AT-COmpre-Exercises-nokey.docx

34 

Loading.... (view fulltext now)

Loading....

Loading....

Loading....

Loading....

Full text

(1)

1. The primary reason an auditor requests a letter of inquiry be sent to a client’s attorney is to provide the auditor with

a. The probable outcome of asserted claims and pending or threatened litigation.

b. Corroboration of the information furnished by management about litigation, claims, and assessments.

c. The attorney’s opinions of the client’s historical experiences in recent similar litigation.

d. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date.

2. When considering the use of management’s written representations as audit evidence about the completeness assertion, an auditor should understand that such representations:

a. Complement, but do not replace, substantive test designed to support the assertion.

b. Constitute sufficient evidence to support the assertion when considered in combination with reliance on internal accounting controls.

c. Are not parts of the evidential matter considered to support the assertion.

d. Replace reliance on internal accounting controls as evidence to support the assertion.

3. Which of the following situations most likely illustrate a risk of fraud or error in online systems?

I. On-line data entry is performed at or near the point where transactions originate.

II. Invalid transactions are corrected and re-entered immediately.

III. On-line access to data and programs is possible through telecommunications systems.

IV. Workstations are located throughout the entity.

V. Data entry is performed on-line by individuals who understand the nature of the transactions involved.

VI. Transactions are not processed immediately by the computer system.

a. I, III, IV, VI. c. I, IV, VI.

b. III, IV, VI. d. IV, V, VI.

4. Earl D. Pearl, CPA, is conducting the first examination of a non-public company’s financial statements. Earl hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor auditor’s working papers. This procedure is

a. Acceptable if the client and the predecessor auditor agree to it. b. Acceptable if Earl refers in the audit report to reliance upon the

predecessor auditor’s work.

c. Required if Earl is to render an unqualified opinion.

d. Unacceptable because Earl should bring an independent viewpoint to a new engagement.

5. Ivan Bagayao, CPA, has decided to use statistical sampling for the audit of Gor Corporation. When using statistical sampling, which of the following need not be known to Ivan to evaluate the results of an attribute sample?

a. Sample size

(2)

c. Number of deviations in the population d. Number of deviations in the sample

6. Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories?

a. Confirmation of inventories at locations outside the client facilities.

b. Analytical review of inventory balances compared to purchase and sales activities.

c. Observation of physical inventory counts. d. Examination of paid vendors’ invoices.

7. The working papers prepared during the engagement are the property of: a. The auditor, but do not include the working papers prepared by

client for the auditor.

b. The auditor, even including those prepared by client for auditor. c. The client.

d. The auditor and client jointly.

8. The primary purpose for obtaining an understanding of an audit client’s internal control structure is to:

a. Provide a basis for making constructive suggestions in a management letter.

b. Determine the nature, timing and extent of tests to be performed in the audit.

c. Obtain sufficient, appropriate evidential matter to afford a reasonable basis for an opinion on the financial statements under examination.

d. Provide information for a communication of internal control structure-related matters to management.

9. Which of the following can an auditor observe as a general control procedure used by companies?

a. Segregation of functional responsibilities. b. Management philosophy and operating cycle.

c. Open lines of communication to the audit committee of the board of directors.

d. External influences such as bank examiner audits.

10. An advantage of using internal control flowcharts instead of internal control questionnaires to document information about internal control is that flowcharts

a. Identify internal control weaknesses more prominently. b. Provide a visual depiction of clients’ activities.

c. Indicate whether control procedures are operating effectively.

d. Reduce the need to observe clients’ employees performing routine tasks.

11. In an audit sampling application, an auditor:

a. Performs procedures on all the items in a balance and makes a conclusion about the whole balance.

b. Performs procedures on less than 100% of the items in a balance and formulates a conclusion about the whole balance.

c. Performs procedures on less than 100% of the items in a class of transactions for the purpose of becoming familiar with the client’s accounting system.

(3)

d. Performs analytical procedures on the client’s unaudited financial statements when planning the audit.

12. In micro-computer systems, the MOST important aspect for auditors to consider is the:

a. Audit techniques. b. Computer technology. c. Control environment. d. Computer software.

13. George Company uses the account code 614 for maintenance expense. However, one of the company clerks often codes maintenance expense as 641. The highest account code in the system is 620. What would be the best internal control check to build into the George Company’s computer system to detect this error?

a. A manual re-check of the code. c. Valid-character test. b. Sequence check. d. Valid-code test. 14. The most important output control is:

a. Distribution control, which assures that only authorized personnel receive the reports generated by the system.

b. Review of the data for reasonableness by someone who knows that the output should look like.

c. Control totals, which are used to verify that the computer’s results are correct.

d. Logic tests, which verify that no mistakes were made in processing. 15. When auditing “around” the computer, the independent auditor focuses

solely upon the source documents and

a. Test data. c. IT output.

b. IT processing. d. Compliance techniques. 16. The following statements relate to CAATs. Which one is incorrect?

a. CAATs may improve the effectiveness and efficiency of auditing procedures.

b. CAATs may provide effective tests of control, but not substantive procedures.

c. CAATs are advisable where there are no input documents or a visible audit trail, or where population and sample sizes are very large. d. CAATs are used considering the principle of cost-benefit.

