“Why won’t you choose me” – Best Answer ASSURANCE ENGAGEMENT What is an assurance engagement? a.
Assurance engagement enables the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. b.
Assurance engagement enables an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor's attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an identified financial reporting framework. Assurance engagement carries out those procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. d.
Assurance engagement means an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. Which of the following is not element of assurance engagement? a.
A third-party relationship involving a practitioner, a responsible party, and intended users; An appropriate subject matter; Suitable criteria; Sufficient appropriate evidence; and A written assurance report in the form appropriate to a reasonable assurance engagement or a limited assurance engagement. In an assurance engagement, the responsible party and the intended users a.
Are from different entities c.
May be (a) or (b) b.
Are from the same entities d.
Neither (a) or (b) In an assurance engagement, the person or class of persons for whom the professional accountant prepares the report for a specific use of purpose is the a.
Intended user Responsible party c.
Management Client An assurance engagement should have which of the following elements? a. b. c. d. Subject Matter Yes No Yes No Criteria No Yes Yes No The subject matter of an assurance engagement may include a. b. c. d. Financial Information Yes No Yes No Internal Controls Yes No No Yes Compliance with Regulation Yes No Yes No When performing an assurance service, professional accountants use standards or benchmarks to evaluate or measure the subject matter of an assurance engagement. These are referred to in the framework as a.
Criteria Norms c.
The following are characteristics of suitable criteria, except: a.
An assurance engagement should have the following elements? Neutrality Understanding a. b. c. d. Sufficient Appropriate Evidence Yes No Yes No Assurance Report, which can be oral No Yes Yes No The auditor’s report should be titled, and the title should include the word a.
The main purpose of implementing quality control policies and procedures is a.
To comply with regulatory agency To provide reasonable assurance that audit will be conducted in accordance with PSA To have a favorable peer review To standardize the policies and procedures of the audit firm The objectives of the quality control policies to be adopted by the audit firm will ordinarily incorporate a. b. c. d. Skills and competence Yes No Yes No Monitoring Yes No No Yes Professional Requirements Yes No Yes No Which of the following is an element of a CPA firm’s quality control system that should be considered in establishing its quality control policies and procedures? a.
Complying with laws and regulations b.
Using statistical sampling c.
Human resources Considering audit risk and materiality Which of the following is one of the elements of a CPA firm’s quality control system?
Complying with laws and regulations c.
Using statistical sampling techniques d.
Considering audit risk and materiality Ethical principles governing audit of financial statements do not include a.
Technical standards b.
Competence and due care d.
Professional responsiveness In planning an audit, the auditor should consider the presence of fraud risk factors relating to misstatements arising from (1) fraudulent financial reporting and (2) misappropriation of assets. In which of the following situations would the auditor most likely presume that a high risk of defalcation exists? a.
ABC Company is a multinational company that does business in various countries in the Asia-Pacific rim. DEF Company does business with related parties. c.
GHI Company has a cashier who also handles accounting and authorization functions. MNO Company is in an industry where the rate of change is very slow. Which of the following is an example of fraud? a.
Errors in the application of the accounting principles b.
Misappropriation of assets or group of assets Clerical error in accounting data underlying the financial statements 2 |
Misinterpretation of facts that existed when financial statements were prepared The major reason an independent auditor gather evidence is to a.
Detect fraud Form an opinion on the financial statements Evaluate management Evaluate internal controls In working with the bank reconciliation and the bank cutoff statement, the auditor finds that a prior check was not on the reconciliation as an outstanding check. This may be an indication of a.
Window dressing Lapping c.
Kiting An attempt to conceal a cash shortage Which is the appropriate timing of substantive test if the risk of material misstatement is low for an assertion? a.
All testing must be done for yearend balances Interim testing and yearend update No testing must be done Either a, b, or c
Philippine Accountancy Act of 2004 and its implementing Rules and Regulations, Continuing Professional Development Act of 2016 and its implementing Rules and Regulations, Rule 68 of the Securities Regulation Code, SEC Memorandum Circular No. 1, Series of 2018 and SEC Memorandum Circular No. 21, Series of 2016
Republic Act 9298 is known as the a.
Revised Accountancy Law Code of Ethics for Professional Accountants Philippine Accountancy Act of 2004 Philippine Accountancy Law of 2004 22.
Which of the following is not an objective of the Philippine Accountancy Act of 2004? 23.
The standardization and regulation of accounting education The examination for registration of certified public accountants The supervision, control, and regulation of the practice of accountancy in the Philippines The development and improvement of accounting standards that will be generally accepted in the Philippines Integration of Accountancy Profession V.
I, II, and IV II, III, IV, and V The practice in Accountancy includes c.
IV and V I, II, III, IV, and V I.
Practice in public accountancy Practice in education/academe Practice in the government Practice in commerce and industry a.
I, II, and IV II, III, and IV c.
I, II, and III I, II, III, and IV 24.
A CPA is in public accounting practice when he/she a.
Represents his/her employer before the government agencies on tax and other matters related to accounting b.
Holding out himself/herself as one skilled in the knowledge, science and practice of accounting, and as a qualified person to render professional services as a certified public accountant Teaches accounting, auditing, management advisory services, finance, business law, taxation, and other technically related subjects 3 |
Holds, or is appointed to, a position in an accounting professional group in government or in a government – owned and/or controlled corporation including those performing proprietary functions, where decision making requires professional knowledge in the science of accounting, The practice of accountancy includes the following except 26.
Practice in public accountancy Practice in education/academe Practice in the government Practice in commerce and industry, when the CPA is appointed as marketing manager of the enterprise CPAs firms and partnerships of CPAs engaged in the practice of public accountancy including partners and staff members thereof, shall register with the Commission and the Board, such a.
