University of Luzon

College of Accountancy
ACC 40 ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE
FINAL EXAMINATION
Name:__________________________________________

Date: October 14, 2015

Score: _______

Direction: Write your answers on your test booklet. (2 POINTS EACH)

1.
2.
3.
4.

Define Auditing.
What creates demand for audit? Give at least four reasons why audit is important.
Differentiate the three types of audit (FS audit, Operational audit and Compliance audit)
An audit provides only reasonable assurance regarding the fairness of the financial statement, operations or compliance
because of limitations. What are the limitations of audit?
5. Define Internal Control.
6. What are the components of Internal Control?
7. What are included in the audit documentation or working papers?
8. What are the components of audit risk?
9. What is the difference between error and fraud.
10. Enumerate the Audit process steps.
Multiple Choice.
1. Independent auditing can best be described as:
a. a branch of accounting
b. a discipline that attests to the results of accounting and other functional operations and data
c. a professional activity that measures and communicates financial and business data.
d. a regulatory function that prevents the issuance of improper financial information.
2.

Which of the following best describes why an independent auditors report on financial statements:
a. to give stockholders some assurance that any fraudulent activities will be detected.
b. a poorly designed internal control structure may exist which produces unreliable financial statements
c. the client may not be totally knowledgeable of prevailing GAAP
d. to lend credibility since the client may not be objective with respect to its own financial statements.

3.

An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example
of one these differences?
a. The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually
limited to either the balance sheet date or the income statement.
b. the boundaries of an operational audit are often drawn from an organization chart and are not limited to a single
accounting period.
c. Operational audits do not ordinarily result in the preparation of a report.
d. The operational audit deals with pre-tax income.

4.

Which of the following best describes the audit of a taxpayers tax return by an Internal Revenue auditor?
a. operational audit
c. compliance audit
b. internal audit
d. government audit
e.
Inquiries and analytical procedures ordinarily form the basis for which type of engagement?
a. agreed-upon procedures
c. examination
b. audit
d. review

5.

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7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

e.
to be effective, analytical procedures in the overall review stage of an audit engagement should be performed by
a. the staff accountant who performed the substantive auditing procedures
b. a beginning staff accountant who has had no other work related to the engagement
c. a manager or partner who has a comprehensive knowledge of the clients business and industry
d. the CPA firms quality control manager
f.
Which of the following audit phases would generally be conducted before all of the others?
a. auditing business processes and related accounts.
b. preliminary assessment of materiality and audit risk
c. gaining an understanding of the clients industry
d. consideration of internal control system
g.
An auditors evaluation of the reasonableness of a clients loan loss reserve would normally be made during which phase of
the audit?
a. preliminary assessment of materiality and audit risk.
b. client acceptance/pre-planning
c. consideration of internal control systems
d. auditing business processes and related accounts.
h.
The most favorable type of audit report opinion for the client to receive is
a. qualified
b. unqualified
c. full assurance
d. exceptional
e. adverse
i.
Which one of the following is not a key attribute needed to perform assurance?
a. subject matter knowledge
b. independence
c. established criteria or standards
d. accounting skills
j.
As it relates to an audit, materiality is
a. not taken into consideration
b. related only to the sufficiency of procedures performed
c. based upon audit fees
d. determined based upon the importance to a user of the financial statements.
k.
Management is responsible for
a. hiring the auditor
b. preparing the financial statements
c. the audit workpapers
d. independent and obtaining evidence
l.
As a planning materiality is decreased, the auditor should plan more work on individual accounts to
a. find smaller misstatements
b. find larger misstatements
c. increase the tolerable misstatement in the accounts
d. decrease the risk of assessing control risk too low
m.
Which of the following is not an assertion relating to classes of transaction?
a. Accuracy
b. Sufficiency
c. Cutoff
d. classification
n.
Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
a. the prospective client ahs fired its prior auditor
b. the CPA lacks a thorough understanding of the prospective clients operations and industry
c. the CPA is unable to review the predecessor auditors working papers.
d. the prospective client is unwilling to make financial records available to the CPA.
o.
Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement>
a. lack of understanding of the potential clinets internal auditors computer-assisted audit techniques
b. managements disregard for internal control
c. the existence of related party transactions
d. managements attempt to meet earnings per share growth rate goals
p.