17. Gorgonio Macariola, CPA was considering the sample size needed for a selection of sales invoices for the test of controls audit of the Four Horsemen Company’s internal controls. He presented the following information for two alternative cases:

Case A Case B Acceptable risk of underreliance on

controls ... Acceptable risk of overreliance on controls ... Tolerable deviation rate ... Expected population deviation rate

High High High Low Low Low Low High Gorgonio should expect the sample size for Case A to be:

(4)

a. Smaller than the sample size for Case B. b. Larger than the sample size for Case B. c. The same as the sample size for Case B.

d. Not determinable relative to the Case B sample size.

18. The term “error” refers to unintentional mistakes in the financial statements, and may involve the following:

A B C D

Mathematical or clerical mistakes in the underlying

records & accounting data ... Yes Yes Yes Yes Oversight or misinterpretation of facts ... No Yes Yes No Misapplication of accounting principles ... Yes Yes No No Suppression or omission of the effects of

transactions from records or documents ... No No No No 19. Mr. Earl Jimson Garcia, CPA, has organized a gathering of tax experts and

CPAs which shall include among others, workshops, technical lectures or subject matter meetings, non-degree training courses and scientific meetings. Under the IRR to RA No. 9298, this shall qualify as:

a. Seminars. c. Meetings.

b. Conventions. d. Professional gathering. 20. You are Mr. Yannick, CPA, and your client consulted you regarding measures

to be taken to address the company’s repeated incidence of lapping of trade accounts receivable. Select which of among the following would be considered as the best protection to deter lapping:

a. Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.

b. Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts.

c. Have customers send payments directly to the company’s depository bank. d. Request that customer’s payment checks be made payable to the

company and addressed to the treasurer.

21. Which of the following is an internal control procedure that would prevent a paid disbursement voucher from being processed for payment a second time?

a. Vouchers should be prepared by individuals who are responsible for signing disbursement checks.

b. Disbursement vouchers should be approved by at least two responsible management officials.

c. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment.

d. The official signing the check should compare the check with the voucher and should stamp “PAID” on the voucher documents.

22. Jude Isaac James, CPA, has released a 3,500-page book on Auditing Problems. Technically, his work falls under “authorship” for purposes of CPE credits. Credits earned by Mr. James must be claimed:

a. Within 3 years from date of publication. b. Within 1 year from date of publication. c. Within six days from date of publication. d. Within six months from date of publication.

(5)

23. The following are used by the auditor in assessing whether the accounting for assets or liabilities requiring fair value measurements be appropriate, except:

a. The auditor’s understanding of the requirements of the financial reporting framework.

b. Knowledge of the business and industry. c. Results of other audit procedures.

d. Number of personnel involved in the measurement process.

24. When a client auditor uses a report from the auditor of a service organization, the client auditor:

a. Makes no reference in his audit report on the service organization. b. Should refer the matter in a separate emphasis of matter paragraph

of his audit report.

c. Should refer the matter by modifying the scope, and opinion paragraphs of the auditor’s report.

d. Should attach the copy of the service organization’s auditor’s report to his audit report.

25. When an auditor expresses an adverse opinion, the opinion paragraph should include:

a. The principal effects of the departure from Philippine Financial Reporting Standards.

b. A direct reference to a basis for adverse opinion paragraph disclosing the basis for the opinion.

c. The substantive reasons for the financial statements being misleading.

d. A description of the uncertainty or scope limitation that prevents an unqualified opinion.

26. Alpha Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of the Insurance Commission. If Abad, CPA, Alpha’s auditor, discovers that the statements are not suitably titled, Abad should:

a. Disclose any reservation in a Basis for Qualified Opinion paragraph and qualify the opinion.

b. Apply to the Insurance Commission for an advisory opinion.

c. Issue a special statutory basis report that clearly disclaims any opinion.

d. Explain in the notes to the financial statements the terminology used.

27. Prospective financial statements are for: a. General use.

b. Limited use only.

c. Either general or limited use. d. Used by internal management only.

28. In which of the following situations would a public accounting firm have violated the Code of Ethics in determining its fee?

a. A fee is based on whether or not the public accounting firm’s audit report leads to the approval of the client’s application for bank financing.

b. A fee is to be established at a later date by the Bankruptcy Court. c. A fee is based upon the nature of the engagement rather than upon

(6)

d. A fee is based on the fee charged by the client’s former auditors. 29. Which of the following would contribute most to the safeguarding of

assets?

a. Access to computer facilities and records is limited to authorized personnel on an “as needed” basis.

b. Training programs are conducted to develop competence of newly hired personnel

c. Control and subsidiary accounts are reconciled on a regularly scheduled basis

d. Blank stock of all purchase orders and sales invoices are pre-numbered.

30. One difference between auditors and other professionals is that most professionals

a. Need not be concerned about remaining independent.

b. Don’t have requirements for continuing education beyond college. c. Don’t have to pass a rigorous examination.

d. Aren’t expected to act in the public interest. 31. The auditor commits a Type I error if:

a. a qualified report is issued when the financial statements do not contain any material misstatements

b. an unqualified report is issued when the financial statements are materially misstated

c. the risk of a material misstatement exceeds the level of assurance d. the cost of additional testing is greater than the expected benefit

of risk reduction

32. A client company has not paid its 2015 audit fee. Ethically speaking, for the auditor to be considered independent with respect to the 2016 audit, the 2015 audit fee must be paid:

a. Before the 2016 audit work is completed. b. Before the 2016 report is issued.

c. Before the 2016 audit work is started. d. On the date of the 2016 audit report.

