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(1)

CPA REVXEW SCHOOL OF THE

PHILIPPINES

Manila

AUDITING

THEORY

FIRST PREBOARD

EXAMINATIOII

SET

A

JULY

27,20L3

SATURDAY, 3:30PM

-

5:00PM

INSTRUCTIONS:

CHOOSE

THE

BESI"ANSWER FOR EACH OF

THE FOLLOWING.

FULLY SHADE ONLY ONE BOX FOR EACH

ilEM,

STRITI-LY NO ERASURES ALLOWED.

1.

The primary reason

for

an audit by ar, lndeperrdent, external audit

firm

is

to

A.

Relieve management

of

responsii:ili*y for

ihe

financial staternents

B.

Guarantee

thlt

there are no

missurternents

the

financial statements and ensure

that

any fraud

will

be discovered.

C.

Satisff

government regulatory requlrernents.

D.

providelncreased assurance

to

users as

to

the fairness of the financial statements'

2.

An independent auditor must have whicir of the following?

A.

A pie-existing and well-informed point of view

with

respect

to the

audit.

B.

A background in many different disciplines.

C.

Fxperience

in

taxatiorr

that

is

sufficiei"rt

to

comply

with

Philippine

Standards

on Auditing.

D.

Technical qualifications

to peform

an engagement.

3.

Which of the following statemenLs applies

to

consultation services engagements?

A.

A practitioner should obtain an understaniJing

of the

internal control

to

assess control risk.

B.

A practitioner is not permitted

to

compile a financial forecast.

C.

A practitioner is

to

maintain an appearance

of

independence.

D.

A practitioner should obtain sufficient relevant data

to

complete

the

engagement'

4.

Upon discovering material misstaterienLs

in a

client's financial statements

that the

client

would

not

revise,

a

predecessor auditor withdretv

from the engagement'

If

asked by the auditor about the termination of the engagement,

the

predecessor auditor should

A.

Indicate

that

a misunderstanding occurred'

B.

State

that

he/she found material misstatements

that

the client would

not

revise.

C.

Suggest

that the

auditor obtain the ellentk permission

to

discuss

the

reasons.

D.

Suggct

that

the auditor ask

the

client.

5.

An auditor is

planning

an audit

engagrment

for a

new

client

in a

business unfamiliar

to

the aud'rtor.

Which G

tne

least useful sotrrce

of

information

for the

auditor during

the preliminary planning stage when

the

aui";!:or is

trying

to

obtain

an

understanding

of

the entity and its environment?

A.

Inquiries

of

intemal auditing personnel.

B.

Observation of the entity's activities.

C.

Inspections

of

documented buslness plans.

D.

Results

of

performing substantive proredttrer.

6.

According

to

professional standards, analyl-ical procedures are least likely

to

be applied

to

A.

Plan an audit and assist in the finai revit'u,;.

B"

Test disclosures about rcportable operatinc segments.

C.

Compile financial statements.

D.

Review financial statements or int-erin: fiirancial informatlon.

(2)

cPA REVIEV\I SCHOOL OF THE PFITUPPINES (CPAR)

*

MANitA FTRST PR"EBOARD EHMIT{ATIOI{ AUDMI{G THEORY JULY 27. 2013 / SATURDAY

I

3:30PM

-

5:00PM

7.

Three

conditions

are

generally present

in

the clientt

organizaUon

when

fraud

occurs. Those conditions include each of the following except a/an

A.

Incentive

or

pressure

to

commit fraud"

B.

Professional skepticism about

the

likelihood of fraud.

C.

Attitude

or

rationalization about the act of ftaud.

D.

Opportunity

to

commit fraud.

8.

Internal auditing

can

affect

the

scope

of

the

external auditor's

audit

of

financial statements by

A.

Decreasing

the

external auditor's need

to

perforrn detailed tests.

B.

Eliminating

the

need

to

be on hand during

the

physical count

of

inventory.

C.

Limiting direct

testing by

the

external ar:ditor

to

assertions

not

directly

tested

by internal audiUng.

D.

Allowing the external auditor

to

limit

hislher audit

to

substantive testing.

9.

Which of the following is an unusual procedure

that

may be deemed necessary

to

discover the effect of a related-parlry transactir.,n?

A.

Inspect or

confirrr

the trcnsferabriify and value of collateral.

B.

Confirm

or

discuss

significant information

with

intermediaries,

such

as

banks, guarantors, or agents.

C.

Examine invoices and other pertinent docrrments such a receiving or shipping reports.

D.

Determine

whether

the

transaction has

bten

approved

by the

board

of

directors or other appropriate officials.

10.

In

evaluating

the

reasonableness

of

an

aecriunting estimate,

an auditor is

rnost likely

to

concentrate on key factors and assumptions

that

are

A.

Consistent

with

prior periods.

B.

Deviations

from

historical pattems.

C.

Similar

to

industry guidelines.

D.

Objective and not susceptible

to

bias.

11.

Directors, management, external auditors, and interrral auditors all play important roles in

creating proper control processes. Senior rnanagement is primarily responsible

for

A.

Establishing risk management and conftol processes.

B.