Two years on or before December 31 b.
Two years on or before September 30 Three years on or before December 31 Three years on or before September 30 27.
Which of the following has the power to conduct an oversight into the quality of audits of financial statements through the review of the quality control measure instituted by auditors? a.
Bureau of Internal Revenue b.
Securities and Exchange Commission Board of Accountancy Insurance Commission 28.
The Board of Accountancy shall be composed of a chairman and ________ members to be appointed by the ______________________. a.
6, President of the Philippines b.
5, President of the Philippines 6, Professional Regulation Commission d.
5, Philippine Institute of CPAs A member of the BOA shall, at the time of his/her appointment, possess which of the following qualifications? a.
Must be a natural-born citizen of the Philippines Must be a Filipino citizen Must be a citizen and a resident of the Philippines Must be a natural-born citizen and a resident of the Philippines The Auditing and Assurance Council (AASC) was established by the a.
PICPA PICPA and the Association of CPAs in the Public Practice International Federation of Accountants (IFAC) Professional Regulation Commission (PRC) upon the recommendation of the Board of Accountancy (BOA) 31.
Which of the following organizations is not directly/indirectly represented in the 15-member FRSC? a.
Bureau of Internal Revenue (BIR) Commission on Audit (COA) c.
Which of the following is the accredited national professional organization of CPAs? a.
Securities and Exchange Commission (SEC) Professional Regulations Commission (PRC) None of the above PICPA ASC c.
AASB FRSC 4 |
A certificate of accreditation shall be issued to CPA’s in public practice only upon showing, in accordance with rules and regulations promulgated by the Board and approved by the PRC, that such registration has acquired a minimum of ____ years meaningful experience in any of the areas of public practice including taxation. a.
3 years 5 years c.
12 years 1 year Based on RA 9298, how many years can a partner who survived the death or withdrawal of other partner(s) continue to practice under the partnership name after becoming a sole practitioner? 35.
1 year 2 years c.
3 years Indefinite period of time No person who has served two (2) successive complete terms shall be eligible for reappointment until the lapse of __________ year. a.
3 years c.
12 years b.
5 years d.
1 year No person shall serve the BOA for more than a.
3 years 5 years c.
12 years 1 year An applicant for the CPA licensure examination should be I.
A Filipino Citizen II.
Of good moral character A holder of the degree of Bachelor of Science in Accountancy a.
I and II only I and III only c.
II and III only I, II, and III Wendy just took the recently-concluded October 2017 licensure board examination for certified public accountants and obtained the following ratings: Subject 1 91.43 Subject 2 65.75 Subject 3 92.00 Subject 4 69.69 Subject 5 88.25 Subject 6 74.50 Subject 7 64.50 Average Based on the Implementing Rules and Regulations of Republic Act No. 9298 otherwise known as the Philippine Accountancy Act of 2004, what is the status of Wendy on the said licensure board examination? a.
Passed Failed c.
Conditioned None of the choices 40.
Any candidate who fails in 2 complete CPA board examinations shall be disqualified from taking another set of examinations unless he/she has completed at least how many units of subjects given in the licensure examination. a.
24 Which of the following is correct? a.
The Certificate of Registration issued to successful examinees is renewable every three years b.
The professional Identification Card issued to successful examinees shall remain in full force and effect until withdrawn, suspended, or revoked in accordance with RA 9298 c.
The BOA shall not register and issue a Certificate of Registration and Professional Identification Card to any successful examinee of unsound mind The BOA may, after the expiration of three years from the date of revocation of a Certificate of Registration, reinstate the validity of a revoked Certificate of Registration 5 |
How many credit units are earned by a CPA who serves as a resource at a CPD seminar? a.
60 CU per hour b.
5 CU per hour 3 CU per hour Full credit units for compliance period upon completion of degree How many credit units are earned by a CPA who serves as a resource at a CPD seminar? a.
60 CU per hour 5 CU per hour c.
3 CU per hour Full credit units for compliance period upon completion of degree Reymond, CPA is applying for renewal of his professional license. He is exempted from the CPE requirements a.
If he is at least 65 years old b.
If he is working abroad and he has been out of the country for at least two years immediately prior to the date of renewal. Either A or B Under no circumstances 44.
The statement of the Management’s Responsibility to accompany the financial statements to be filed with the SEC shall be signed by the I.
Chairman of the Board of Directors Chief Executive Officer Chief Financial Officer II and III only I only c.
I and Ii I, II, and III
Professional Regulatory Board of Accountancy Resolution No. 18, Series of 2018 and the Code of Ethics
The underlying reason for a code of professional conduct for any profession is a.
The need for public confidence in the quality of service of the profession That it provides a safeguard to keep unscrupulous people out c.
That it is required by legislation That it allows licensing agencies to have a yardstick to measure deficient behavior 46.
Which of the following statements best describes why the profession of CPAs has deemed it essential to promulgate a code of ethics and to establish a mechanism for enforcing observance of he code? a.
A distinguishing mark of a profession is its acceptance of the responsibility to the public A prerequisite to success is the establishment of an ethical code that stresses primarily the professional’s responsibility to client’s and colleagues c.
A requirement of most state laws calls for the profession to establish a code of ethics An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession
Fundamental Principles and Independence
Which of the following fundamental ethical principles prohibits association of professional accountants with reports, returns, communications or other information that is believed to contain a materiality false or misleading statement? a.
Professional competence and due care Confidentiality 6 |
According to the code of ethics, which of the following is not a fundamental principle? a.
Professional Competence and Due Care b.
Under the code of ethics, independence is most likely impaired when a.
An immediate family member of a member of the audit team is a director of the client b.