33. Knowledge of the rules of conduct and related interpretations on independence, integrity a objectivity will help you respond to the following case:

CPA Gelai James performs the audit of the local symphony society. Because of her good work, she was elected an honorary member of the board of directors. Gelai will not be considered independent unless:

A B C D

The position is in fact purely honorary ... Yes Yes Yes Yes Listings of directors show she is an

honorary director. ... No Yes Yes No She restricts participation strictly to

the use of her name ... Yes No Yes No She does not vote or participate in

(7)

(Numbers 34 and 35) Knowledge of the rules of conduct and related interpretations on independence, integrity a objectivity will help you respond to the following case:

Antonio “Tony” Jaramillo, a retired partner of your CPA firm, has just been appointed to the board of directors of Honey Corporation, your firm’s client. Tony is also an ex-officio member of your firm’s income tax advisory committee which meets monthly to discuss income tax problems of the partnership’s clients, some of which are competitors of Honey Corporation. The partnership pays Tony P1,500 for each committee meeting attended and a monthly retirement benefit, fixed by a retirement plan policy, of P10,000.

34. Based solely on the above information, would the above situation impair the appearance of the firm’s independence?

a. Yes, because Tony is still active with the firm as an ex-officio member of the income tax advisory committee.

b. Yes, because the intimidation threat created is so significant that no safeguard could eliminate or reduce the threat to an acceptable level.

c. No, because Tony is already a retired partner of the CPA firm.

d. No, because Tony is only an ex-officio member of the firm’s income tax advisory committee.

35. What are the options available to Tony to remedy the situation described above?

a. Tony should ask that the audit client be given, consistently, a disclaimer of opinion.

b. Tony should either resign from the Board of Directors of Honey Corporation or cease his association with the accounting firm.

c. Tony should request that Honey Corporation place him in the company’s audit committee.

d. Tony should request the accounting firm to cease giving him P1,500 for each committee meeting attended.

36. What is an auditor’s evaluation of a statistical sample for attributes when a test of 200 documents results in 4 errors if the tolerable rate is 5 percent, the expected occurrence rate is 3 percent, and the allowance for sampling risk is 2 percent?

a. Accept the sample results as support for lowering the assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected occurrence rate.

b. Do not decrease the assessed level of control risk because the sample occurrence rate plus the allowance for sampling risk exceeds the tolerable rate.

c. Do not decrease the assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected occurrence rate.

d. Accept the sample results as support for lowering the assessed level of control risk because the sample occurrence rate plus the allowance for sampling risk does not exceed the tolerable rate.

37. It is estimated that up to 70% of all computer frauds involves fraudulent input. This is a much higher percentage than for manual systems because:

a. it is difficult to alter the hard copy documents used in manual systems without detection

(8)

b. frauds in manual systems are concentrated more on the theft of information

c. computer controls over processing are less reliable than those used in manual systems

d. employees with computer passwords have virtually unlimited ability to alter computer records

38. Which of the following material events occurring subsequent to the reporting date would require an adjustment to the financial statements before they are issued?

a. Settlement of long-term debt using ordinary shares. b. Loss of a plant as a result of a flood.

c. Major purchase of a business, which is expected to double sales volume.

d. Settlement of litigation, in excess of the recorded liability.

39. James Garcia, CPA, is preparing a report on internal control. He has already discussed the internal control weaknesses with the appropriate client officials. During these discussions, the client stated that, given its circumstances, there was no practicable corrective action which could be taken for one of the major weaknesses and therefore asked that it not be included in James Garcia’s report. In the final analysis, James Garcia concurred that no corrective action by management is practicable. Which of the following is the MOST appropriate course of action for James Garcia to take?

a. He must include this weakness in his report; otherwise, he will be in violation of GAAS.

b. He may omit this weakness from the report without further mention. c. He may omit this weakness from the report but should send a

confidential memo to the Board of Directors pointing out the nature of the weakness and why it was omitted from her report.

d. He may omit the weakness from his report but should clearly state that the report is restricted to material weaknesses for which corrective action by management may be practicable in the circumstances.

40. Which of the following is an example of fraudulent financial reporting? a. Company management changes inventory count tags and overstates

ending inventory, while understating cost of goods sold.

b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses.

c. An employee steals inventory and the “shrinkage” is recorded in cost of goods sold.

d. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

41. If an illegal act is discovered during the audit of a publicly held company, the auditors should

a. notify the regulatory authorities.

b. determine who was responsible for the illegal act. c. intensify the examination to identify all illegal acts.

d. report the act to high level personnel within the client’s organization and to the audit committee.

(9)

42. When planning an audit, the auditor must take steps to provide reasonable assurance that any material frauds will be detected. This level of assurance is less than that provided for the detection of nonfraudulent material misstatements because:

a. auditors face less liability for failure to detect fraud

b. frauds are extremely rare and therefore a lower level of assurance is appropriate

c. most frauds are detected by means other than the audit

d. those committing frauds usually take steps to prevent the detection of the frauds

43. The electronic transmission of documents between organizations in a machine-readable form.

a. Cryptography. c. Short messaging service b. Computer processing d. Electronic data interchange 44. Which one of the following statements best describes a CPA’s

responsibilities when a material amount of an audit client’s transactions are with related parties?

a. The CPA should withdraw from the engagement

b. If the disclosure of related party transactions is inadequate, the CPA should qualify his or her audit opinion

c. Unless related party transactions are eliminated from the financial statements, the auditor must give a qualified or adverse opinion d. The CPA should ensure the transactions are recorded at fair market

values

45. Which one of the following is not a valid purpose for performing analytical procedures?

a. improve knowledge of the client’s business b. identify material misstatements

c. assess inherent risk d. assess control risk

46. Which one of the following audit tests is not a valid analytical procedure method?

a. scanning disbursements for unusual items

b. comparing account balances to budgeted amounts c. examining documentation supporting disbursements d. predicting account balances using regression analysis

47. After discovering a misstatement in a sample taken from a population, a CPA is most likely to:

a. extrapolate the misstatement to the population as a whole

b. examine additional sample items to ensure that the sample results were representative

c. consider issuing a qualified opinion

d. compare the discovered misstatement to the amount considered material 48. Which of the following is the best audit procedure for determining the

existence of unrecorded liabilities?

a. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable.

b. Examine unusual relationships between monthly accounts payable balances and recorded purchases.