Implementing and monitoring controls clesigned by

the

board of directors.

C.

Ensuring

that

external

and

internal auditors

oversee

the

administration

of

risk management and control processes.

D.

Reviewing

the

reliability and integrity of financial and operational information.

L2.

Why do auditors generally use a sampline appr<iacl-r

to

evidence gathering?

A.

Auditors are

eryerts

and

do not

neecr

to loo( at

much

to

know whether

the

financial statements are correct

or

not.

B.

Auditors must balance the cost of

the

audit tt'ith

the

need

for

precision.

C.

Auditors must limit their exposure

to

their client

to

maintain Independence.

D.

The auditor's relationship

with

the cllent is generally adversarial, so

the

auditor

will

not have access

to

all of the financial inforrnation of the company.

13.

An

investor

is

reading

the

financial statements

cf the

Staquio Corporation

and

observes

that the

statements

are

accompanied

by

arr

auditor's

unmodified

report.

From

this,

the investor may conclude

that

A"

Any

disputes

over

significant

accounting issues

have been settled

to

the

auditor's satisfaction.

B.

The auditor is satisfied

that

Staquio

will

be hlghly profitable in the future.

C.

The

auditor

is

certain

that

Staquls's

financial statements

have been

prepared accurately and

that

all account balances are nrecisely correct.

D.

The auditor

has determined

that

Staquro's rnanagement

is not

qualified

to

lead the company.

Hindi ka pwedeng magrely TOTALLY dun sa mga natest na ng Internal Auditor, pero pwedeng LESS DETAILED na lang yung gawin mo.

(3)

cpA REVTEW SCHtr;L

iir

rHE pHIUppINES (CPAR)

-

MANIIS

FrRST PR.EBOAR.D EXAi'll1{ATrOt{

lUOmtte

tXeonv

JULY 27' 2013 / SATURDAY I 3:30PM

-

5:00PM

14.

With regard

t0

detecting fraud, auditing standards require auditors

to

A.

perform procedurei

designed

to

deteet af!

instances

of

fraud

that

rnight affect

the financial statements.

B.

Provide

reasonable

assu!'ance

that the

financial statements

are misstated hecause of fraud"

C.

Issue

an

unmodifled

opinion only when

the

auditor

is

satisfled

that

not

materially

no

instances

of

16.

fraud have occurred.

D.

Design

the

audit

program

to

meet financial staternent users' expectations concerning fraud.

15.

Internal

control

is

a

function

of

manaEement and effective control

is

based

upon

the concept

of

charge and discharge

of

resfionsibility and

duty.

Which

of

the following is one of

the

overriCing principics

cf

internal control?

A.

Responsibrliiy'

for

accounting

and

financial duties should

be

assigned

to

one responr;ible o.fflcer.

B.

Responslbilitr,,fcr

the

accgunting duties must be borne by the audit committee.

c.

Responsibilfi"y for

the

performance of each

duty

must be fixed.

D.

Responsibitity

for

accounting must be assigned only

to

honded ernployees'

When engageri

to

compile the financiai statements

of

an

entity,

an accountant is required

to

possesi

i

ievel

of

kncwledge

of

the

entity's

accounting principles and.

practices.

This requirement n;cst likely

will

inctude obtaining a general understanding of the

A.

Internal control awareness of

the

entity'.s senior management.

B.

Risk factors relating

to

misstaten'lents arising from lllegal acts'

C.

Design of

the

entity's internal controls innplemented.

D.

Nature of

the

entity's business transactions,

the

form

of

its accounting records and the accounting basis on which the tinancial inforrnation is

to

be presented'

Which

of the

foltowing

procedures

would

a

CPA

ordinarily perform when

reviewing the

financial statement*

of

'an

entity

'in

accordance

with

Philippine Standards

on

Review Engagenrents (PSRES)?

A. -Document whethen control risk is assessed at or below

the

maximum levei.

B.

Obtain an unierskrnding of the entity's internal control components.

c.

compare the fir.lancial statements

with

budEets or forecasts.

D.

Apply '/ear-encl cutoff tests for

the

sales and purchasing functions.

In

an assurancf; engagement,

the

responsible

pafi

and

the

intended users

A,

Should L're from different entities.

B.

Should be from the same entity.

C.

Are

both

responsible

for

determining

the

nature,

timing

and

extent of

the

procedures

to

be perf<lrmed.

D.

May be frocn the same entity or different entities.

The following

statements relate

to the

performance

of

an

assurance engagement other

than an

auclit

or

review

of

historical financial

information

iovered by

PSAs

and

PSRES.

Which is

incorrcd?

A.

Those

persons

who

are

to

perform

the

engagement should collectively possess

the

necessary professional contpetence.

B.

The assurance

repolt

should be in

writing

anri should contain a clear expression of the practitioner's concllision about

the subjerl

matter information.

C.

The

practitioner should consider nraieriality

and

assurance engagement

risk

when planning and performirrg an assurance engaqement.

D.

The prJditiorrer is

pn:ciuded

from

using

thi

work

of

persons

from

other

professional disciplines"

The

repori

on an

lgreed-upon

pnocerlures engagerTlent should contain

A.