The firm purchases goods and services from the client c.
The firm prepares a client’s tax returns The firm and the client have an insignificant business relationship involving an immaterial financial interest
Threats to Fundamental Principles and Independence
Fundamental principles are potentially affected by I.
Self-interest threat Self-review threat Advocacy threat IV.
Familiarity threat Intimidation threat I, II, III, IV, and V I, II, III, and IV c.
I, II, and III I only Which of the following circumstance may create a self-interest threats for a professional accountant in public practice? a.
A financial interest in a client or jointly holding a financial interest with a client b.
Performing a service for a client that directly affects the subject matter of the assurance engagement Being threatened with litigation Acting as an advocate on behalf of an assurance client in litigation or disputes with the thirds parties The CPA has significant indirect financial interest on the Entity. The Entity engaged the CPA to apply agreed upon procedures on its accounts receivable and to submit a Report of Factual Findings to a particular financing company. According to the Philippine Standards on Related Services that applies to this engagement, the CPA. a.
Should decline the engagement because of lack of independence Should convince the Entity to change the engagement to compilation, due to lack of independence Can accept the engagement, issue the Report of Factual Findings and state the CPA’ s lack of independence d.
in the report Perform agreed-upon procedures and restrict the distribution of the report due to lack of independence Which of the following statements concerning publicity is incorrect? a.
Booklets and other documents bearing the name of a professional accountant and giving technical information for the assistance of staff or clients may be issued to such persons, other professional accountants or other interested parties Professional accountants who author books or articles on professional subjects may state their name and c.
professional qualifications; give the name of their organization; and give any information as to the services that the firm provides Appropriate newspapers or magazines may be used to inform the public of the establishment of new practice of changes in the composition of a partnership of professional accountants in public practice or of any alternation in the address of a practice A professional accountant may develop and maintain a website in the internet in such suitable length and style which may also include announcements, press releases, publications and such other necessary and factual information 7 |
The code of ethics for professional accountants in the Philippines provides the categories of threats that could compromise or could be perceived to compromise a professional accountant’s compliance with the fundamental principles. The threat that the professional accountant will not appropriately evaluate the results of a previous judgment made or service performed on which the accountant will rely when performing a judgment as part of providing a current service is called a.
Self-review threat c.
Advocacy threat b.
Self-interest threat d.
Intimidation threat 55.
Which of the following will not create self-interest threat to professional account in public practice? a.
The possibility of losing a significant client Direct financial interest in the assurance client Undue dependence on total fees from a client Preparing the original data used to generate records that are the subject matter of the assurance engagement Familiarity threat could be created under the following circumstances, except a.
A member of the engagement team is the spouse of the accounting manager of the client b.
A member of the engagement team is the spouse of one of the members of the Board of Directors of the client Senior personnel of the engagement team having a long association with the assurance client A professional accountant accepting gifts from a client whose value is inconsequential or trivial 58.
Which threat is present if an auditor promotes the position of the client in a specific situation? a.
Self-review threat c.
Advocacy threat b.
Self-interest threat d.
Intimidation threat What threats to independence are created when a contingent fee is charged by a firm in respect of an assurance engagement? a.
Self-review and intimidation threats Self-interest and advocacy threats Familiarity and intimidation threats Self-interest and self-review threats The following circumstances create advocacy threats for a professional account in public practice except a.
Promoting shares in an audit client b.
Acting as an advocate on behalf of an audit client in litigation or disputes with third parties Acting as campaign manager for the president of a client who is running for a public office A member of the assurance team having a significant close business relationship with as assurance client Intimidation threat a.
Is not a threat to independence Occurs when a professional accountant may be deterred from acting objectively and exercising professional skepticism by threats, actual or perceived c.
Occurs when, by virtue of a close relationship, a professional accountant becomes too sympathetic to the client’s interests Occurs when a professional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised After evaluating the significance of the threat created by an actual or threatened litigation, the following safeguards should be applied to reduce the threat to an acceptable level, except a.
Disclosing to the audit committee, or others charged with governance, the extent and nature of the b.
litigation If the litigation involves a member of the assurance team, removing that individual from the assurance team 8 |
Involving an additional professional accountant in the firm who was not a member of the assurance team to review the work or otherwise advise as necessary d.
Withdraw from, or refuse to accept, the assurance engagement The professional accountant should be constantly conscious of and be alert to factors that give rise to conflicts of interest. When faced with significant ethical issues such as identify unethical behavior or resolving an ethical conflict, the professional accountant should do the following, except a.
Follow the established policies of the employing organization to seek a resolution of such conflict b.
Review the conflict problem with the immediate superior if the organization’s policies do not resolve the ethical conflict Seek advice on a confidential basis with an independent advisor or the applicable professional d.
accountancy body or regulatory body to obtain an understanding of possible courses of action Report the matter to the Securities and Exchange Commission 63.
Which of the following safeguards to eliminate or reduce threats to independence is provided by the profession, legislation, or regulation? a.
Policies and procedures that emphasize the assurance client’s commitment to fair financial reporting Internal policies and procedures to implement compliance with firm policies and procedures as they relate c.
to independence Continuing professional development requirements Rotation of senior personnel 64.
Which of the following is an example of engagement-specific safeguards in the work environment? a.
Advising partners and professional staff of those assurance clients and related entities from which they must be independent b.
Disclosing to those charged with governance of the client the nature of service provided and extent of fees charged A disciplinary mechanism to promote compliance with the firms’ policies and procedures Published policies and procedures to encourage and empower staff to communicate with the fundamental principles that concerns them 65.
