BANKING UNIVERSITY OF HO CHI MINH CITY

FACULTY OF ACCOUNTING - AUDITING

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MIDTERM: FUNDAMENTALS OF AUDITING

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A DEFINITION AND DESCRIPTION OF THE PHRASES LISTED BELOW:

1 5 Steps of Planning an Audit

2 5 Steps of Performing an Audit

3 2 Steps of Reporting an Audit

4 4 Major Types of Audits

5 The Original 10 Auditing Standards

6 Risk Assessment Procedures

Procedures performed to obtain an understanding of an

entity and its environment, including internal controls,
represent the auditor's risk assessment procedures.

Performed to assess the risk of material misstatements

in the financial statements.

Other four test are done in response to this first test.

Procedures to Obtain an Understanding of Internal

Control: procedures used by the auditor to gather
evidence about the design and implementation of
specific controls.
7 Tests of Controls

Audit procedures to test the effectiveness of controls in

support of a reduced assessed control risk

May include the following types of evidence:

1. Make inquiries of appropriate client personnel
2. Examine documents, records and reports
3. Observe control-related activities

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 4. Reperform client procedures

Used to determine whether these controls are effective

and usually involve testing a sample of transactions.

Amount of additional evidence required for tests of

controls depend on two things:
1. The extent of evidence obtained in gaining the
understanding of internal control
2. The planned reduction in control risk

Audit Evidence: documentation, observation, inquiries

of client, reperformance.
8 5 Types of Tests of Controls

9 Substantive Procedures

10 Types of Tests

11 Summary of Types of Tests

12 Further Audit Procedures

13 Substantive Tests

1) In the auditing process

A) the types and amounts of
evidence remain constant from
audit to audit.
B) the criteria for evaluating
information will not vary
depending on the information
being
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audited.
C) the audit report communicates
the auditor's findings to users.
D) records are gathered by the
auditor to determine whether the
audited information is stated in
accordance with SEC standards
B MULTIPLE CHOICE
STT COMMENTARY ANSWER
1 The auditor should document the audit strategyin audit report
containing the key decisions about the scope, timing,
andconduct of the audit.
2 During the planning process, the auditor determinesthe overall
audit strategy for the audit. This strategy establishes the
scope,timing, and direction of the audit and guides the auditor
when he prepares theaudit plan.
3 In the planning stage, one of the objectives ofthe auditor is to
identify and assess the risk of material misstatement.
4 The purpose of the audit is to increase the levelof confidence
that users of financial statements can place on
financialstatements.
5 The internal control function in a company is aprocess designed
by management and others charged with governance to
providereasonable assurance that the financial statements are
prepared in accordancewith the applicable financial reporting
framework.
6 In a financial statement audit, the auditor willdecide to either (1)
rely on internal controls in the company to prevent ordetect
misstatements or (2) make recommendations to the client so that
controlscan be relied upon.

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7 The auditing standards allow the auditor to usethe work of the
internal auditors to gather evidence about the effectiveness
ofinternal controls.
8 During an audit, the auditor may become aware ofdeficiencies
in the internal control functions of a client that may be ofinterest
to the audit committee of the company.
9 At the end of an audit after the opinion isissued, the auditor
should have sufficient appropriate evidence to reduce auditrisk
to an acceptably low level.
10 The relationship of the audit firm to the clientcan be described
as the framework of an employer-employee relationship.
11 An important requirement of the auditingstandards is that the
auditor gather sufficient appropriate evidence todetermine
whether the financial statements have been prepared by
competentindividuals.
12 An accounting cycle involves both balance sheetand income
statement accounts and follows transactions through a process
whereit begins to its conclusion.
13 At the conclusion of the audit, the auditorissues an audit opinion
to the SEC.
14 The audit plan will be used to gather sufficientappropriate
evidence reduce audit risk to a near zero level.
15 Which of the following is a characteristic ofthe person doing the
assessment of the financial statements:
A. The person completing the assessment is an employee of the
company.
B. The person completing theassessment works for an
accounting firm that is associated with thecompany only in a
role of being hired to perform an audit.
C. The person performing the assessment may be bankers,
current orpotential stockholders, or regulatory bodies.
D. The person performing the assessment makes adjustments to
the decisionsrecorded by the firm so that outsiders have accurate
information to makedecisions.
One of the characteristics of a principal-agentrelationship is:
16
A. Owners of the company are involved in the daily
management of thecompany.
B. They hire an agent to runthe company for them and to make
daily decisions for the company.
C. The owners have more knowledge than management about
the dailyoperations of the company.
D. Outsiders benefit when a manager is hired by owners to