An expre,ssioli

.if

positive assurance based'on

the

specific procedures performed. ''

B.

A statement that

the

auditor is independent of

the

entity. L7,

18.

19.

zCI.

(4)

cPA REVrn^/ SCHOOL OFTHE pHTUppINES (CPAR)

*

MANIT A EIRST PREBOARD EXAHITIATIO]I

AUDmNGJHEoRY ___:__

JiJty2Z 2013 { sATURDAyliJopM -i:00pM

C.

A general description of

the

procedures performed.

D.

Identification of

the

purpose for which the agreed-upon procedures were performed.

21.

which

of the following statements best descriSes a,ssurance services?

A.

Services designed

to

express

an

opinion

on the

fairness

of

historical

financial statements based on

the

results

nf

an aqrdit.

The

preparation

of

financial statements

or

the

collection"

classification,

and

surnmarization of other fi nancial information.

Independent

professional services

that

are

intended

to

enhance

the

credibility

of

information

to

meet

the

needs of an Intended user.

D.

SeEvices desiEned

for the

improvement of operations, resulting

in

better outcomes. Which of the following is not an overall objective of il're audltor in

the

aur"lit

of

revenues?

A.

To

identifu and interpret

significant

trenrls and

variaUons

in the

arnounts

of

various categories

of

revenue.

B.

To

veriff

that

earnecl re'renue

has been

recorded

and

recorderj revenue

has

been earned.

C.

To verify cash deposited during the year.

D.

To

obtain

an

understanding

of

internei ':ontrol and

assess

the

risk

of

material misstatement

with

particular

emphasis

cn the

use

of

accrual accounting

to

record revenue,

PSA

500

describes

five

qener".liizailrrns

ccncerning

the

i'eliahil;ly

of

evidence.

The situations given below indicate

the

relative degrees

of

assurance provided by

two Vpes

of

evidence

obtained

in

different

sitrrations.

Which

descrlbes

an

exr:eptrsn

tc

one

of

the genera!izations?

4.. The

schedule

of

insurance coverage

obtained

frorn the

company's insurance agent provides greater assurance than one pi'epared by ttre intenral arldit staff"

B.

The

report

of

an

expert

regardinE

the

valuation

of a

collection

of

paintings held as an investrnent provides

greater

assurance

than

&e

euditor's

physical obseryafion

of

the paintings.

C.

The

auditor's computation

of

interest payable

on

outstanding boncls provides greater assurance than reliance on the

clienfs

calculation"

D.

The

auditor has obtained greater

assurance abrout

tfre

balance

of

sales

at

Plant A

where he/she

has

rnade limited

tesG

cf

traneactiCIr,s

berause

of

effective

intemal ccrntrol than

at

Plant B where he/she has nraCe .:xtr:nsive

tes*;

of

t.an*ictions

because

of

lnerTective intemal controi.

In

confirming accounts

receivable,

an

auditor

decide.d

tn

crrniirm

r:ustorners' account balances

rather

than

indivlC*al

invcices,

ttuhieh

+f

:"lie firlicra:inq nnost

likely

will

be included wrth

tlte

.,::lienfs cr.rnfirntation leiter?

A.

An auditor-prepared

letter

expleininq

tiat

e

rtcnresl)onse rnay cause an inference

that

the account balance is correct.

B'

A

client-prepared

letter

reminding

the

:u.;tonrer

that

a

nonresflosrse

will

cause

a second request

to

be senr.

C.

An

auditor-prepared

letter

requesting

the

customer

to

supply

rnissing

and

incorrect inforrnatiorr direcfiy to

*re

alrriltor.

D.

A client-prepared statement

of

accourit shcwirrg

the

detaiiu

of the

customer's account balance.

Which of the following is usually included or shown in the.audit docu,'nentaUon?

A.

The

manner

in

which

exceptions

and

unusual matters

disclosecl

by the

audito/s

procedures were resolved or treated.

B.

The procedures used by

the

audltor

to

verifu

the

persc,nal

fi*anclal

stafus

of

members of

the clienfs

managernent team.

C.

Analyses

that

are <lesigried

to

be

a

pard:

of, or

a

subsxittite

fcr,

tlr*

clieinfs accounting records.

B.

23.

24.

25.

Mas reliable kung directly sa auditor talaga. Kahit pa vs expert.

(5)

26.

27.

29.

30.

31.

cPA REVIn/V SCHOOL OF THE PHIUPPINES (CPARj

-

l',i{NILA

FIRST PREBOARD EX/IMIiIATXOI{

Xffi;iirfl;#ffii

-'

'-"-*

'-

-

-

-^

--,

JULY

27' 20131sAruRDAY / 3:3oPM

-

s:00PM

D.

Excerpts

from

authoritative

pronouncernents

that

support

the

underlying

generally accep:ted accounting principles used in preparing the financial statements.

A company has computerized sales ancl cash receipts

journals.

The

computer programs

for

these journals have been properly

debugged.

The auditor discovered

that the total

of

the

accounts receivable subsidiary accr:unts differs materially from

the

accounts receivable control

account.

This discrepancy could indicate.

A.

Credit memoranda being improperly recorded,

B.