Jayson, CPA, was offered the engagement to audit CAMPUWISE for the year ended December 31, 2017. He had served as a director of CAMPUWISE until December 31, 2015, and his spouse currently owns 6,000 of the 100,000 outstanding share capital of CAMPUWISE. Jayson disassociated from the company prior to being offered the engagement. Moreover, the engagement does not cover any period that includes Jayson’s association or employment with the company. Under the code ethics, Jayson should a.
Accept the engagement Refuse the engagement because of his spouse’s stock ownership Let a partner from the same office accept and conduct the engagement Refuse the engagement because he had served as a director PLANNING AN AUDIT OF FINANCIAL STATEMENTS 66.
Planning an audit involves 67.
Establishing the overall audit strategy for the engagement Developing an audit plan Both A and B Neither A and B The auditor should perform the following risk assessment procedures to obtain an understating of the entity and its environment, including its internal control I.
Inquiries of management and others within the entity Confirmation Reperformance IV.
Analytical procedures Observation inspection 9 |
I, II, III, IV only I, II, IV, V, and VI only c.
I, IV, V and VI only I, II, III, IV, V and VI The auditor should obtain sufficient understanding of the entity and its environment, including its internal control in order to a Identify and assess the risk of material misstatement Yes Design appropriate audit procedures Yes b c d Yes Yes No Yes No No When obtaining understanding of the entity’s control, the auditor should obtain knowledge about the internal control’s a b c d Design Yes Yes Yes No Implementation Yes Yes No No Maintenance Yes No No Yes It sets the tone of the organization, provides discipline and structure, and influences the control consciousness of employees a.
Control Activities Monitoring of controls c.
Control Environment Entity's risk assessment process In evaluating the design of the entity’s internal control environment, the auditor considers the following elements and how they incorporated into the entity’s processes. Such elements would i nclude all of the following except. a.
Integrity and ethical values b.
Commitment to competence c.
Organizational structure Information and communication system After obtaining a sufficient understanding of the client’s internal control, the auditor a.
Assesses the need to apply PSAs b.
Determines the preliminary assessment of control risk Assesses detection risk to determine the acceptable level of inherent risk Determines the acceptable level of detection risk and inherent risk The auditor is not always required to perform a.
Risk assessment procedures Test of controls c.
Substantive procedures Both a and c As the acceptable level of detection risk decreases, an auditor may change the a.
Timing of substantive tests; perform them at an interim date rather than at year-end Nature of substantive tests; select from less effective to a more effective procedure Timing of tests of controls; perform them at several dates rather than at one time Assessment of inherent risk; assume a higher level Which of the following is not considered a substantive test? a.
Analytical procedures Test of details of transactions c.
Test of controls Test of details of balances 10 |
GATHERING SUFFICIENT APPROPRIATE AUDIT EVIDENCE 76.
The best evidence regarding year-end bank balances is documented in the a.
Cutoff bank statement Bank reconciliations c.
Interbank transfer schedule Bank deposit lead schedule A cash shortage may be concealed by transporting funds from one location to another or by converting negotiable assets to cash. Because of this, which of the following is vital? 78.
Simultaneous confirmation Simultaneous bank reconciliation Who should receive the confirmation replies? a.
The audit client The auditor c.
Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipients? a.
This is not a request for payment; remittances should not be sent to our auditors in the enclosed b.
envelope Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records c.
If you do not report any differences within fifteen days, it will be assumed that this statement is correct The following invoices have been selected for confirmation and represent amounts that are overdue c.
Simultaneous verification Simultaneous surprise cash count The regulators Either a or b All of the following are examples of substantive tests to verify the valuation of net accounts receivable except the a.
Recomputation of the allowance for bad debts Inspection of accounts for current versus non-current status in the statement of financial position c.
Inspection of the aging schedule and credit records of past due accounts Comparison of the allowance for bad debts with pas records An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidenc e concerning a.
Existence Completeness c.
Rights and obligations Valuation and allocation Purchase cut-off procedures should be designed to test whether all inventory 83.
Purchased and received before year-end was paid for Ordered before year-end was received Purchased and received before year-end was recorded Owned by the company is in the possession of the company at year – end Which statement is correct regarding audit of investment securities? a.
An auditor’s objective i s to determine whether the securities are authentic b.
Examination of paid checks issued in payments of securities purchased is the most effective procedure to verify existence In performing tests of the carrying amount of investment in equity securities, the auditor would usually d.
refer to the quoted market prices of the securities If a client has a large and active investment portfolio that is kept in a bank safe-deposit box and the auditor is unable to count the securities at the end of the reporting period, the auditor most likely will Which of the following is not one of the auditor’s primary objectives in an audit of trading securities?
To determine whether securities are authentic To determine whether securities are the property of the client To determine whether securities actually exist 11 |
To determine whether securities are properly classified on the balance sheet date 85.
An auditor is most likely to verify the interest earned on bond investment by a.
Verifying the receipt and deposit of interest checks Confirming the bond interest rate with the issuer of the bonds Recomputing the interest earned on basis of face amount, interest rate, and period held Testing controls relevant to cash receipts Property, plant, and equipment is typically judged to be one of the accounts least susceptible to fraud because a.
The amounts recorded on the balance sheet for most companies are immaterial The inherent risk is usually low The depreciated values are always smaller than cost Internal cost is inherently effective regarding this account Which of the following combinations of procedures is an auditor most likely to perform to obtain evidence about fixed asset additions? a.
Inspecting documents and physically examining assets b.
Recomputing calculations and obtaining written management representations Observing operating activities and comparing balances to prior period balances Confirming ownership and corroborating transactions through inquiries of client In auditing intangible assets, an auditor most likely would review or recomputed amortization and determine whether the amortization period is reasonable in support of management’s financial statement assertion to a.