(10)

c. Examine a sample of invoices a few days prior to and subsequent to year end to ascertain whether they have been properly recorded.

d. Examine a sample of cash disbursements in the period subsequent to year end.

49. The close relationship that can develop between an auditor and a small business client has raised concerns among accounting critics. These concerns are heightened when the auditor provides both auditing and consulting services to the client. The main concern raised is:

a. auditors may not have the sufficient expertise to provide business advice to clients

b. auditors may not be able to maintain client confidentiality with respect to information learned during the course of the consulting engagement

c. client information learned during the consulting engagement gives the auditor an unfair advantage in a competitive bid for the audit

d. auditors may not be able to maintain their objectivity when auditing systems they have provided to clients

50. Which of the following best describes an auditor’s review for subsequent events?

a. it is generally performed after an audit report is issued

b. it need not be performed unless the auditor has reason to believe that material unusual transactions occurred after the balance sheet date c. it can result in a change in financial statement amounts or the

addition of a footnote to the financial statements

d. it is usually performed in conjunction with tests of internal control 51. This document contains the norms and principles governing the practice

of the accountancy profession in the highest standards of ethical conduct: A. Code of Ethics for CPAs in the Philippines

B. Republic Act No. 9298 C. IRR to RA9298

D. PSA 220 on Quality Control

52. The Commission on Audit is one of the organizations affecting the practice of accountancy in the Philippines. Which of the following is not one of the duties of the COA)?

A. Define the scope of its audit and examination B. Promulgate accounting rules and regulations

C. Assume fiscal responsibility for the Government and its instrumentalities

D. Keep the general accounts of the government

53. Which of the following criteria is unique to the independent auditor’s attest function?

A. General competence.

B. Familiarity with the particular industry of each client. C. Due professional care.

D. Independence.

54. When a practitioner is inappropriately associated with financial information, the following remedies are available, except:

A. Require the other party (i.e., management) to cease associating the CPA with the subject matter.

(11)

practitioner’s name. C. Seek legal advice.

D. Keep silent about the matter.

55. In government auditing, the three elements of expanded scope auditing are:

A. Goal analysis, audit of operations, audit of systems.

B. Financial and compliance, economy and efficiency, program results. C. Pre-audit, post-audit, internal audit.

D. National government audit, local government audit, corporation audit. 56. The underlying conditions that create demand for users for reliable

financial information do not include (the): A. Transactions that are numerous and complex.

B. Expression of an opinion on the fairness of the financial statements. C. Users separated from accounting records by distance and time.

D. Financial decisions that are important to investors and users.

57. Who is responsible for leading debriefing and setting the direction for improvement of both individual and team performance in the future?

A. Quality Review Committee B. Board of Accountancy

C. The client and the audit team D. The engagement partner

58. If a change in the type of engagement from higher to lower level of assurance is not justified, the auditor should:

A. Qualify the report on the original engagement.

B. Continue with the revised engagement, but make explicit reference about the original engagement.

C. Refuse to agree to management’s request on the change of engagement and continue with the original engagement.

D. Withdraw from the engagement.

59. According to PSA 315, the scope of the audit engagement includes the following, except:

A. The financial reporting framework on which the financial information to be audited has been prepared, including any need for reconciliations to another financial reporting framework.

B. The entity’s timetable for reporting, such as interim and final stages.

C. Industry-specific reporting requirements, such as reports mandated by industry regulators.

D. The expected audit coverage, including the number and locations of components to be included.

60. Tests of controls may include the following, except: A. Reperformance of internal control procedures.

B. Inquiries about, and observation of, internal controls which leave no audit trail.

C. Inspection of documentary support for transactions evidencing authorization.

D. Analytical procedures involving comparison of operating expenses with budgeted amount.

(12)

61. The scope of substantive tests as compared to the scope of tests of controls generally vary:

A. In a parallel manner. C. Directly.

B. Inversely. D. Equally.

62. If the auditor uses the primarily substantive approach instead of the lower control risk approach:

A. A higher level of understanding of internal control is required. B. The auditor plans to assess control risk at a lower level.

C. The auditor plans heavier reliance on substantive tests. D. The auditor plans to restrict substantive tests.

63. “Physical examination” is the inspection or count by the auditor of assets such as:

A. Cash or inventory only.

B. Cash, inventory, cancelled checks, and sales documents.

C. Cash, inventory, securities, notes receivable, and tangible fixed assets.

D. Cash, inventory, cancelled checks, and tangible fixed assets.

64. Which of the following methods is considered the best combination in obtaining audit evidence assuming documentary evidence is available to the auditor?