Lapping

of

receivable;s.

C.

Receivables not being properly aged.

D,

Statements being intercepted pr;or

to

mailing.

An

auditor is

reviewing

a

corporate client's statement

of

cash

flows.

The auditor

should expect

the

cash flows

to

be classifled according

to

A.

Operating activities, sources, and ures.

B.

Investing, financing, and operatlng activlties.

C.

Fund inflows and fund outflows.

D.

Cash inflows and cash outflows.

Zg.

What is

the

general character

of the work

conducted

in

performing

a

forensic audit

for

a company?

A.

Rroviding assurance

that

the finar*cial statenlents are

not

materially misstated,

B.

Detecting

or

deterring ftaudulent acilvity.

C.

ffieringln

opinion

in

tf,.

reliabilitr

ctthe

specific assertions made by management.

D.

Identiffing the

causes of an

entit/'s

financial difficulties.

which

of

the

following

characteristics

most likely

would

heighten

an

auditor's

concern about

the

risk

of

intentional manipulatinrr of financial statements?

A.

Turnover of senior acccunting personnel is low.

B.

Insiders recently purchased acJditional shares of

the

entity's stock.

C.

Management places substantial ernphasis on meeting earnings projections.

D.

The rate of change in

the

entity-s industry is slow.

Which

of

the

following

would an auditor

nnost

likely

use

in

determining

the

auditor's planning ;:nateriality?

A.

The anticipated sample size

for

slanned substantive procedures.

B.

The entity's annualized interim (i.e. qurartertry) financial statements.

C.

The results of

the

intemai contrc! questionttaire.

D.

The contents of

the

management represeniation letter.

Which of the following procedures wcuicl he$- detect a liability omission by rnanagement?

A.

Review purchase contracts and other" legal cocuments.

B.

Review articles

of

incorporation and colporate bylaws.

C.

Review and check mathematical accuratry of financial statements.

D.

Inquiry of senior support staff and recenfly depafted employees'

In

an audit of other assets, ail of the foliowing are done except

A.

Determining that

the

asset is

written off cn

a periodic basis.

B.

Determining whether

the

asset is fairiy presented in the financial statements.

C.

Confirming

that the

asset exicts'

D.

Determining

the

basis of

the

car"r"ryinq amount of the asset'

In

connection

with an audit

of the

prepairl

insurance

account, which

of

the

following procedures is usually not perfiormerl by tire autiitor?

A.

Recompute

the

portion of

the

premiilryr that expired during the year.

B.

Prepare excerpts

of

insurance pclici*s

for

audit documentation.

c.

confirm

premium rates

with

an i*dependent insurance broker.

D.

Examine support

for

premium pa;rnrant^e.

32.

(6)

cPA REVIEW SCflOOL OF THE PFIIUPPINES (CPAR)

-

MANiI-q FIRST PREBOARD

EXAIIII{ATIOI{

\

35.

AtlLIIItrGlH

-_-

IULY 27- 2013 / SATURDAY / 3:30PM

-

5:00PM

34.

On January

20,2014,

before

the

Balview Co. released its financial statements

for

the year ended December 31, 2013,

it

settled a long-standing

lawsuit.

A material loss resulted and no prior liability had been

recorded.

Hcw should

this

loss be disclosed

or

recognized?

A.

The

loss

should be

disclosed

in

notes

to

the

financial statements,

but the

financial statements themselves need not he adiusted"

B.

The

loss

should

be

disclosed

iR

en

emphasis

of

rnatter

paragraph

in the

auditot's report.

C.

No disclosure

or

recognition is rer;uired.

D.

The financial statements should be adjusted

to

recognize

the

loss.

Each

time

an auditor draws

a

concluslon based

cn

evidence

from a

sample, an additional rislq sampling

ris(

is

introduced.

An example of sanrpling risk is

A.

Drawing an erroneous conclusion ftorn sample data.

B.

Improperly applying a proper audit pr*cedure

to

sample data.

C.

Properly applying an improper audit procedure

to

sample data.

D.

Projecting

the

results of sampling beyon.d

the

population tested.

If

finaircial statements are

to

meet

the

requirernents of adequate disclosure,

A,

All

information pertaining

to

the

company

must be

disclosed

in

the

statements or

related notes, even

though

sornc

cf

the

disclosures

are

potentially detrimental

to

the company

or

its shareholders.

B.

All

information believed

by

the

auditor

to

be

essential

to

the

fair

presentation

of

the

financial statements

must

be

dlsclosed,

no

matter how

confidential

management believes

the

data

to

be.

C.

A

statement note must clearll.

deGil statements themselves.

D.

Statement

notes should

be

u;ritten misinterpretation by

the

reader.

The risk

of

material misstatement differs frorn detection risk in

that

it

A.

Arises from

the

misapplication

of

aucliting procedures.

B.

May be assessed in either quantiiative or qualitative terms.

C,

Exists independently of

the

actions of

ths

auditor.

D.

Can be changed at

the

auditor's dis:tetion.

Whlch

of

the following

procedures

would

mert be used

to

obtain

an

understanding

of

the

entity

and its environment?

A.