Rights and obligations A corporate balance sheet indicates that one of the corporate assets is a patent. An auditor will most likely obtain evidence regarding the continuing validity and existence of this patent by obtaining a written representation from a.
A patent attorney The SEC c.
The patent inventor The patent owner Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a.
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports Examining unusual relationships between monthly accounts payable balances and recorded cash payments d.
Reconciling vendor’s statement to the file of receiving reports to identify items received just prior to the balance sheet date Which of the following is a substantive test that an auditor is most likely to perform to verify the existence and valuation of recorded accounts payable? a.
Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and accounted for b.
Receiving the client’s mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor’s invoices Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports Confirming accounts payable balances with known suppliers who have zero balances In an examination of shareholders’ equity, an auditor is most concerned th at a.
Capital stock transactions are properly authorized Stock splits are capitalized at par or stated value on the dividend declaration date Dividends during the year under audit were approved by the shareholders 12 |
Changes in the accounts are verified by a bank serving as a registrar and stock transfer agent a.
The auditor does not expect the client to debit retained earnings for which of the following transactions? a.
A 10% stock dividend An appropriation of retained earnings for treasury shares A large stock dividend d.
A four for one stock split Which is true about substantive analytical procedure? Used to understand the audit client Used to identify significant and material accounts Used to detect material misstatements; appropriately at a disaggregated level Used when the risk of material misstatement is high due to inherent and control risks AUDIT SAMPLING Which of the following exclusively pertains to sampling risks, as opposed to non-sampling risks? I.
Failure to draw a random sample II.
Component of detection risk Failure to perform a procedure a.
I only I and II c.
III only I, II, and III A sample in which the characteristics of the sample are the same as those of the population is a(n) a. variables sample. b. representative sample. c. attributes sample. d. random sample. 97.
When the auditor decides to select less than 100 percent of the population for testing, the auditor is said to be using a. audit sampling. b. representative sampling. c. poor judgment. d. none of the above. 98.
A sample in which every possible combination of items in the population has an equal chance of constituting the sample is a a. random sample. c. judgment sample. b. statistical sample. d. representative sample. 99.
The process which requires the calculation of an interval and then selects the items based on the size of the interval is a. statistical sampling. b. random sample selection. c. systematic sample selection. d. computerized sample selection. 100.
Sampling risk is a.
the risk that an auditor reaches an incorrect conclusion because the sample is not representative of the b.
population. the risk that an auditor reaches the correct conclusion after considering the nonsampling risk introduced by auditor judgment. a and b. neither a nor b. 101.
Which of the following statements is correct? a. A sample of all items of a population will eliminate sampling risk, but increase nonsampling risk. b. The use of an appropriate sample selection technique ensures a representative sample. c. The auditor’s failure to recognize an exception is a significant cause of sampling risk.
d. The use of inappropriate audit procedures is a significant cause of nonsampling risk. 13 |
The risk which the auditor is willing to take of accepting a control as being effective when it is not is the a. finite correction factor. b. tolerable exception rate. c. acceptable risk of assessing control risk too low. d. estimated population exception rate. 103.
The exception rate the auditor will permit in the population and still be willing to usethe assessed level of control risk is called the a. tolerable exception rate. c. acceptable risk of overreliance. b. estimated population exception rate. d. sample exception rate. 104.
A statistical method used to estimate the proportion of items in a population containing a characteristic of interest is a. attributes sampling. b. variables sampling. c. estimation sampling. d. population-proportional-to-size sampling. 105.
The exception rate that the auditor will permit in the population and still be willing to use the assessed control risk is called the a. acceptable exception rate. c. sample exception rate. b. estimated population exception rate. d. tolerable exception rate. 106.
The auditor’s best estimate of the population exception rate is the a. sample exception rate. c. experience of the previous year. b. tolerable exception rate (TER). d. computed upper exception rate (CUER). 107.
If an auditor, without statistical sampling, selects a sample of one hundred items from a population and finds two exceptions, the auditor a. can conclude that the sample exception rate is 2%. b. can conclude that the population exception rate is 2%. c. can calculate the highest exception rate expected in the population. d. cannot make any conclusions about either the sample or the population. 108.
Which of the following statements regarding the process of defining the population is not correct? a. The auditor can define the population to include whatever data is desired. b. The auditor may generalize only about that population which has been sampled. c. The population represents the body of data about which the auditor wishes to generalize. d. The auditor can randomly sample from whatever part of the population that he or she chooses. 109.
The tolerable exception rate (TER) has a significant effect on sample size. The relationship of TER to sample size is a. direct (larger TER = larger sample). b. inverse (larger TER = smaller sample). c. variable (sometimes larger, sometimes smaller). d. not determinable. 110.
The acceptable risk of accessing control risk too low (ARACR) has a significant effect on sample size. The relationship of ARACR to sample size is a. variable (sometimes larger, sometimes smaller). b. direct (larger ARACR = larger sample). c. inverse (larger ARACR = smaller sample). d. nonexistent. 14 |
Which of the following combinations of attributes and exception conditions is inappropriate. a.
Existence of sales invoice number in the sales journal – No record of sales invoice number in the sales b.
journal. Credit is approved – Lack of initials indicating credit approval. Quantity on customer order agree with duplicate sales invoice – Quantity on customer order do not agree with quantity on duplicate sales invoice. Evidence that pricing are checked – Lack of initials on duplicate sales invoice indicating that extensions were checked. 112.
A means of reducing the potential bias in systematic sample selection is to a.
use multiple starts. use a random number table. c.
include a large block of the population. include only the high-Peso-value items. 113.
What is an auditor’s evaluation of a statistical sample for attributes when a test of 100 documents results in four exceptions if the tolerable exception rate is 5%, the expected population exception rate is 3%, and the allowance for sampling risk is 2%? a.