A. Inspection and Reperformance. B. Observation and inquiry. C. Inquiry and inspection.

D. Inquiry and analytical procedures.

65. The most difficult type of misstatement to detect is fraud based on A. The over-recording of transactions.

B. The non-recording of transactions. C. Recorded transactions in subsidiaries. D. Related party receivables.

66. During audit planning, an auditor and his client agreed on a timetable for the preparation and delivery of the audit schedules and reports needed by the auditor in the conduct of his engagement. The deadline arrived and still the client was not able to give the auditor the needed schedules and reports. Accordingly, the auditor should:

A. Issue a qualified opinion or disclaimer of opinion due to a scope limitation.

B. Prepare his/her own audit requirements, notwithstanding the self-review threat created.

C. Withdraw from the audit and issue a memorandum stating the reasons thereof.

D. Agree on a revised timetable within which the requirements are to be prepared by the client.

67. (Glossary) An approximation of the amount of an item in the absence of a precise means of measurement:

A. Professional judgment C. Scope limitation B. Analytical procedures D. Accounting estimate

68. Material errors which occur in the accounting process may not be detected by the auditor in his examination of the firm is quite a big risk. In order to minimize this risk, the auditor relies on:

(13)

A. Compliance tests. C. Substantive tests.

B. Internal controls. D. Statistical risk analysis. 69. Assertions are representations of management that are embodied in

financial statement components. They can be either explicit or implicit. Which of these assertions is not about valuation or allocation?

A. Notes payables in the balance sheet include all such obligations of the entity.

B. Trade accounts receivables in the balance sheet are stated at net realizable value.

C. Property is recorded at historical cost.

D. Property cost is systematically allocated to appropriate accounting period.

70. Which of the following would most likely cause a CPA not to accept a new audit engagement?

A. a high level of client business risk.

B. being approached by the client just before the fiscal year end. C. concluding that there was a high inherent risk of management fraud.

D. lack of adequate knowledge of the client’s business.

71. Which of the following topics is not normally included in an engagement letter?

A. The auditor’s preliminary assessment of internal control. B. The auditor’s estimate of the fee for the engagement.

C. Limitations on the scope of the engagement.

D. A description of responsibility for the detection of fraud.

72. When performing analytical tests, a CPA is least likely to compare the current year’s balances or ratios to expectations derived from:

A. informed judgment C. industry data B. budgetary data D. unaudited data

73. A preliminary or entrance conference with the auditee is a useful step in avoiding misunderstandings. Which of the following items is usually not covered in a preliminary conference?

a. Special problems known to be relevant to the audit.

b. Extent to which the independent auditor will need assistance and cooperation from the organization’s personnel.

c. Condition of accounting records and other data sources which may affect the scope of the audit and difficulty of completion.

d. Audit program to be followed. 74. The term incoming auditor refers to:

I. The auditor of the financial statements of the current period, where either the financial statements of the prior period have been audited by another auditor (i.e., successor auditor)

II. The auditor of the financial statements of the current period, where the audit is an initial audit engagement.

A. I only C. Both I and II

B. II only D. Neither I nor II

75. The record of work performed, results obtained, and conclusions the practitioner reached:

A. Engagement documentation C. Engagement letter

(14)

76. This refers to the gathering of professionals which shall include among others, workshops, technical lectures or subject matter meetings, non-degree training courses and scientific meetings.

A. Seminars. C. Meetings.

B. Conventions. D. Professional gathering. 77. Lorie, CPA, is planning the audit of ABC Manufacturing, Inc., a

medium-sized manufacturing concern with less than one hundred (100) shareholders, which one of the following areas would require the least amount of audit time?

A. Revenue. C. Liabilities.

B. Assets. D. Owners’ Equity.

78. Baby James, CPA, is performing pre-engagement activities. Which of the following must Baby James obtain from his predecessor, prior to the acceptance of the engagement?

A. Analysis of income statement accounts. B. Analysis of balance sheet accounts.

C. All matters of continuing accounting significance. D. Reason for the change in auditors.

79. Which of the following statements is incorrect?

A. A component is a division, branch, subsidiary, joint venture, associated company or other entity whose financial information is included in financial statements audited by the principal auditor. B. An error is an unintentional fraud in the financial statements, while

fraud is an intentional error by one or more individuals, among management, employees, or third parties, which results in a misrepresentation of financial statements.

C. An expert is a person or a firm possessing special skill, knowledge and experience in a particular field other than accounting and auditing.

D. One procedure an auditor considers using is inquiry, which consists of seeking information of knowledgeable persons inside or outside the entity.

80. Peter Etcetera, CPA, has performed analytical procedures during the audit of the 2010 financial statements of SQUIZ COMPANY. Which of the following would be a possible reason why Peter performed analytical procedures?

A. Peter believes that their use can be less effective or efficient than tests of details in reducing detection risk for specific financial statement assertions.

B. Peter is trying to form a conclusion as to the effectiveness of the internal control system of Squiz Company.

C. Peter is about to write his report on the fairness of the internal control system of the company.

D. Peter is obtaining an understanding of the business and identifying areas of potential risk.

81. The phrase “the report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.” should be construed to require:

A. An implied measure of fairness. B. A statement of fact by the CPA.

(15)

C. An objective measure of compliance. D. An opinion by the auditor.

82. A CPA must earn at least 60 credit units for three years, with a minimum of 15 credit units earned per year. Excess credit units, if any, shall not be carried over to the next three-year period except:

A. Credit units earned for authoring an article of national significance. B. Credit units earned for serving as professorial chair.