Obserye entrty operations.

B.

Reper:1'r:rnn e;rtity processss.

C.

Verifl7 proper valuation

of

inventory subject

to

technological obsolescence.

D.

Review prior year's audit

documentittion-Which

of

the following is

not

an

irnpertant consideration

in

an

auditor's evaluation

of

an entity's business risk?

A.

The specific business risks an

entity

faces

that

may result in financial statement errors and fraud.

B.

Business risk factors

that

impact

the

abliity

cf the

entity

to

be profitable and

sulive.

C.

Audit

standards include many

er:ti\i

hrisin*ss risk factors

that identiff

circumstances

that

increase

the

likelihood

of

rnatr.riai i"vtisstaternents.

D.

Audit

standards require

the

auditar

t,ei e'raluate

the

entity's

business

risk

in

order to

provide suggestions

to

impror.,e

thc

r:nUS's

profihbility.

A

practitioner's

repoft on

agree,J-iJpon pio{::edures related

to

an

entityt

compliance with specified requirements should contain

A.

A statement

of

restrictions on

the

use of

the

repoft.

B.

An acknowledgment

of

responsibrllty

f*r

the

sufficiency of

the

procedures.

C.

Negative assurance on compliance.

any

deficiencies

contained

in

the

financial

in

rr€ty

technical language

to

avoid

37.

38. 39. 40. 36. Going Concern <= pwedeng emphasis of mather kasi yun.

(7)

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D.

An

opinion about whether

the entity

complied,

in

all

material respects,

with

specified requirements.

4L.

Internal auditing rs a dynemic

profession,

Which of the foltowing best describes

the

scope

of

Internal auditirrE as

it

iras developed

to

date?

A.

Internal ouditing

involves evaluating

the

effectiveness

and

efficiency

with

which resources are ernPloYed.

B.

Internal

audltin_q'hai evolved

to veriffing the

existence

of

assets

and

reviewing the means of safeguarding assets.

C.

Intemal

auditing involves evaluatinE compliance

with

laws, regulations, and contracts. .

D.

Internal

auditiig

has

evolved

td

evaiuating

all

risk

management,

control,

and governance processes.

42.

Which of the fcrllowing statements reflects an auditor's responsibility

for

detecting fraud?

A,

An auditor is

responsible

for

detecting employee errors and simple

fraud,

but

not for

discovering fraudulent acts involving

ehpbyee

collusion

or

management override.

B.

An

auditoishould

design

the

arrdit

to

provide reasonable assurance of detecting errors and fraud

that

are material

to

the financial statements.

C.

An

auditor

is

not

responsible

for

detecting

fraud

unless

the

application

of

auditing standards would result in such detection.

D.

An auditor should ptan the audit

to deted

fraud caused try departures

from

PFR.S.

43.

An auditor discovers

a

iixely

ftaud

during an

audit but

concludes

that the

overall effect

of

the

fraud

is

not

sufficiently rnaterial

io

affect

the

audit

opinion.

The auditor

should probably

A.

Disciose the fl"aud to

the

appropriate levei of

ttte

client's management.

B.

Disclose the fraud to appropriate authorities external

to the

client.

C.

Discuss

with

the

client

ihe

additionpl

audit

procedures

that will

be

needed

to

identifu

the

exaet amourtt of the fraud.

D.

Modiff the

ieudit program

to

inclucJe

tests

specificatly designed

to

identifu

the

fraud and its impact on the financial statennents.

44.

In

testing

plant and

equipngnt

baiances, an ai*ditor may physically inspect new additions listed 9n1he $:tmmary'of plant and equiprnent transactions

for the

year. This procedure

is-designed

to

obtain

.evidence

concel'ning

managennenfs

asseftions

about

classes

of

transactions and events, and specifically, which assertion?

A.

Occurrence.

B.

Cutoff.

C.

Authorization.

D.

Oassification.

45.

Ih

designing

written audit

prograrns,

an auditor

shoutd plan specific

audit

procedures

to

test

A.

TiminE of audit procedures.

B.

Cost-benefit of gathering evidence.

C.

Selected audit i:cctrniclues.

D.

Management asseftions.

46.

Which staternent concerning audit evidence is neit valid?

A.

The auditor is

seldom convinced heyorrd

all

cJoubt

with

respect

to

all

aspects

of

the

fi nancial statements being audited.

B.

The auditor performs tests

to

collect conrrincinE evidence

that the

financial statements are not misstated.

C.

The auditor weighs

the

cost of obtaining evidence

witlt

its usefulness'

D.

The auditor conliders

the

am,:unt

of

risk present in decldinE

the

nature and

extent

of

evidence

to

be collected.

Agreed-upon procedures ka lang, NO OPINION expressed.

________

persuasive

(8)

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47.

Which

of the

following statements is generally

corect

alrout

the

appl'c'prifit.€n'l:is

';f

audit evidence?

A.

The

more effective

the

internat conFol,

the

more

assurance

it

provides

about

the reliability of

the

accounting data and "4nancial statements.

B.

Appropriateness

of

audit

evidence

refers

to

the

amount

of

cc:'roborative evidence obtained.

C.