Accept the sample results as support for planned reliance on the control because the tolerable rate less b.
the allowance for sampling risk equals the expected population exception rate. Modify planned reliance on the control because the sample exception rate plus the allowance for sampling risk exceeds the tolerable rate. Modify planned reliance on the control because the tolerable rate plus the allowance for sampling risk exceeds the expected population exception rate. Accept the sample results as support for planned reliance on the control because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. 114.
Tests for rates of occurrence are appropriately used in all but which of the following situations? a. Testing of internal controls. b. Substantive testing of transactions. c. Substantive testing of details of balances. d. Tests for rates of occurrence are appropriate for all of the above. 115.
The auditor must consider the possibility that the true population misstatement is greater than the amount of misstatement that is tolerable when the auditor is performing a. statistical sampling. c. monetary-unit sampling. b. nonstatistical sampling. d. all of the above. 116.
The most commonly used method of statistical sampling for tests of details of balances is a. attributes sampling. b. variables sampling. c. discovery sampling. d. monetary-unit sampling. The primary factor affecting the auditor’s decision about ARIA is a. assessed control risk. b. assessed inherent risk. c. the interaction between control risk and inherent risk. d. sample size. 118.
In monetary-unit sampling, the relationship between the tolerable misstatement size and the required sample size is a. direct; that is, larger tolerable misstatement leads to larger sample size. b. inverse; that is, larger leads to smaller. c. varied; that is, sometimes larger = larger, and sometimes larger = smaller. d. indeterminable. 15 |
The risk the auditor is willing to take of accepting a balance as correct when the true error in the balance is greater than the tolerable misstatement is a. the upper bound. b. the tolerable risk. c. the acceptable risk of incorrect acceptance. d. the lower bound. 120.
When using monetary-unit sampling, evaluating the likelihood of unrecorded items in the population a. is unnecessary. c. is possible but difficult. b. is impossible. d. is an automatic outcome of the process. 121.
There are many kinds of statistical estimates that an auditor may find useful, but basically every accounting estimate is either of a quantity or of an error rate. The statistical terms that roughly correspond to “quantities” and “error rate,” respectively, are a. attributes and variables. b. variables and attributes. c. constants and attributes. d. constants and variables. 122.
If the auditor believes that there will be more than just a few exceptions discovered, and desires an accurate estimate of the Peso value of the exceptions, he or she will use a. attributes sampling. b. monetary-unit sampling. c. block sampling. d. variables sampling. Stratified sampling is applicable to difference, mean-per-unit, and ratio estimation, but it is most commonly used with a. ratio estimation. b. discovery sampling. c. difference estimation. d. mean-per-unit estimation. An important statistic to consider when using a statistical sampling audit plan is the population variability. The population variability is measured by the a. sample mean. b. standard deviation. c. standard error of the sample mean. d. estimated population total minus the actual population. 125.
Using statistical sampling to assist in verifying the year-end accounts payable balance, an auditor has accumulated the following data: Balance Population: Number of accounts 4,100 Book balance P5,000,000 determined by the auditor ? Sample: 200 P 250,000 P300,000 Using the ratio estimation technique, the auditor’s estimate of year -end accounts payable balance would be a. P5,050,000. b. P5,125,000. c. P6,000,000. d. P6,150,000. Factors influencing sample size for tests of control a b 126.
Increase Decrease 127.
An increase in the auditor’s intended reliance on accounting and internal control systems. An increase in the rate of deviation from the prescribed control procedure that the auditor is willing to accept. Tolerable error. An increase in the rate of deviation from the prescribed control procedure that the auditor expects to find in the population. Expected error. Increase Increase Decrease Decrease 16 |
Factors influencing sample size for tests of control a b 129.
An increase in the auditors required confidence level (or conversely, a decrease in the risk that the auditor will concluded that the control risk is lower than actual control risk in the population. Increase Decrease 130.
An increase in the number of sampling units un the population Factors influencing sample size for substantive procedures 131.
An increase in the auditor’s assessment of inherent risk. Negligible effect a Increase b Decrease 132.
An increase in the auditor’s assessment of control risk. An increase in the use of other substantive procedures directed at the same financial statement assertion An increase in the auditor’s required confidence level (or conversely, a decrease in the risk that the auditor will conclude that a material error does not exist, when in fact it does not exist). An increase in the total error that the auditor is willing to accept. Tolerable error. An increase in the amount of error that auditor expects to find in the population. Expected error. Increase Increase Increase Increase Increase. Decrease Decrease Decrease Decrease Decrease 139.
Stratification of the population when appropriate The number of sampling units in the population Increase Negligible effect Decrease AUDITING IN A CIS ENVIRONMENT ______ involves implementing a system in one part of the organization, while other locations continue to use the current system. a. Parallel testing. c. Pilot testing. b. Online testing. d. None of the above. 140.
Which of the following statements about general controls is not correct? a. Backup and disaster recover plans should identify alternative hardware to process company data. b. Successful IT development efforts require the involvement of IT and non-IT personnel. c. The chief information officer should report to senior management and the board. d. Programmers should have access to computer operations to aid users in resolving problems. 141.
In complex IT systems, which of the following factors does not increase the likelihood of material misstatements in the financial statements? a. Reduced human involvement. b. Uniformity of processing. c. Ease of access to data. d. Specialists are needed to write computer programs. 142.
A control which relates to all parts of the IT system is called a(n) a. general control. b. systems control. c. universal control. d. applications control. 143.
Controls which apply to a specific use of the system are called a. user controls. b. general controls. 17 |
c. systems controls. d. applications controls. Auditors usually evaluate the effectiveness of a. hardware controls first. b. sales-cycle controls first. c. general controls before applications controls. d. applications controls first. 145.
