denied by the client.
  • Seek legal advice before responding to the proposed auditor

PSA 315 Redrafted requires the auditor to obtain an understanding of the client's internal controls

  • for every audit
  • for first-time audits
  • whenever it would be appropriate
  • sufficient to find any frauds which may exist

Which of the following is an effective audit planning and control procedures that helps prevent misunderstandings and inefficient use of audit personnel?

  • Provide the client with copies of the audit programs to be used during the audit.
  • Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing.
  • Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.
  • Make copies, for inclusion in the working papers, of those client supporting documents examined by the auditor.

To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would

  • Read specialized industry journals.
  • Perform tests of details of transactions and balances.
  • Reevaluate client’s internal control environment.
  • Review prior-year working papers and the permanent file for the client.

Internal control can only provide reasonable, not absolute, assurance of achieving entity control objectives. One of the factors limiting the likelihood of achieving those objectives is that:

  • the auditor's primary responsibility is the detection of fraud
  • management monitors internal control
  • the board of directors is active and independent
  • The cost of internal control should not exceed its benefits

Which of the following statements is correct concerning analytical procedures?

  • Analytical procedures usually involve comparisons of ratios developed from recorded amounts to assertions developed by management.
  • Analytical procedures used in planning an audit generally use data aggregated at a high level.
  • Analytical procedures are more efficient, but not more effective, than tests of details and transactions.
  • Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk.

As part of a periodic planning exercise, AAA Company discovers that a political dispute may interfere with the company's supply sources. This is an example of:

  • monitoring of controls
  • risk assessment
  • control activities
  • control environment

In planning the audit engagement, the auditor should consider each of the following, except

  • the kind of opinion that is likely to be expressed
  • materiality level and audit risk
  • matters relating to the entity's business and the industry in which it operates
  • the entity's accounting policies and procedures

Which of the following statements is/are correct?

  • both statements are correct
  • only statement 2 is correct
  • both statements are incorrect
  • only statement 1 is correct

Which statement is incorrect regarding the extent of further audit procedures?

  • The auditor ordinarily decreases the extent of audit procedures as the risk of material misstatement increases.
  • The extent of an audit procedure is determined by the judgment of the auditor after considering the materiality, the assessed risk, and the degree of assurance the auditor plans to obtain.
  • Increasing the extent of an audit procedure is effective only if the audit procedure itself is relevant to the specific risk.
  • Extent includes the quantity of a specific audit procedure to be performed.

Engagement letter that documents and confirms the auditor's acceptance of the engagement would normally be sent to the client

  • at the end of the fieldwork
  • before the auditor report is issued
  • before the commencement of the engagement
  • after the audit report is issued

There is an inverse relationship that exists between the acceptable level of detection risk and the

  • assurance provided by substantive tests
  • preliminary judgments about materiality levels
  • risk of misapplying audit process
  • risk of falling to discover material misstatement

Control activities constitute one of the five components of internal control. Which of the following is not included in this internal control component?

  • performance reviews
  • authorization
  • segregation of duties
  • an internal audit function

Arrangements concerning with which of the following are least likely to be included in the engagement letter?

  • Other services to be provided in addition to the audit
  • CPA investment in client securities
  • A predecessor auditor
  • Fees and billing

Which of the following is least likely included in an audit engagement letter?

  • Arrangement concerning the involvement of other auditors or experts in some aspects of the audit.
  • Management responsibility for the financial statements.
  • The objective of financial reporting.
  • The form of any reports or other communication of the results of the engagement.

Which of the following least likely requires the auditor to send a new engagement letter?

  • Legal requirements and other government agencies’ pronouncements.
  • Any revised or special terms of the engagement.
  • An indication that the client misunderstands the objective and scope of the audit.
  • A recent change in the audit firm’s management.

Internal controls are not designed to provide reasonable assurance that

  • access to assets is permitted only in accordance with management's authorization
  • the recorded accountability for assets is compared with the existing assets at reasonable intervals
  • transactions are executed in accordance with management's authorization
  • irregularities will be eliminated

The development of a general strategy and a detailed approach for the expected nature, timing, and extent of audit refers to :

  • Directing
  • Supervision
  • Planning
  • Audit procedures

To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of the following except:

  • inspect documents and records
  • make inquiries
  • design substantive tests
  • make observations

The auditor’s assessment of the identified risks at the assertion level provides a basis for considering the appropriate audit approach for designing and performing further audit procedures. Which of the following is incorrect?