Information

obtained indirectly

frort

independent outside sources

is

more Bemuasive

than

the

auditor's clirect

persona! knowledge

obtained through

observation

and inspection.

D.

Appropriateness

of

aurllt evidence refers only

to

audit eviclence obtained

from

outside the entity.

,18.

Audit documentati6n

A.

Must be in electronic

fonn.

B.

Must be in

paperfonn

only.

C.

Is not

required,

but

is strongly recommended.

D.

May be in paper, elecfionic, or some

oiher

form.

49.

Based

on

cc,nversations

with the

ovJner-'manager

of

an

audit

client,

the

auditor ascertained

that the

cornpany's prirnary moflwatisn is

to

arloid pi:ving irrr:o,me taxes. Based

on

this

motivation, which account balanc* assei'ticn

fdr

enrJino inventoty vrrili

the

auditor

be most concemed abor.rt

veriffing?

A.

Existence or o€curence.

B.

Completeness.

C.

Rights and obligations.

D.

Observation.

50.

An

auditor's

conslderation

of

the

risk

of

rnaterial

misstatement

due

to

fraud and

tie

results of audit tests indicate a significant" nsk of

fraird.

"f,Fre aurlitor" orciinafily shot"lld

A.

Express either a qualified

oi'an

ad'yEersc cpinicn.

B.

Consider

withdrawing

from

the

engagernent

antJ

communiceting

the

reasons

for

withdrawal to

the

audit committee.

C.

Inform

proper authorities outside

the

entity.

D.

Express only an adverse opinion beeause

oi

Sre strong possittlli$, fraud.

51.

When

an

outside

expert

(sBecialist) has assumed

full

responsihiiit'y

for

taking

the

clienYs physical

inventory

reliance on the

experfs

report is acceptahie i'i

A.

The auditor

is

satisfied

through

application

of

apprcprlate

procedures

as

to

the reputation and cornpetence of

the

expert.

B.

Circumstarrces rnade

it

ir"npracticable

or

imposslble

for tire

aurliter

to

either do

the

work perconally or observe the work done by

the

in'ventory

fin:i

C.

The auditor

conducted

the

same

audit tests anrl

procedures

as would

have

been applicable if ttre client eniployees tool( $re nhysical

intertt,iry.

D.

The auditor's report contains a reference

ts

the ass;rnpiion of

fuil

:esoonsiDility.

52.

Internal

control can provide only reasanable assurancc

ot

achieving

enti$

obje$ives.

One fact"or limitlng the likelitiood of achieving those obiecttues in a srnalf

entity

is

that

A.

Effective separation of duties may not be feasibie.

B.

The aurJitor/s primary responsibility is the deteeXion of fiaud"

C.

The board

of

directors is active and intlependent.

D.

Management monitorc internal conh'ol.

53.

An abnonnal

fluctuatlon in

gross income

timt

miglrt

sugge*

the

nexd

f,:r

extended audit procedures

for

sales and inventories

w*uld

rnost likely be identJfietl in t-he planning phase of the audit by

the

use

of

A.

Tests of transactions and balances"

B.

A prelirninary review

of

internal controis"

(9)

54.

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D.

Analytical procedures.

An

auditor

is

required

to

establish

an

understanding

with

a

client

regarding

the responsibilities

for

each engagement.'This understanding generally includes

A.

Managemenfs responsibil,ty

h

gua::antee

that there are no

material

misstatements due

to

frauci.

B.

The

auditor's responsibility,

to

plan

and

perform

the

audit

to

provide reasonable,

but

not absolute, assurance of 'detecting rnaterial errors or fraud.

C.

Managemeni's ,esponsibility

for

prJ,,iding

the

auditor

with

an assessment of

the

risk

of

material misstatement due to fraud.

D.

The auditor's responsibility for the fairness of the financial statements.

Analytical

procedures

performed

in

the

overall review stage

oi

?n audit

suggest

that

several accounh;

have'unexpected

relationships.

The

results

of

these

procedures most likely would indlcate

that

A.

Fraud exists within

the

relevant accounts.

B.

Internal control activiUes are not operating effiectively'

C.

AdcJitional tests of details are required.

D.

The communication with

the

audit comrnittee should be revised.

The audit

client's board

of

directors and audit committee refused

to

take

any action with respect

to

an

immaterial illegal

act which was brought

to their

attention by

the

auditor' Because

of their

failure

to a&, the

auditor withdrew-from

the

engagement'

The

auditor's decision

to

withdraw was prirnarily due

te

doubts concerning

A.

Adequate financial statement disclosures.

E.

Compliance with

the

statutory laws and regulations.

C.

Scope limitatlcns resulting from

their

inaction.

D.

The integrity

of

management.

An entity's

financial statements

were

misstated

over

a

period

o!

.V9ars

due

to

large amounts

of

revenue being recorded in

journal

entries

that

involved debits and credlts

to

an

illogical combination

of

accounts.

-fhe

auditor could most likely

have been

alefted to

this

fraud

iry

A,

Scanning

the generaljournal for

unusual entries.

B.

Perforrning a revenue cutoff

test

at year-end.

C.

Tracing a sample of journal entries

to the

general ledger'

D.