C. Credit units earned for an invention of significance to the profession.

D. Credit units earned for doctoral or masteral degrees.

83. Tomahawk Corp. orally engaged Indian & Co., CPAs, to audit its financial statements. Tomahawk’s management informed Indian that it suspected that the accounts receivable were materially overstated. Although the financial statements that Indian audited did, in fact, include a materially overstated accounts receivable balance, Indian issued a standard unqualified report. If Tomahawk sues Indian for negligence in failing to discover the overstatement, Indian’s best defense would be that:

A. Indian had signed no engagement letter.

B. Indian performed the audit in accordance with PSAs. C. Indian was not in privity of contract with Tomahawk.

D. Indian did not perform the audit recklessly or with an intent to deceive.

84. S1 The auditor cannot assume that an instance of fraud is an isolated occurrence.

S2 If the auditor believes that a misstatement is or may be the result of fraud, but the effect of the misstatement is not material to the financial statements, the auditor evaluates the implications, especially those dealing with the organizational position of the individual(s) involved.

A. True, false C. True, true

B. False, true D. False, false

85. This term means to identify and analyze the relevant issues, including performing further audit procedures as necessary, to come to a specific conclusion on a matter.

A. Investigate C. Assess

B. Express D. Evaluate

86. The following statements relate to Republic Act No. 9298. Which statement is correct?

A. The Board of Accountancy has the authority to remove, after due process, any member of the Professional Regulation Commission for negligence, incompetence or any other just cause.

B. The functions of the Board of Accountancy include the preparation of the contents of the CPA licensure examination and the rating of examination papers.

C. After two years, subject to certain conditions, the Board of Accountancy must order the reinstatement of a CPA whose certificate of registration has been revoked.

D. Insanity is a ground for issuing a certificate of registration to a successful CPA candidate.

(16)

87. Jackson, CPA, has just concluded a meeting with Michael Company, a prospective client. Unfortunately, Jackson believes that an understanding with Michael has not been established. In this case, Jackson should ordinarily:

A. Perform the engagement with increased professional skepticism. B. Decline to accept or perform the engagement.

C. Assess control risk at a HIGH level and implement the primarily substantive audit approach.

D. Modify the assessment of control risk due to fraud.

88. Which of the following situations apply to errors as well as to fraud? A. Mathematical or clerical mistakes in the underlying records &

accounting data.

B. Misinterpretation of facts.

C. Misapplication of accounting principles.

D. Suppression of the effects of transactions from records or documents. 89. Which statement is incorrect?

A. A review involves the application of audit skills and techniques and the gathering of evidence.

B. A review comprises inquiry, confirmation, and analytical procedures which are designed to review the reliability of an assertion that is the responsibility of one party for use by another party.

C. In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing expertise.

D. No assurance is expressed in a compilation engagement, but users of compiled information still derive some benefit, because the service has been performed with due professional skill and care.

90. Which of the following factors or conditions is an auditor least likely to plan an audit to discover?

A. Financial pressures affecting employees. B. Inadequate monitoring of significant controls. C. High turnover of senior management.

D. Inability to generate positive cash flows from operations.

91. A set of guidelines not having the authority of standards defined by an authoritative body at a national level and commonly applied by auditors in the conduct of an audit, review, other assurance or related services.

A. Framework of Assurance Engagements C. Code of ethics B. National practices D. PAPS

92. Material misstatements due to fraudulent financial reporting often result from:

A. An overstatement of revenues (such as premature revenue recognition) B. An understatement of revenues (such as shifting income to a later

period)

C. Both a and b D. Neither a nor b

93. (Glossary) The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties, in an arms’ length transaction:

A. Fair value C. Net realizable value

(17)

94. Describes the role of persons entrusted with the supervision, control and direction of an entity.

A. Management C. Audit committee

B. Governance D. Steward of company resources 95. This exists when other information (such as those presented in an

annual report) contradicts information contained in the financial statements.

A. Material misstatement of fact C. Material misstatements B. Material scope limitations D. Material inconsistency 96. What threat to independence is created when the same senior personnel

are used for assurance engagements over a prolonged period? A. Self-review threat C. Advocacy threat B. Intimidation threat D. Familiarity threat

97. The following are examples of the type of information that may come to the auditor’s attention which might indicate that noncompliance with laws or regulations has occurred. One of them is not. Identify the exception:

A. Media comment.

B. Industry is regulated by various government agencies.

C. Unusual payments in cash, purchases in the form of cashier’s checks payable to bearer or transfers to numbered bank accounts.

D. Payments without proper exchange control documentation.

98. Audit risk has three components: inherent risk, control risk, and detection risk. The following statements pertain to these components. Which one is incorrect?

A. The acceptable level of detection risk is inversely related to the combined assessed levels of inherent risk and control risk.

B. The higher the assessment of inherent and control risks, the lower the detection risk that can be accepted by the auditor.

C. Detection risk cannot be changed at the auditor’s discretion.

D. The auditor considers the combined assessments of inherent risk and control risk in order to determine the level of detection risk which may be accepted.

99. Which of the following statements is not true regarding the appropriateness of audit evidence?

A. Relevance is enhanced by an effective information system. B. To be appropriate, evidence must be both valid and relevant.

C. Validity is related to the quality of the client’s information system. D. Relevance must always relate to audit objectives.

100. Which of the following is most likely a quality control procedure on client acceptance and continuance?

A. Designate individuals as specialists to serve as authoritative sources.

B. Periodically counsel personnel as to their progress and career opportunities.

C. Evaluate clients upon the occurrence of specified events to determine whether the relationships ought to be continued.