  • The auditor needs to be satisfied that performing only substantive procedures for the relevant assertion would be effective in reducing the risk of material misstatement to an acceptably low level.
  • The auditor may determine that only by performing tests of controls may the auditor achieve an effective response to the assessed risk of material misstatement for a particular assertion.
  • The auditor designs and performs substantive procedures for each material class of transactions, account balance, and disclosure only when the auditor uses the substantive approach.
  • The auditor may determine that performing only substantive procedures is appropriate for specific assertions and, therefore, the auditor excludes the effect of controls from the relevant risk assessment.

The auditor should determine overall responses to address the risks of material misstatement at the financial statement level. Such responses least likely include

  • Performing substantive procedures at an interim date instead of at period end.
  • Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed.
  • Assigning more experienced staff or those with special skills or using experts.
  • Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence.

Which of the following is/are correct?

  • only statement 1 is correct
  • both statements are correct
  • only statement 2 is correct
  • both statements are incorrect

The auditor should consider the nature, extent, and timing of the work to be performed and should prepare a written audit program for every audit. Which audit standard is most closely related to this requirement?

  • Due professional care is to be exercised in the planning and performance of the audit and preparation of the report.
  • The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.
  • In all matters relating to the assignment, an independent mental attitude is to be maintained by the auditor(s).
  • The work is to be adequately planned and assistants, if any, are to be properly supervised.

The objective and scope of the audit and the extent of the auditor’s responsibilities to the client are best documented in

  • Client’s representation letter
  • Audit program
  • Audit engagement letter
  • Independent auditor’s report

Analytical procedures used in planning an audit should focus on

  • Providing assurance that potential material misstatements will be identified.
  • Reducing the scope of tests of controls and substantive tests.
  • Enhancing the auditor’s understanding of the client’s business.
  • Assessing the adequacy of the available evidential matter.

An audit engagement letter least likely includes

  • Description of any letters or reports that the auditor expects to submit to the client.
  • Identification of specific audit procedures that the auditor needs to undertake.
  • A reference to the inherent limitation of an audit that some material misstatements may remain undiscovered.
  • Arrangements concerning the involvement of internal auditors and other client’s staff.

Which statement is incorrect regarding the timing of further audit procedures?

  • If the auditor performs tests of controls or substantive procedures prior to period end, the auditor considers the additional evidence required for the remaining period.
  • The auditor may perform tests of controls or substantive procedures at an interim date or at period end.
  • All audit procedures can be performed prior to period end.
  • Timing refers to when audit procedures are performed or the period or date to which the audit evidence applies.

An engagement letter is prepared with the interest(s) of

  • the client only
  • the auditor only
  • the public
  • both the client and the auditor

Which of the following is correct statement?

  • The auditor should obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach.
  • The subsequent discovery that a material misstatement exists in the financial statements is evidence of inadequate planning, performance, or judgment on the part of the auditor.
  • The auditor should use professional judgment to assess audit risk and to design audit procedures to ensure it is eliminated.
  • The auditor is an insurer, and his or her report constitutes a guarantee.

Set the following phases in proper order:

  • i, iv, ii, iii, v, vi
  • i, iv, ii, iii, vi, v
  • i, ii, iii, iv, v, vi
  • i, iv, iii, ii, v, vi

Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?

  • Facts that might bear on the integrity of management
  • Analysis of income statement accounts
  • All matters of continuing accounting significance
  • Analysis of balance sheet accounts

Which of the following is an example of an inherent limitation in a client's internal control system?