17. The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as
_______________________.
q.
18. Which of the following is least likely to be considered a financial statement audit risk factor?
a. management operating and financing decisions are dominated by top management
b. a new client with no prior audit history
c. rate of change in the entitys industry is rapid
d. profitability of the entity relative to its industry is inconsistent
r.
19. Which of the following statements is accurate about fraud risk factors considered when conducting an audit?
a. Factors whose presence indicates that fraud exists
b. factors whose presence often have been observed in circumstances where frauds have occurred.
c. factors whose presence will required modification to planned audit procedures.
d. factors obtained during the audit which lead to required communications with the audit committee.
s.
20. In performing a test of control last year the auditors specified a tolerable deviation rate of X percent. This year the auditors
have specified a tolerable rate of more than X percent. Assuming that all other factors remain the same, which of the
following is true regarding the relationship between this years sample size compared to last years sample size?
a. this years sample is larger than last years sample.
b. this years sample is smaller than last years sample.
c. this years sample is equal to last years sample.
d. this years sample is indeterminate in relation to last years sample.
t.
21. When performing test of controls over authorization of cash receipts, which of the following sampling methods would be
most appropriate?
a. attributes
b. ratio
c. stratified
d. variables
u.
22. Which of the following is required documentation in an audit?
a. written engagement letter formalizing the level of services to be provided
b. a flowchart of the clients organization
c. a written audit program
d. a memo setting forth the scope of the audit
v.
23. the auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5
percent. They believe that inherent risk is 100% and there is 40% risk that the material misstatement could have bypassed the
clients system of internal control. what is the maximum detection risk the auditors should specify in their substantive
procedures of details of accounts receivable? _____________
w.
24. During the financial statement audits, auditors seek to restrict which type of risk?
a. control risk
c. inherent risk
b. detection risk
d. account risk
25.
26. Which of the following is not a financial statement assertion relating to account balance?
a. completeness
b. existence
c. rights and obligations
d. valuation and allowances
27.
28. A schedule set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a
single amount, is referred to as a:
a. supporting schedule
c. corroborating schedule
b. lead schedule
d. reconciling schedule
e.
29. when using statistical sampling, which of the following need not be known to evaluate the results of an attributes sample?
a. sample size
c. number of deviations in the population
b. risk of assessing control risk too low
d. number of deviation found in the population
e.
30. when the auditors have chosen to test a control, what relationship will the tolerable rate normally have when compared to the
expected rate of deviations in the sample?
a. exceed
c. be less than
b. equal
d. indefinite
e.
31. increases in the planned allowance for sampling risk have what effect on required sample size?
a. increases
c. no effect
b. decreases
d. indeterminate

