AUDITING THEORY

8. Which of the following should an auditor do when control risk is assessed at the
maximum level?
A. Perform fewer substantive tests of details.
B. Perform more tests of controls.
C. Document the assessment.
D. Document the internal control system more extensively.
9. Which of the following is least likely to be a test of a control?
A. Inquiries of appropriate personnel.
B. Inspection of managements engagement letter.
C. Observation of the application of a policy.
D. Reperformance of the application of a policy.
10. Which of the following controls may prevent the failure to bill customers for
some shipments?
A. Each shipment should be supported by a prenumbered sales invoice that is
accounted for.
B. Each sales order should be approved by authorized personnel.
C. Sales journal entries should be reconciled to daily sales summaries.
D. Each sales invoice should be supported by a shipping document.
11. If the objective of a test of details is to detect overstatements of sales, the
auditor should trace transactions from the
A. Cash receipts journal to the sales journal.
B. Sales journal to the cash receipts journal.
C. Source documents to the accounting records.
D. Accounting records to the source documents.
12. Which of the following is least likely to be considered when assessing inherent
risk?
A. Nonroutine transactions.
B. Estimation transactions.
C. Susceptibility to theft.
D. Expected effectiveness of controls.
13. The risk that an auditors procedures will lead to the conclusion that a material
misstatement does not exist in an account balance when, in fact, such
misstatement does exist is referred to as
A. Audit risk
B. Inherent risk
C. Control risk
D. Detection risk
14. Evidential matter concerning proper segregation of duties ordinarily is best
obtained by
A. Preparation of a flowchart of duties performed by available personnel.
B. Inquiring whether control activities operated consistently throughout the
period.
C. Reviewing job descriptions prepared by the personnel department.
D. Direct personal observation of the employees who apply control activities.
15. According to the Code of Professional Ethics for CPAs, which of the following fee
arrangements is prohibited?
A. A fee for a review of financial statements that is based on time spent on the
engagement.
B. A fee for a review of financial statements that is based on time spent and a
premium for the risk involved.
C. A fee for a review engagement that is based on a fixed fee of P15,000.
D. A fee for a review engagement that varies depending on the amount of
financing that the company may obtain.
16. Which of the following is not ordinarily performed in response to the risk of
management override?
A. Evaluating the rationale for significant unusual transactions.
B. Observe counts of inventory at all locations.
C. Review accounting estimates for bias.
D. Test appropriateness of journal entries and adjustments.

Page 1 of 1