D. Provide adequate supervision at all organizational levels, considering training, ability and experience of personnel assigned in engagements.

(18)

101. Family and personal relationships between a member of the assurance team and a director, an officer or certain employees, depending on their role, of the assurance client create:

A B C D

Self-interest threat No Yes No Yes

Self-review threat Yes No Yes Yes

Intimidation threat No Yes Yes Yes

Familiarity threat Yes Yes Yes No

102. A client company has not paid its 2009 audit fee. Ethically speaking, for the auditor to be considered independent with respect to the 2010 audit, the 2009 audit fee must be paid:

A. Before the 2010 audit work is completed. B. Before the 2010 audit work is started. C. Before the 2010 report is issued. D. On the date of the 2010 audit report.

103. Engagement quality control reviewers consider:

A. The work has been performed in accordance with GAAP.

B. Consultation with experts has been made for all phases of the engagement.

C. The work performed supports the conclusions reached and is appropriately documented;

D. Whether the system of quality control is operating effectively and adequately.

104. Ethically, an auditor could:

A. Base his audit fee on a percentage of the proceeds of his client’s share issue.

B. Advertise only as to his expertise in preparing tax returns. C. Own preference shares in a corporation which is an audit client.

D. Perform an examination for a financial distressed client at less than his customary fees.

105. A professional accountant who does not consider and apply the guidance included in a relevant Practice Statement should be prepared to:

A. Explain to the Board of Accountancy tribunal why the practice statement was not complied with

B. Bear the consequences of such non-compliance, such as suspension or revocation of license, plus imprisonment of not more than two (2) years.

C. Face the shareholders of the entity, and explain in the meeting why such practice statement was not complied with, provided that the explanation is also put in writing, and signed in the presence of the Chairperson of the Auditing and Assurance Standards Council.

D. Explain how the basic principles and essential procedures in the Engagement Standards addressed by the Practice Statements have been complied with.

106. A requirement of the application of PSAs is for the auditor: A. Not to obtain clients by solicitation.

B. To undertake a proper study and evaluation of the existing internal control.

C. To charge fees fairly and in relation to time and cost of the engagement.

(19)

D. To inspect all fixed assets acquired during the year.

107. Generally, advertising and publicity in any medium are acceptable provided (select the exception):

A. It has as its objective the notification to the public or such sectors of the public as are concerned, of matters of fact (e.g., name, address, contact numbers, services offered) in a manner that is false, misleading or deceptive

B. It is in good taste

C. It avoids frequent repetition of, and any undue prominence being given to the name of the firm or professional accountant in public practice D. It is professionally dignified

108. Which of the following is allowed under the revised rules on advertising?

A. Publishing services in billboard (e.g., tarpaulin, streamers, etc.) advertisements

B. Using words or phrases which are hard to define and even more difficult to substantiate objectively

C. Giving too much emphasis on competitive differences D. None of these are allowed forms of advertising.

109. Asser Tamayo, CPA, has listed his practice in a directory. Which of the following cannot be included in the listing?

A. Complete name

B. Address and contact number

C. Professional description and services offered

D. All of these may be included in the directory listing.

110. Antonio, CPA and partner of Dayag and Lee auditing firm, is being interviewed by Chris Espenilla, CPA in his noontime business show, “Chris per Minute”. During the course of the interview, which of the following responses by Antonio would most likely be construed as a violation of the Code of Ethics and the revised rules on advertising?

A. “Derivatives require higher accounting knowledge, but they are relatively easy with study and practice.”

B. “PFRS No. 3 covers business combinations. It has been the recent subject of the IASB Improvements Project.”

C. “Alright, I would be more than willing to entertain accounting questions from the audience.”

D. “Dayag and Lee offers audit and other assurance services, and also management consulting services, including creation and installation of accounting systems. Our clients account for 35% of the total audit market. Our clients include top universities and manufacturing companies in the Luzon area.”

111. A violation of the profession’s ethical standards would most likely occur when a CPA who

A. is also admitted to the Bar represents on letterhead to be both an attorney and a CPA.

B. Writes a newsletter on financial management also permits a publishing company to solicit subscriptions by direct mail.

C. is controller of a bank permits the bank to use the controller’s CPA title in the listing of officers in its publications.

(20)

112. In using a general model for making ethical decisions, the CPA should do all of the following except

A. Gather or identify all the relevant facts about situation that raises the ethical issue.

B. Consider the alternative course of action.

C. Consider the possible consequences of some of the courses of action. D. Select a course of action from among the alternatives.

113. Which of the following is not a potential benefit of having the auditor provide both auditing and consulting services to the client?

A. as a consequence of the knowledge gained during the audit, the auditor can provide the consulting services more efficiently than an outside consultant

B. information acquired during the course of the consulting engagement may help in the planning and performing of the audit

C. systems designed by the auditor as part of a consulting engagement do not need to be audited as carefully as systems designed by an outside consultant since the auditor has prior knowledge of their reliability D. consulting practice increases the auditor’s understanding of the

client and the client’s industry, This understanding reduces the potential for an audit failure

114. The accounting firm of Dawson and Creek, CPAs, is negotiating a fee with ABC Company, a new audit client. ABC is in a high-risk industry. They agree as follows: Client will pay P75,000 if Dawson issues a clean, unqualified opinion, P50,000 if a qualified opinion is issued, P40,000 if an adverse opinion is issued and P10,000 if a disclaimer of opinion is issued. Is there a violation of the Code of Ethics?