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 protect theirinterests in the company because the information
available to outsiders is morelikely to correspond to financial
accounting standards.
17 Which of the following best describes “attest”services?
A. The auditor attests tothe quality of some type information.
B. The auditor attests to the source of some type of information
C. The auditorattests to the accuracy of some type of
information
D. The auditor attests to the quantity of some type of
information.
18 The areas where management is more likely tomisstate
transactions are riskier for the auditor because
A. The auditor will be the subject of legal action
B. the auditor probably will not have enough time to identify
these areas
C. because failing to correctthe misstatements may lead to
issuing a clean opinion on materially misstatedfinancial
statements
D. because failing to correct the misstatements may lead to
issuing aqualified opinion on materially misstated financial
statements.
19 Which of the following will allow a company toreport higher
net income?
A. recording fictitious expenses at the beginning of the year
B. recording fictitiousrevenue at the end of the year
C. depreciating long lived assets
D. increasing a line of credit at a bank
20 The principle reason to misstate financial statementsis to
A. minimize the amount of taxes owed by the company
B. maximize the amount of officers’ bonuses
C. satisfy the requirement of a going concern
D. keep the company’s stockprice from falling
21 Which of the following is not an important partof the audit
process?
A. understanding incentives of the company to misstate the
financialstatements
B. identify the financial statement accounts with the greatest
potentialfor misstatements
C. document management’sefforts to achieve the necessary
requirements to gain a bank loan
D. design audit procedures to determine that the accounts are
fairlypresented according to the applicable financial reporting
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 framework.
22 Which of the following is an incorrect statementabout auditors’
professional duties?
A. In their professional duties, they will be watched by federal
and stateregulators and interested outsiders
B. Attention will be focused on the auditors’ responsibility to
determinewhether the financial statements present fairly the
financial position of thefirm and the results of operations
C. Auditors must understand the importance of presenting
unbiasedinformation to outsiders
D. The auditors isexpected to approach an audit with an
independent mind and to recognize that heor she is hired to
protect the interests of owners
23 Throughout the planning and performance of theaudit, auditors
are responsible for
A. having appropriate competence and capabilities to review the
audit
B. complying with relevantethical requirements
C. complying with relevant independence and fraud detection
requirements
D. maintainingprofessional skepticism and exercising
professional judgment
24 The Public Companies Accounting Oversight Board(PCAOB) is
A. a for profit public company
B. a government entity
C. private sector non profitorganization
D. a non profit public company
25 Before the creation of the PCAOB, the auditingstandards of the
Auditing Standards Board were used to audit allcompanies.
Which statement bestdescribes the PCAOB and auditing
standards?
A. In 2003, the PCAOB adoptedcertain auditing standards of the
ASB as interim standards
B. In 2003, the PCAOB developed over 100 new auditing
standards
C. In 2003, the PCAOB developed audit standards to audit all
companies,private and public
D. In 2003, the PCAOB adopted all the standards of the AICPA
to save timein the development of new standards
26 Management is responsible for:
A. gathering sufficient evidence
B. the preparation of thefinancial statements
C. determining that the financial statements have been prepared
inaccordance with the applicable financial reporting framework
D. approving the audit plan
27 The auditor is responsible for
A. the preparation of the financial statements
B. preparing adjustments to the accounting records
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 C. gathering sufficientappropriate evidence
D. advising management on accounting matters
28 Substantive tests of transactions are done togather evidence on
A. income statement accounts
B. balance sheet accounts
C. accounts receivable
D. inventory
29 Tests done by the auditor that are referred toas internal control
tests determine whether
A. the internal controls have been placed in operation
B. the internal controls are operating effectively
C. the internal controls are the responsibility of management
D. the internal controls ofthe company prevent or detect
misstatements in the financial statements
30 Before the work of audit is commenced, the auditor plans out
the whole of audit work is known as –
(A) Audit plan
(B) Audit note
(C) Audit risk
(D) Audit program
C DISCUSSION QUESTION
On 17.2.X2, a major customer of the audited entity
went bankrupt, resulting in an uncollectible significant
receivable. The auditor requested to make provisions for this
account receivable for the fiscal year ended 31.12.X1 but the
entity did not accept. The entity suggested that they disclose
this issue in the notes to the financial statements.
Required:
a. What audit procedures the auditor can use to detect
subsequent events?
b. What kind of opinion the auditor might issue in this
situation? Suppose that except for this issue, the
financial statements have been presented fairly in
terms of materiality.

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