1. The areas where management is more
likely to misstate transactions are riskier for the auditor because

the auditor will be the subject of legal action.

the auditor probably will not have enough time to identify these areas.

failing to correct the misstatements may lead to issuing
a clean opinion on materially misstated financial statements.

failing to correct the misstatements may lead to issuing a qualified opinion on
materially misstated financial statements.

Question 2
1. To obtain reasonable assurance, which is a high, but not absolute level of
assurance, the auditor:

Performs the work and properly supervises the client.

Assumes appropriate materiality level or levels.

Identifies and assesses risks of material misstatement,
whether due to fraud or error, based on an understanding of the entity and its
environment, including the entity’s internal control.

Obtains sufficient appropriate management representations about whether
material misstatements exist
Question 3
1. The Auditing Standards Board

Each year issues a new “Codification of Statements of Auditing
Standards”.

Issues new financial accounting standards

Evaluates complaints about violations of the standards.

Issues new auditing standards as “Statements on
Auditing Standards.”
Question 4
1. The PCAOB is required to

Conduct continuing inspections of public accounting firms registered with the
SEC.

Inspect firms with more than 100 public clients on an annual basis.

Inspect firms with fewer than 100 clients at least every four years

Post the inspection reports on the SEC website and are
available to the public
Question 5
1. In the gathering of evidence, several concepts are important. At the
beginning of the audit, the auditor presents his credentials to the client as

An individual with training and knowledge in accounting
and auditing.

An individual who will be sensitive to good client relations.

Someone with the knowledge to make good business decisions.

Someone who will exercise good judgment.
Question 6
1. The auditor must gather evidence guided by the standard of due professional
care. Due professional care requires

The auditor to perform audit duties with skill comparable to that of any other
client.

To gather statements and interpret statements in a manner
that any other professional would have done.

The auditor to know accounting and auditing requirements.

The auditor to be knowledgeable about the client.
Question 7
1. When management presents the financial statements to the auditor, management
makes several assertions about the financial statements. Which of the following
is not one of these assertions?

Existence or occurrence.

Evaluation.

Accuracy.

Classification.
Question 8
1. Which of the following statements is correct about the objective of the
audit process?

Generally accepted auditing standards require the auditor to obtain assurance
about whether the financial statements are free from all misstatements.

Assurance is obtained by the auditor when he has obtained evidence to reduce audit
risk to a low level.

A material misstatement is an error or fraud in the
financial statements that might cause a user of the financial statements to
change his decision about the company.

Sufficient appropriate audit evidence refers to the persuasiveness of the
evidence gathered.
Question 9
1. How does the auditor gain an understanding of the entity and its
environment? The auditing standards require the auditor to understand

Industry, regulatory and
other external factors relevant to the entity

The nature of management of the entity, including its operations, ownership and
governance structures, the types of investments management makes, and the way
the entity is structured and financed.

Management’s selection and use of accounting policies, including any changes in
these policies.

Management’s objectives and strategies and the related business risks that may
lead to the risk of material misstatement.
Question 10
1. Audit risk is defined as

The risk that the auditor issues an opinion saying that
the financial statements are not materially misstated when they are.

The risk that the auditor fails to issue an opinion using random sampling.

The risk that the auditor does not detect a material misstatement in the
financial statements.

The risk that the auditor does detect a material misstatement in the financial
statements but fails to report the material misstatement.
Question 11
1. When an auditor agrees to perform an audit because the preconditions for an
audit have been met and the auditor believes that he can gather sufficient
appropriate audit evidence to reduce audit risk to an acceptably low level, an
engagement letter is prepared. This engagement letter includes:

The objective and scope of the audit (to express an
opinion on particular financial statements).

Management’s assistance (to prepare the financial statements, select accounting
policies, establish effective internal controls, design programs to prevent and
detect fraud, provide written representation, inform the auditor of subsequent
events that may affect the financial statements, and make all financial records
and information available to the auditor).

The auditor’s performance (to conduct the audit in accordance with generally
accepted auditing standards and obtain an understanding of the client’s
internal control).

The internal control limitations of an audit engagement (material misstatements
may not be detected).
Question 12
1. In the planning process, the auditor assesses the risk that misstatements
have occurred in the financial statements. The source of misstatements includes

The use of auditing standards that the auditor may consider unreasonable or
inappropriate.

Inaccuracies in gathering or processing data used to
prepare the financial statements.

Differences between the amount or classification of a financial statement item
and what should have been reported under generally accepted auditing standards.

Omissions of financial statement explanations.
Question 13
1. The auditor has to develop an audit plan that responds to the risks of
material misstatement identified in the prior steps of the audit process. The
auditing standards require the auditor to develop an audit plan that includes
which of the following elements?

The nature, timing, and extent of planned risk assessment procedures to allow
the auditor to estimate the risk of material misstatement at the financial
statement and assertion level.

The nature, timing, and extent of audit procedures to
respond to the assessed risks of material misstatement at the relevant
assertion level.

The nature, timing, and extent of audit procedures to test the effectiveness of
internal controls.

Other audit procedures that need to be done to allow the auditor to comply with
generally accepted accounting principles.
Question 14
1. The auditor should document the audit strategy in the audit report
containing the key decisions about the scope, timing, and conduct of the audit.