e.
32. When using sampling for tests of controls, which of the following audit consequences may follow?
a. if sample results indicate that the control is operating effectively, but in fact it is not, control riks will be assessed too
high.
b. if sample results indicate that the control is operating effectively, but in fact it is not, control riks will be assessed too
low.
c. if sample results indicate that the control is operating effectively, but in fact it is operating effectively, the audit is
likely to be faulty because of reduced substantive tests.
d. if sample results indicate that the control is operating effectively, but in fact it is operating effectively, the control
risk will be assessed too low.
e.
33. Which of the following may be used to reduce the risk of nonsampling errors?
a. increasing the size of audit samples
c. adequately planning audit samples
b. stratifying audit samples
d. using statistical sampling techniques
e.
34. which of the following types of risk is of critical importance to auditors in performing tests of controls?
a. the risk of assessing control risk too low.
c. the risk of incorrect acceptance.
b. the risk of assessing control risk too high.
d. the risk of incorrect rejection.
e.
35. the auditors failure to recognize a misstatement in an amount or a deviation in an internal control data processing procedure
is described as a:
a. statistical error
c. standard error of the mean
b. sampling misstatement
d. nonsampling error
e.
f. use the following to answer the next two questions:
g. the 2000 accounts receivable of ABC Company have a total book value of P40,000. Bob Rotter, CPA, has selected
and audited a sample of 100 accounts with a total book value of P1,940. the audited value of the 100 accounts in the
sample is P1,880.
36. using the ratio estimation technique, Rotters estimate (to the nearest dollar)of year-end accounts receivable balance would be
(audited book value): _______________
37. using the difference estimation technique, Rotters estimate (to the nearest dollar) of year-end accounts receivable balance
would be (audited book value): _______________
h.
38. Which of the following is a correct statement with respect to evaluating results when using nonstatistical sampling for
substantive tests?
a. when the projected misstatement exceeds the tolerable misstatement, the auditor should conclude that the population
is not misstated
b. the closer the project misstatement is to the tolerable misstatement, the higher the risk of material misstatement.
c. when the projected misstatement is equal to zero, the auditors may conclude with certainty that no misstatements
exist in the account.
d. when the projected misstatement percentage exceeds the risk of incorrect acceptance the auditors will generally
conclude that the population is materially misstated
i.
39. During the final planning of the accounts receivable program a CPA specified a tolerable misstatement of P30,000, instead of
the P20,000 contained in the preliminary audit program. What would be the impact of this change?
a. a decrease in population standard deviation
c. An increase in required sample size
b. An increase in sample standard deviation
d. A decrease in the required sample size
e.
40. which of the following is an advantage of systematic selection over random number selection?
a. it provides a stronger basis for statistical conclusions
b. it enables the auditor to use the more efficient sampling with replacement tables
c. there may be correlation between the location of items in the population, the future of sampling interest, and the
sampling interval
d. it does not require establishment of correspondence between random numbers and items in the population
f.
41. statistical sampling generally may be applied to test internal control when the clients internal control procedures:
a. depend primarily on appropriate segregation of duties
b. are carefully reduced to writing and are included in client accounting manuals
c. leave an audit trial in the form of evidence of compliance
d. enable the detection of material fraud in the accounting records
g.
42. which of the following statements is correct about the sample size in statistical sampling when testing internal controls?
a. the auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size
b. as the likely of deviation decreases, the auditor should increase the planned sample size
c. the allowable risk of assessing control risk too low has no effect on the planned sample size
d. of all the factors to be considered, the population size has the greatest effect on the sample size
h.
43. to determine sample size in an attribute sampling application, what must be specified?

a.
b.
c.
d.

44.

45.

46.

47.

population mean, expected error rat, allowance for sampling risk

allowance for sampling risk, risk of assessing control risk too low, standard deviation
allowance for sampling risk, risk of assessing control risk too low, expected deviation rate
population mean, standard deviation, allowance for sampling risk.
i.
Independence requirements suggest that a CPA should evaluate whether a particular threat to independence would lead a
reasonable person, aware of all the relevant facts, to conclude that:
a. a questioning mind reveals doubt as to independence
b. an unacceptable risk of non-independence exists
c. the accountant is definitely not independent
d. there is a substantial cause for a legal finding of non-independence.
j.
A successor auditor is required to attempt communication with the predecessor auditor prior to
a. Performing test of controls
c. Making a proposal for the audit engagement
b. Testing beginning balances for the current
d. Accepting the engagement
year
e.
A successor auditor has accepted an engagement that was previously performed by a predecessor auditor and, prior to
accepting the engagement, has communicated with the predecessor. When the successor believes that the predecessor has
performed satisfactory previous audits, which of the following is correct?
a. a second communication is required and must include details of previous audits
b. ordinarily, the successor auditors may be able to accept the opening balances of the current year with a minimum of
verification work
c. absent ongoing litigation, a predecessor must provide all working papers requested by the predecessor
d. the client should be informed of the need to perform a detailed audit of all opening balances.
e.
Relationship between control risk and detection risk is ordinarily?
a. parallel
c. direct
b. inverse
d. equal

e.
f.

g.

end of examination