A. No. The fees have been set in accordance with the Code of Professional Ethics.

B. Yes. It is a contingent fee arrangement.

C. Yes. The fees are not contingent, but they are inadequate in light of the risk involved. There might be a risk of a perception that the quality of work could be impaired.

D. No. The fees have been set in the proper manner, since an unqualified opinion demands more audit work to detect and adjust misstatements, while a disclaimer is not really an opinion, but a refusal to express an opinion.

115. CPA Ela Santos performs the audit of the local symphony society. Because of her good work, she was elected an honorary member of the board of directors. Ela will not be considered independent unless:

A B C D

- The position is in fact purely honorary Yes Yes Yes Yes - Listings of directors show she is an

honorary director.

No Yes Yes No

- She restricts participation strictly to

the use of her name. Yes No Yes No

- She does not vote or participate in

management functions Yes Yes Yes Yes

(Numbers 116 and 117) Antonio “Tony” Jaramillo, a retired partner of your CPA firm, has just been appointed to the board of directors of Honey Corporation, your firm’s client. Tony is also an ex-officio member of your firm’s income tax advisory committee which meets monthly to discuss income tax problems of

(21)

the partnership’s clients, some of which are competitors of Honey Corporation. The partnership pays Tony P1,500 for each committee meeting attended and a monthly retirement benefit, fixed by a retirement plan policy, of P10,000.

116. Based solely on the above information, would the above situation impair the appearance of the firm’s independence?

A. Yes, because Tony is still active with the firm as an ex-officio member of the income tax advisory committee.

B. Yes, because the intimidation threat created is so significant that no safeguard could eliminate or reduce the threat to an acceptable level. C. No, because Tony is already a retired partner of the CPA firm.

D. No, because Tony is only an ex-officio member of the firm’s income tax advisory committee.

117. What are the options available to Tony to remedy the situation described above?

A. Tony should ask that the audit client be given, consistently, a disclaimer of opinion.

B. Tony should either resign from the Board of Directors of Honey Corporation or cease his association with the accounting firm.

C. Tony should request that Honey Corporation place him in the company’s audit committee.

D. Tony should request the accounting firm to cease giving him P1,500 for each committee meeting attended.

118. GELAI, CPA, was requested to perform a review engagement for Beauty, Inc., a non-public entity. GELAI has an immaterial direct financial interest. In this situation, GELAI is:

A. Not independent, and therefore, may not be associated with the financial statements.

B. Not independent, and therefore, may not issue a review report.

C. Not independent, and therefore, may issue a review report, but may not issue an auditor’s report.

D. Independent because the financial interest is immaterial, and therefore, may issue a review report.

119. A public accounting firm would least likely be considered in violation of the independence rules in which of the following instances?

A. A partner’s checking account, which is fully insured by the Philippine Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services.

B. A manager of the firm donates service as vice-president of a charitable organization that is an audit client of the firm.

C. An attest client owes the firm fees for this and last year’s annual engagements.

D. A covered member’s dependent son owns stock in an attest client.

120. Rita, CPA is in charge of the audit of Mabuhay Resort, Inc. Seven young members of the audit firm’s professional staff are working with Rita on this engagement, all of which are avid divers. Mabuhay Resort owns two condominiums in Boracay, which it uses primarily to entertain clients. The controller of Mabuhay Resort has told Ms. Rita that her whole team is welcome to use the condominiums at no charge any time that they are not already in use. How should Rita, CPA, respond to this offer?

A. Rita should withdraw from the engagement due to a significant threat to independence.

(22)

B. Rita alone may accept the offer, but her staff may not use the condominiums.

C. Rita should decline the offer, both for herself and her staff. D. Rita may accept the offer, but only in favor of her staff; she cannot

use the condominiums because as partner, Rita will sign the report. 121. PSQC No. 1 requires complaints and allegations against the firm to be

dealt with appropriately. Complaints and allegations may come from:

A B C D

Firm personnel Yes No Yes Yes

Clients Yes Yes No Yes

Other third parties No Yes No Yes

122. A(n) ______________ auditor is one who is asked to replace an existing auditor:

A. Existing B. Predecessor C. Successor D. Proposed 123. Which of the following is not mandatory when performing an audit in

accordance with AASC-issued Engagement Standards (i.e., Philippine Standards on Auditing)?

A. proper supervision of assistants

B. efficient performance of audit procedures C. understanding the client’s internal controls D. adequate planning of work to be performed

124. Ordinarily, predecessor auditor permits the successor to review the predecessor’s working paper analyses relating to

Contingencies

Balance sheet

accounts Contingencies

Balance sheet accounts

A. Yes Yes C. No Yes

B. Yes No D. No No

125. Select the proper reply as to the allowable form of the understanding with a client when an audit is being performed

A. While preferably written, it may be oral: but in all cases it should be documented in the working papers.

B. While preferably written, it may be oral, in which case it need not be documented in the working papers.

C. The understanding must be obtained in written form and included in the working papers.

D. No requirement exists that the auditor obtain an understanding with the client.

126. S1 PSA 300 applies only to initial audits.

S2 An initial audit normally requires more time in obtaining an understanding of the entity and its environment.

S3 An initial audit requires consideration of internal control, while a recurring audit does not require such consideration.

A. True, true, true. C. False, true, false. B. True, true, false. D. False, false, false.

127. The primary objective of procedures performed to obtain an understanding of an entity’s control environment is to provide the auditor with:

Figure

Updating...

References

Updating...

Related subjects :