Controls which are designed to assure that the information processed by the computer is authorized, complete, and accurate are called a. input controls. b. processing controls. c. output controls. d. general controls. 146.
An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as a. time tickets with invalid job numbers. b. overtime not approved by supervisors. c. deductions not authorized by employees. d. payroll checks with unauthorized signatures. COMPLETING THE AUDIT 147.
Which of the following is not a condition for a contingent liability to exist? a. There is a potential future payment to an outside party that would result from a current condition. b. There is uncertainty about the amount of the future payment. c. The outcome of an uncertainty will be resolved by some future event. d. The amount of the future payment is reasonably estimable. 148.
If a potential loss on a contingent liability is remote, the liability should be a. disclosed in footnotes, but not accrued. b. neither accrued nor disclosed in footnotes. c. accrued and indicated in the body of the financial statements. d. disclosed in the auditor’s report but not disclosed on the financial statements. Which of the following is an incorrect combination of the “likelihood of occurrence” and financial statement treatment? a. Remote – no disclosure. b. Probable (amount is estimable) – financial statements are adjusted. c. Reasonably possible (amount is estimable) – financial statements are adjusted. d. Probable (amount is not estimable) – footnote disclosure is required. 150.
At the completion of the audit, management is asked to make a written statement that it is not aware of any undisclosed contingent liabilities. This statement would appear in the a. management letter. b. letter of inquiry. c. letters testamentary. d. letter of representation. The responsibility for identifying and deciding the appropriate accounting treatment for contingent liabilities rests with _____. a. b. c. d. a company’s auditors.
a company’s legal counsel.
a company’s management.
a company’s management and their auditors.
The auditor has a responsibility to review transactions and activities occurring after the year-end to determine whether anything occurred that might affect the valuation or disclosure of the statements being audited. The auditing procedures required to verify these transactions are commonly referred to as the review for a. contingent liabilities. b. subsequent year’s transactions.
c. late unusual occurrences. d. subsequent events. 153.
Audit procedures related to contingent liabilities are initially focused on a. presentation and disclosure. b. completeness. c. existence. d. rights and obligations. 154.
Which of the following audit procedures is least likely to be used as part of the auditor’s attempt to identify potential contingent liabilities? a. Inquire of management about the potential for unrecorded liabilities. b. Review the minutes of directors’ meetings for indication of lawsuits or other contingencies. c. Review of personnel files for evidence of potential employment lawsuits. d. Analyze legal expenses for the period under audit. 155.
Which type of subsequent event requires consideration by management and evaluation by the auditor? a. Subsequent events that have a direct effect on the financial statements and require adjustment. b. Subsequent events that have no direct effect on the financial statements but for which disclosure is advisable. c. Both a and b. d. Neither a nor b. 156.
Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that come into being after the end of the year. The subsequent information should not be incorporated directly into the statements if the conditions causing the change in valuation a. took place before year-end. b. did not take place until after year-end. c. occurred both before and after year-end. d. are reimbursable through insurance policies. 157.
The concept of “dual dating” on the auditor’s report refers to a. the client’s date on the statements (12/31/18) and the auditor’s date on the report (3/30/19).
b. c. the auditor’s date on the report (3/30/19) and the review required statement with the SEC (5/30/19). when the client files a registration the auditor’s date on the report representing the end of the fieldwork (3/30/19) and the review of an important event that occurred after the completion of fieldwork (4/5/19) but bef ore the auditor’s report d. was issued. the wording problem created because some of client’s statements are for a period of time (for year ended 12/31/18) and others are for one specific date (12/31/18). 158.
Auditors will generally send a standard inquiry letter to a. only those attorneys who have devoted substantial time to client matters during the year. b. every attorney that the client has been involved with in the current or preceding year, plus any attorney the client engages on occasion. c. those attorneys whom the client relies on for advice related to substantial legal matters. d. none of the above. 159.
Who may identify matters to be included in a letter of inquiry sent to a client’s legal counsel?
a. Company management. b. Auditors. c. Company’s legal counsel at the direction of company management. d. All of the above. 19 |
Which of the following is not one of the three main reasons why it is essential that audit files be thoroughly reviewed by another member of the audit firm at the completion of the audit? a. To evaluate the performance of inexperienced personnel. b. To counteract the bias that frequently enters into the auditor’s judgment.
c. To make sure that the audit meets the CPA firm’s standard of performance.
d. To evaluate the accuracy of the auditing firm’s time budget for the engagement.
Which of the following subsequent events is most likely to result in an adjustment to a company’s financial statements? a. Merger or acquisition activities. b. Bankruptcy (due to deteriorating financial condition) of a customer with an outstanding accounts receivable balance. c. Issuance of common stock. d. An uninsured loss of inventories due to a fire. “A potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place” is the definition of a(n) a. current liability. b. long-term liability. c. accrued liability. d. none of the above. 163.
Which of the following is a required condition for a contingent liability to exist? a. The amount of the future payment is known. b. The liability resulted from an existing condition. c. The outcome has been resolved by a current event. d. There is a potential liability to an employee of the client. 164.
With which of the following client personnel would it not generally be appropriate to inquire about commitments or contingent liabilities? a. Controller. b. President. c. Accounts receivable clerk. d. Vice president of sales. At what stages of the audit must analytical procedures be used? a. Planning and testing. b. Testing and completion. c. Planning and completion. d. Planning, testing, and completion. 166.