  • in the performance of most control procedures, there are possibilities of errors arising from mistakes in judgment
  • the effectiveness of procedures depends on the segregation of employee duties
  • procedures for handling large numbers of transactions are processed by information technology (IT) equipment
  • procedures are designed to assure the execution and recording of transactions in accordance with management's authorization

According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms would need to be recorded in

  • memo placed in the permanent section of the working papers
  • engagement letter
  • comfort letter
  • client representation letter

Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the CPA should

  • Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate the confidential relationship between auditor and client.
  • Accept the engagement without contacting the predecessor auditor since the CPA can include audit procedures to verify the reason given by the client for the termination.
  • 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.
  • Advise the client of the intention to contact the predecessor auditor and request permission for the contact.

A reason to establish internal control is to:

  • encourage compliance with organizational objectives
  • ensure the accuracy, reliability and timeliness of information
  • have a basis for planning the audit
  • provide reasonable assurance that the objectives of the organization are achieved.

Which statement is incorrect regarding tests of controls?

  • Tests of controls are required under certain circumstances.
  • 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 an assertion.
  • Testing the operating effectiveness of controls is the same as obtaining audit evidence that controls have been implemented.
  • Tests of controls are required when an entity conducts its business using IT and no documentation of transactions is produced or maintained, other than through the IT system.

Which statement is incorrect regarding the nature of further audit procedures?

  • The nature of further audit procedures refers to their purpose and their type.
  • The higher the auditor’s assessment of risk, the less reliable and relevant is the audit evidence sought by the auditor from substantive procedures.
  • The auditor is required to obtain audit evidence about the accuracy and completeness of information produced by the entity’s information system when that information is used in performing audit procedures.
  • Certain audit procedures may be more appropriate for some assertions than others.

It is the process designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of the entity's objectives.

  • internal auditing
  • accounting process
  • business strategy
  • internal control

The auditor should design and perform further audit procedures whose nature, timing, and extent are responsive to the assessed risks of material misstatement at the assertion level. Which of the following is the most important consideration in responding to the assessed risks?

  • All of these are equally important.
  • The nature of the audit procedures.
  • The timing of the audit procedures.
  • The extent of the audit procedures.

On recurring audit engagements, the auditor may decide not to send a new engagement letter each period. In which of the following situations will there be no need to send a new letter?

  • indications of misunderstanding of the objective and scope of the audit
  • significant change in nature or size of the client's business
  • recent change of middle management and rank and file organizational structure
  • revisions or special terms of the engagement

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s

  • Opinion of any subsequent events occurring since the predecessor’s audit report was issued.
  • Understanding as to the reasons for the change of auditors
  • Evaluation of all matters of continuing accounting significance.
  • Awareness of the consistency in the application of GAAP between periods.

Information about segregation of duties ordinarily is best obtained by

  • developing audit objectives that reduce control risk.
  • performing test of transactions that corroborate management's financial statement's assertions.
  • observing employees as they apply specific controls.
  • obtaining a flowchart of activities performed by entity personnel.

The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with

  • evidence to use in reducing detection risk
  • a basis for modifying test of controls
  • knowledge necessary to plan the audit
  • information necessary to prepare flowcharts

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?

  • A flowchart or narrative of the information system describing the recording and classification of transactions for financial reporting.
  • An audit program setting forth in detail the procedures necessary to accomplish the engagement’s objectives.
  • A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel.
  • An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved.

The following are components of internal control:

  • legal environment of the firm, management philosophy, and organizational structure.
  • control environment, risk assessment process, control activities, information system and communication, and monitoring of controls.
  • risk assessment process, backup facilities, responsibility accounting and natural laws.
  • organizational structure, management philosophy, and planning.

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

  • Comparing the financial statements to anticipated results.
  • Inquiring of the client’s legal counsel concerning pending litigation.
  • Examining computer generated exception reports to verify the effectiveness of internal controls.
  • Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

Which of the following would a successor auditor normally perform after acceptance of an audit client?

  • Inquiry of predecessor auditor regarding the client.
  • Review the SEC filings of the client.
  • Review of predecessor auditor working papers.
  • Inquiry of bankers regarding the client.

When an independent auditor is approached to perform an audit for the first time, he or she should make inquiries of the predecessor auditor. Inquiries are necessary because the predecessor may be able to provide the successor with information that will assist the successor in determining whether

  • The engagement should be accepted.
  • In the predecessor’s opinion, control risk is low.
  • The predecessor’s work should be used.
  • The company rotates auditors.
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