INTEGRATED ASSESSMENT AUDITING THEORY & PROBLEMS
Overview of Financial Audit and Substantive Audit of Inventories
1. Analytical procedures used in planning and audit should focus on identifying:
a. Material weakness in the internal control system
This is tested by understanding and testing controls.
b. Areas that may represent specific risks relevant to the audit
In planning, auditors use analytical procedures to highlight unusual trends or unexpected
relationships. This helps them identify areas that could pose audit risks (possible
misstatements).
c. The predictability of financial data from individual transactions
This is part of evaluating reasonableness, not the main planning focus.
d. The various assertions that are embodied in the financial statements
Assertions in financial statements → Assertions are always relevant, but the focus in
planning is risk identification, not listing assertions.
2. The auditor identifies a misstatement that is material but not pervasive, and management
refuses to adjust the financial statements. What type of audit opinion should be issued?
a. Qualified opinion describing the nature and impact of the misstatement
If a misstatement is material but not pervasive, the auditor issues a qualified opinion
(“except for”).
b. Unmodified opinion with an emphasis-of-matter paragraph
Wrong, because a material misstatement requires qualification, not just emphasis.
c. Adverse opinion due to the refusal to adjust
Only if the misstatement is pervasive.
d. Qualified opinion with an emphasis-of-matter paragraph
Redundant, emphasis is unnecessary if the misstatement already modifies the opinion.
3. Which of the following is not part of the fundamental principles a CPA should observe?
a. Integrity c. Confidentiality
b. Professional Competence and due care d. Professional standards
CPAs follow ethical principles such as integrity, objectivity, confidentiality, and
professional competence. “Professional standards” are rules to follow, not ethical
principles.
4. I. This permits the provision of an opinion without being affected by influences that
compromise professional judgment, allowing an individual to act with integrity, and exercise
objectivity and professional skepticism.
II. The avoidance of facts and circumstances that are so significant that a reasonable and
informed third party, having knowledge of all relevant information.
a. 1st statement refers to independence in appearance
b. 2nd statement refers to independence of mind
c. A and B is correct
d. None of the choices are correct
, Independence of mind = ability to act with integrity, objectivity, and skepticism.
Independence in appearance = avoiding situations that may make third parties doubt
independence.
5. When internal controls are determined to be well-designed but not effectively implemented,
how should this influence the audit strategy?
a. Increase control risk assessment and place greater emphasis on substantive
procedures
If controls are not working in practice, auditors cannot rely on them → they must assume
higher control risk and perform more substantive testing.
b. Continue with a controls-based approach but reduce test sample sizes
Wrong, because controls aren’t effective.
c. Reduce planned substantive testing and rely on internal controls
Wrong, must increase instead.
d. Rely on prior year testing results if no major system changes occurred
Not acceptable; the auditor must test current effectiveness.
6. Which of the following procedures would most effectively test the valuation assertion for
inventory?
a. Recalculate the total inventory balance from physical count sheets
Tests accuracy, not valuation of unit costs.
b. Monitoring of usage of programs
Not directly related to valuation.
c. Inspect invoices for recent purchases and review cost buildup
Valuation deals with whether inventory is recorded at the proper cost or NRV. Checking
supplier invoices ensures costs recorded are accurate.
d. Observe inventory counts
Tests existence/completeness, not valuation.
7. This threat to independence arises when a member of the assurance team promotes or may
be perceived to promote an assurance client’s position or opinion to the point that objectivity
may, or may be perceived to be compromised.
a. Familiarity Threat
too close to the client.
b. Advocacy Threat
Acting as client’s advocate.
c. Intimidation Threat
pressured by a client.
d. Self-interest Threat
auditor’s personal gain.
8. Which of the following best reflects an auditor’s exercise of professional skepticism?
a. Maintaining a questioning mindset and seeking corroborative evidence
b. Limiting evidence collection when assertions appear reasonable
Overview of Financial Audit and Substantive Audit of Inventories
1. Analytical procedures used in planning and audit should focus on identifying:
a. Material weakness in the internal control system
This is tested by understanding and testing controls.
b. Areas that may represent specific risks relevant to the audit
In planning, auditors use analytical procedures to highlight unusual trends or unexpected
relationships. This helps them identify areas that could pose audit risks (possible
misstatements).
c. The predictability of financial data from individual transactions
This is part of evaluating reasonableness, not the main planning focus.
d. The various assertions that are embodied in the financial statements
Assertions in financial statements → Assertions are always relevant, but the focus in
planning is risk identification, not listing assertions.
2. The auditor identifies a misstatement that is material but not pervasive, and management
refuses to adjust the financial statements. What type of audit opinion should be issued?
a. Qualified opinion describing the nature and impact of the misstatement
If a misstatement is material but not pervasive, the auditor issues a qualified opinion
(“except for”).
b. Unmodified opinion with an emphasis-of-matter paragraph
Wrong, because a material misstatement requires qualification, not just emphasis.
c. Adverse opinion due to the refusal to adjust
Only if the misstatement is pervasive.
d. Qualified opinion with an emphasis-of-matter paragraph
Redundant, emphasis is unnecessary if the misstatement already modifies the opinion.
3. Which of the following is not part of the fundamental principles a CPA should observe?
a. Integrity c. Confidentiality
b. Professional Competence and due care d. Professional standards
CPAs follow ethical principles such as integrity, objectivity, confidentiality, and
professional competence. “Professional standards” are rules to follow, not ethical
principles.
4. I. This permits the provision of an opinion without being affected by influences that
compromise professional judgment, allowing an individual to act with integrity, and exercise
objectivity and professional skepticism.
II. The avoidance of facts and circumstances that are so significant that a reasonable and
informed third party, having knowledge of all relevant information.
a. 1st statement refers to independence in appearance
b. 2nd statement refers to independence of mind
c. A and B is correct
d. None of the choices are correct
, Independence of mind = ability to act with integrity, objectivity, and skepticism.
Independence in appearance = avoiding situations that may make third parties doubt
independence.
5. When internal controls are determined to be well-designed but not effectively implemented,
how should this influence the audit strategy?
a. Increase control risk assessment and place greater emphasis on substantive
procedures
If controls are not working in practice, auditors cannot rely on them → they must assume
higher control risk and perform more substantive testing.
b. Continue with a controls-based approach but reduce test sample sizes
Wrong, because controls aren’t effective.
c. Reduce planned substantive testing and rely on internal controls
Wrong, must increase instead.
d. Rely on prior year testing results if no major system changes occurred
Not acceptable; the auditor must test current effectiveness.
6. Which of the following procedures would most effectively test the valuation assertion for
inventory?
a. Recalculate the total inventory balance from physical count sheets
Tests accuracy, not valuation of unit costs.
b. Monitoring of usage of programs
Not directly related to valuation.
c. Inspect invoices for recent purchases and review cost buildup
Valuation deals with whether inventory is recorded at the proper cost or NRV. Checking
supplier invoices ensures costs recorded are accurate.
d. Observe inventory counts
Tests existence/completeness, not valuation.
7. This threat to independence arises when a member of the assurance team promotes or may
be perceived to promote an assurance client’s position or opinion to the point that objectivity
may, or may be perceived to be compromised.
a. Familiarity Threat
too close to the client.
b. Advocacy Threat
Acting as client’s advocate.
c. Intimidation Threat
pressured by a client.
d. Self-interest Threat
auditor’s personal gain.
8. Which of the following best reflects an auditor’s exercise of professional skepticism?
a. Maintaining a questioning mindset and seeking corroborative evidence
b. Limiting evidence collection when assertions appear reasonable