True
False
1. The areas where management is more
likely to misstate transactions are riskier for the auditor because

the auditor will be the subject of legal action.

the auditor probably will not have enough time to identify these areas.

failing to correct the misstatements may lead to issuing
a clean opinion on materially misstated financial statements.

failing to correct the misstatements may lead to issuing a qualified opinion on
materially misstated financial statements.
Question 2
1. To obtain reasonable assurance, which is a high, but not absolute level of
assurance, the auditor:

Performs the work and properly supervises the client.

Assumes appropriate materiality level or levels.

Identifies and assesses risks of material misstatement,
whether due to fraud or error, based on an understanding of the entity and its
environment, including the entity’s internal control.

Obtains sufficient appropriate management representations about whether
material misstatements exist
Question 3
1. The Auditing Standards Board

Each year issues a new “Codification of Statements of Auditing
Standards”.

Issues new financial accounting standards

Evaluates complaints about violations of the standards.

Issues new auditing standards as “Statements on
Auditing Standards.”
Question 4
1. The PCAOB is required to

Conduct continuing inspections of public accounting firms registered with the
SEC.

Inspect firms with more than 100 public clients on an annual basis.

Inspect firms with fewer than 100 clients at least every four years

Post the inspection reports on the SEC website and are
available to the public
Question 5
1. In the gathering of evidence, several concepts are important. At the
beginning of the audit, the auditor presents his credentials to the client as

An individual with training and knowledge in accounting
and auditing.

An individual who will be sensitive to good client relations.

Someone with the knowledge to make good business decisions.

Someone who will exercise good judgment.
Question 6
1. The auditor must gather evidence guided by the standard of due professional
care. Due professional care requires

The auditor to perform audit duties with skill comparable to that of any other
client.

To gather statements and interpret statements in a manner
that any other professional would have done.

The auditor to know accounting and auditing requirements.

The auditor to be knowledgeable about the client.
Question 7
1. When management presents the financial statements to the auditor, management
makes several assertions about the financial statements. Which of the following
is not one of these assertions?

Existence or occurrence.

Evaluation.

Accuracy.

Classification.
Question 8
1. Which of the following statements is correct about the objective of the
audit process?

Generally accepted auditing standards require the auditor to obtain assurance
about whether the financial statements are free from all misstatements.

Assurance is obtained by the auditor when he has obtained evidence to reduce audit
risk to a low level.

A material misstatement is an error or fraud in the
financial statements that might cause a user of the financial statements to
change his decision about the company.

Sufficient appropriate audit evidence refers to the persuasiveness of the
evidence gathered.
Question 9
1. How does the auditor gain an understanding of the entity and its
environment? The auditing standards require the auditor to understand

Industry, regulatory and
other external factors relevant to the entity

The nature of management of the entity, including its operations, ownership and
governance structures, the types of investments management makes, and the way
the entity is structured and financed.

Management’s selection and use of accounting policies, including any changes in
these policies.

Management’s objectives and strategies and the related business risks that may
lead to the risk of material misstatement.
Question 10
1. Audit risk is defined as

The risk that the auditor issues an opinion saying that
the financial statements are not materially misstated when they are.

The risk that the auditor fails to issue an opinion using random sampling.

The risk that the auditor does not detect a material misstatement in the
financial statements.

The risk that the auditor does detect a material misstatement in the financial
statements but fails to report the material misstatement.
Question 11
1. When an auditor agrees to perform an audit because the preconditions for an
audit have been met and the auditor believes that he can gather sufficient
appropriate audit evidence to reduce audit risk to an acceptably low level, an
engagement letter is prepared. This engagement letter includes:

The objective and scope of the audit (to express an
opinion on particular financial statements).

Management’s assistance (to prepare the financial statements, select accounting
policies, establish effective internal controls, design programs to prevent and
detect fraud, provide written representation, inform the auditor of subsequent
events that may affect the financial statements, and make all financial records
and information available to the auditor).

The auditor’s performance (to conduct the audit in accordance with generally
accepted auditing standards and obtain an understanding of the client’s
internal control).

The internal control limitations of an audit engagement (material misstatements
may not be detected).
Question 12
1. In the planning process, the auditor assesses the risk that misstatements
have occurred in the financial statements. The source of misstatements includes

The use of auditing standards that the auditor may consider unreasonable or
inappropriate.

Inaccuracies in gathering or processing data used to
prepare the financial statements.

Differences between the amount or classification of a financial statement item
and what should have been reported under generally accepted auditing standards.

Omissions of financial statement explanations.
Question 13
1. The auditor has to develop an audit plan that responds to the risks of
material misstatement identified in the prior steps of the audit process. The
auditing standards require the auditor to develop an audit plan that includes
which of the following elements?

The nature, timing, and extent of planned risk assessment procedures to allow
the auditor to estimate the risk of material misstatement at the financial
statement and assertion level.

The nature, timing, and extent of audit procedures to
respond to the assessed risks of material misstatement at the relevant
assertion level.

The nature, timing, and extent of audit procedures to test the effectiveness of
internal controls.

Other audit procedures that need to be done to allow the auditor to comply with
generally accepted accounting principles.
Question 14
1. The auditor should document the audit strategy in the audit report
containing the key decisions about the scope, timing, and conduct of the audit.

True
False