ExamiiinE documenlary evidence of saies returns and allowances recorded after year-end.

In

conecl

order, general types of audit tests include

A.

Substantive'piocedures, tests

of

controls, and risk assessment procedures.

B.

Substantive procedures, risk assessment procedures, and tests

of

controls.

C.

Risk assessmerrt procedures, tests of controls, and substantive procedures.

D.

Risk assessrnent prr:cedures, substantive procedures, and tests of controls'

In

connection

with the

examirration of fin.lncial statements by an independent auditor, the client suggests

that

members of

the

internal audit

staff

be utilized

to

minimize audit costs. Which

of

the

foltovring tasks could most appropriately

be

delegated

to the

intemal

audit

stafP

A.

Selectiorr

of

accounts receivable

fbr

corrfirrnation, base.d

upon

the

internal

auditor's

judgnient

as

Lo

how

many

accounts

and which

accounts

will

provide

sufficient covere{]e.

B.

Preparution of schedules

for

negative accounts receivable responses'

C.

Evaluation of

the

internal control

for

accounts receivable and sales.

D.

Determination of the adequacy of

the

allowance

for

doubtful accounts' 55.

56.

57.

59. 58.

(10)

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60.

Alfonso

Company

uses

its

sales

invaices

for

posting

Eerpetual

lnventory

records. Inadequate

control

activities

over

the

lnvoicing

function allow

goods Eo

be

invoiced

that

are not shipped. The inadequate control activities could cause afi

A.

Understatement

of

revenues, receivahles, and inventory.

S"

Overstatement

of

revenues and receivables and an undersLaternent

of

inventory.

C.

Understatement

of

revenues and receivables and an overstatement

of

inventory.

D.

Overstatement

of

revenues, receivables, and inventrrry.

61.

Auditors

are

more

concerned

with the

occu!'rence

assertion

for

revenues

than

the

completeness assertion because

A,

Ciients are more likely

to

overstate than undemtate revenues.

B.

Clients are more likely tcr understatr, th,tn ove'state revenues"

C. It

is difEcult

to

detennine when services have b,een pefformed.

D.

The allowance

for

doubtful accounB often is understated.

62.

Which

of

the

fnllowinq activities

r":,o::t

likely would detect whetl,er payroll data

are accurately' pr*cessed?

A.

Monitor authorized distribution of data control sheets.

B.

[.lse test data

to

verifo the accurate

perfrrnance of

payroll processinE.

C.

Examine source documenb

for

approval by superuisors.

D.

Segregate duties between approval

of

hereiware and software specifications.

63.

The

cutcff

assertion

for

prepard insurar:ce

A.

Is

never tested beCause amounE; atysays are inrrnaterial.

B.

Is

best tested as part

sf

the testing

of

propefry and equipment purchasing.

C.

Is

best tested exclusively by sending eonfinnations to venciors.

B,

is

best tested by recomputing

the

unexpiretl portion

of

insurance policies in effect.

ffi.

Due

to

a

vreakness observed

in

rnt*mal

eenEol

over

recordlnq retrrements

r:f

eguipment, the auditor rnay decide

to

A.

Inspecr certain items

of

equipnrent

in the

plant and

h'ace

those items

to

the accountlnE records.

B.

Rerrlevr

the

subsidiary ledger

to

ascertain

wh,,r$er

depre:iatiein

was taken

on

each item

of

equipment during the year.

C.

Trace additions

to the

"other

assets" account

to

search

fer

e,quipment

that

is still

on hand

but

no longer is being ursecl.

D"

S,elect certain items

of

equipment fronr

the

accci.rnting reccrdr; ancl locate

them

in the plant.

65.

An

auditor

testing long-term

investrnenis wo,.lld rrrdlnarlly

use

suLrstantive analytical proceclures as

the

pnrrrary au'Jlt eviilerr,€

lo

support

the

reasonable:ress of the

f'.

Vaiuatisn

of

marketable equity securities.

B.

Classification

of

gairrs and losses on the disposal of seeurities.

C.

Completeness

of

recorded investment income.

D.

Existence and ownership

of

invesffirents.

66.

When a question arises abourt an

entity's

continued existenc;e,

tire

auditor should consider factors tending

to

mitigate

the

significnnce

of

negatirie inrorrnation conceming

the

entity's means

for

maintaining adequate eash flow. An exarnple of such a factos" is the

A"

Possibility

of

purchasinE ceftain assets rafher

ti\an

leasing

ther,.

B.

Capability of exten-ding

*re

elue elates of existlng debt.

C.

Appropriateness

of

changing

deprccleiion

methods ftosrr double declining balance

to

straight line.

D.

Marketability

of

property and equiprnenrt

that

riranagenierrt plan* Lo keep.

67.

Con'rpilations provide which of

the

following typ€s

uf

assurance ahout

file

fair

presentation af fi narrciai statemenE?

(11)

68.

69.

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74.

B.

Negative assurance.

C.

Limited assurance.

D.

Reasonable assurance.

The party responsible

for

assurnptlcns identified in

the

preparation

of

prospective financial statements is usual$

A.

A

third-party

lending institution"

B.

The client's management.

C.

The repofting accountant.

D.

The client's indepenrJent auditor.

For

a

prar.titioner i:c examine rnanagement's asseftions ahout

the

effectiveness

of

internal controls, sll of

ti:*

following conditions are

necessry

except

A.

Suffici+nt ctirnpetent evidence can be developed

to

support the evaluation.

B"

The

practitioner

must

have already concluded

that the

financial statements are fairly presented in accordance

with the

applicable accounting framework.

C. 'ihe

eni:ity's management

accepts'iesponsibility

for

the

effectiveness

of

its

intemal control.

D"

AII of the conditions above arft necessary. Absoiute assurance is provldeo

for

in

A.

An audit engagement.

B.

A compilation engagement.

C.

A review engsgement,

D.

None

ofthe

above.

Which of the following statements about

the

study of auditing is

not

trule?

A.

The

study

of

aud"iting

can

be

valuable

to

future

accountants

and

business decision makers whether

or

not

they

plan

to

become auditors.

B.

The study

of

auditing

focuies on

learning

the

analytical and logical skills necessary

to

evaluate

the

relevance and reliabiliQr

of

informaUon.

C.

The

study

r:f

auditing

focuses

on

learninE

the

rules,

techniques,

and

computations requirecl

to

analyze financial statements.

D,

T5g

$udy uf

auditing begins

with the

understanding

of

a

coherent logical framework and technitrues us"fu]

for

gathering and

analping

evidence about others' assertions.

7L,

72.

The basic pi.it"pose of a financia! statement audit is

to

i:

ffi13':,,:L;iduat

transactions so

that the

auditor may certify as

to

their validitv'

C,,

provide assurance regarding whether

the clienfs

financial statements are fairly stated'

D.

Assure

the

consistent appticatien

of

correct accounting procedures.

73.

An auditor who accepts an audit enEagement and does

not

possess expeftise

with

respect

to the

business entity's industry, should

A.

Engage financial experE familiar

with the

nature of

the

business entity.

B.

OUtain a knowledge

of

matters

that

relate

to the

nature of the entity's business.

C.

Refer

a substantiil

portlon

of the

audit

to

another CPA,

who

will

act

as

the

principal auditor.

D.

First inform management

that

an unmodified opinion cannot be issued.

74.

Which

of the

follrwing

hest describes

why an

independent

auditor

is asked

to

express an opinion oir i;he

fair

presentation of financial statements?

A. It

is cifficult

t*

prepare financial statements

that fairly

present

a

company's financial positiqn and casir flbws without the expertise of an independent auditor.

B. It

is

nranagement's responsibility

to

seek available independent aid in

the

appraisal

of

the

firiancial information shown in its financial statements.

C.

The opir:ion

of

an independent

party is

needed because

a

company

is not

llkely

to

be considered objective

with

resgrect

to

lts own financial

*atements.

(12)

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D.

It

is

a

customary couftesy

that

ail shareholders

of

a company receive an independent report on management's stewardship in managing the affairs of

the

business.

75.

Before accepting an engagement

to

audit a ne-w client, an

auditsr

is required

to

A.

Make inquiries of

the

predecessor auditor.

B.

Tel!

the

client

wheilier or

not the audrtor;s rarllling

to

issue a "clean" opinion.

C.

Prepare

a

memorandum setting

forth

the

stafhng requirements and documenting the prelimlnary audit plan.

D.

Become a member of the client's board of directorc"

76.

Enqagernent lefters include all of the following *<cept

A.

A tist of additional services

that will

be provided.

B.

A list of adjusting

joumal

entries.

C.

Inforrnation about

the

auclit fbe.

D.

Arrangements invohring

the

use of experts.

77.

All of

the

following refer

to

an inLer'na! auditoi"'s com$eitence except

A.

The party in the entity

tn

whicli

the

internal auditor reports.

ts.

The quality

of

internal audit documents and iepot'cs.

C.

Professicnal certification.

D.

Supervision and review

of

lnternal audit activities.

78.

Which of the following is

no*

a typlca! analytical pr":cedure?

A.

Study

of

relationshirs

or

the

financlal information

with

relevant

nonfinancial infornratian.

B.

Connparison of

the

financial

inforrratian with

sirnilar informatSon regarding

the

industry in which

ihe

entity operates.

C.

Comparison

of

recorded arnounts

of

majur disbursements

with

appropriate lnvoices.

D.

Cornparison of

the

financiat informatiorr

with

budgeted anroatnts.

79.

Reviewing notes paid

or

renewed

after

the

balance sheet date,

to

determine

if

there

are unrecorded iiahilitles at'7ear*end can hre used tcl test the assertion

of

A.

Existence.

B.

Cq:mr:leteness.

C.

Rights and obligations.

D.

Valuatlon and ailocation.

80.

A substantive strategy is

ffpically

used

to

audit stockholders'equity because

A.

The nunnber of ti'ansactions is snrall.

B.

Controls ever stockhclders' equity transaetions typically are weak.

C.

A relianr:e strategy is rn,,:st efficient.

D.

A substrantive strateqy likcly was used ln prior years"

Figure

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References

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