Which of the following procedures and methods are important in assessing a company’s ability to continue as a going concern? a. Performance of analytical procedures directed at profitability, asset turnover, and cash flows. b. Discussions with management regarding future plans related to sales activities, cost controls, and marketing efforts. c. d. All of the above are important procedures and methods used in assessing going concern. Knowledge of the client’s business g ained throughout the audit. Inquiries of management regarding the possibility of unrecorded contingencies will not be useful in uncovering a. management’s intention al failure to disclose existing contingencies. b. a particular type of contingency which management has overlooked. c. when management does not comprehend accounting disclosure requirements. d. all three of the above items. 20 |
Which of the following procedures might be useful in discovering a contingent liability for a lawsuit that management is intentionally neglecting to disclose? a. Inquiries (orally and in writing) of management. b. Analyzing legal expense and review invoices and statements from outside legal counsel. c. Reviewing current and previous years’ internal revenue agent reports.
d. Obtaining a letter of representation from management that it is aware of no undisclosed contingent liabilities. The standard letter of inquiry from the client’s legal counsel should be prepared on a. plain paper (no letterhead) and be unsigned. b. lawyer’s stationery and signed by the lawyer.
c. auditor’s stationery and signed by an audit partner.
d. client’s stationery and signed by a company official.
Which of the following items would ordinarily not be included in the standard letter of confirmation from the client’s attorney?
a. A list, prepared by management, of pending threatened litigation of material amounts. b. A request that the attorney furnish information or comment about the likelihood of an unfavorable outcome of litigation. c. A request that the attorney furnish an estimate of the amount or range of the potential loss. d. A request that the attorney confirm the amount of outstanding fees which client owes for legal services. 171.
The letter of representation obtained from an audit client should a. be dated as of the end of the period under audit. b. be dated as of the audit report date. c. be dated as of any date decided upon by the client and auditor. d. be left undated. 172.
The following events all occurred after the balance sheet date (12/31/18) but prior to the auditor’s report (3/15/19). Which one would not require an adjustment of the account balances as of 12/31/18? a. A customer declared bankruptcy on 1/31/19. b. Investments on the books at a cost of P100,000 were sold on 2/l/19 for P60,000. c. Uninsured inventory valued at P100,000 on 12/31/18 was destroyed in a fire on 2/l/19. d. A contingent liability recorded on the books as of 12/31/18 for P100,000 was settled out of court on 2/15/19 for P125,000. 173.
When should auditors generally assess a client’s ability to continue as a going concern?
a. Upon completion of the audit. b. During the planning stages of the audit. c. Throughout the entire audit process. d. During testing and completion phases of the audit. The audit procedures for the subsequent events review can be divided into two categories: (1) procedures normally integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in category 1? a. Inquiries of client regarding contingent liabilities. b. Obtain a letter of representation written by client. c. Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. d. Review journals and ledgers of year 2 to determine the existence of any transaction related to year 1. 21 |
The audit procedures for the subsequent events review can be divided into two categories: (1) procedures normally integrated as a part of the verification of year-end account balances, and (2) those performed specifically for the purpose of discovering subsequent events. Which of the following procedures is in category 2? a. Correspond with attorneys. b. Test the collectibility of accounts receivable by reviewing subsequent period cash receipts. c. Subsequent period sales and purchases transactions are examined to determine whether the cutoff is accurate. d. Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower-of cost-or-market valuation. Which of the following is not a matter that is typically included in the letter of representation obtained from an audit client. a. Availability of all financial records and related data. b. Absence of unrecorded transactions. c. Compliance with aspects of contractual agreements that may affect the financial statements. d. Assessment of management’s effectivenes s. 177.
Which of the following statements regarding the letter of representation is not correct? a. It is prepared on the client’s letterhead.
b. It is addressed to the CPA firm. c. It is signed by high-level corporate officials, usually the president and chief financial officer. d. It is optional, not required, that the auditor obtain such a letter from management. 178.
Refusal by a client to prepare and sign the representation letter would require a(n) a. qualified opinion or a disclaimer. b. adverse opinion or a disclaimer. c. qualified or an adverse opinion. d. unqualified opinion with an explanatory paragraph. 179.
A client representation letter is a written statement from a non-independent source and, therefore, a. cannot be regarded as reliable evidence. b. can be regarded as reliable evidence only if the auditor finds a strong internal control system. c. can be regarded as reliable evidence if the high-level corporate officials who sign it are trustworthy. d. needs to be confirmed by an outside, independent source such as a financial institution, or law firm. 180.
If, after the accumulation of final evidence and during the evaluation of results, the auditor concludes that sufficient evidence has not been obtained to draw a conclusion about fairness of the client ’s representations, there are two choices: a. (1) issue a qualified opinion, or (2) issue a disclaimer. b. (1) issue a disclaimer, or (2) withdraw from the engagement. c. (1) obtain additional information, or (2) issue an adverse opinion. d. (1) obtain additional evidence, or (2) issue a qualified report or a disclaimer. 181.
If, after the accumulation of final evidence and during the evaluation of results, the auditor concludes that there is sufficient evidence but it does not warrant a conclusion of fairly presented financial statements, the auditor has two choices: a. (1) the statements must be revised to the auditor’s satisfaction, or (2) either a qualified or an adverse opinion must be issued. b. (1) either a qualified opinion must be issued, or (2) an adverse opinion must be issued. c. (1) either a disclaimer must be issued, or (2) an adverse opinion must be issued. d. (1) the statements must be revised to the auditor’s satisfaction, or (2) a disclaimer must be issued.
If the auditor becomes aware after the audited financial statements have been issued that some information included in the statements is materially misleading, the auditor’s first and most desirable approach is to a. inform the Securities and Exchange Commission and other regulatory agencies. b. inform the users of the misleading statements. 22 |
c. request that the client issue an immediate revision of the financial statements containing an explanation of the reasons for the revision. d. do all three of the above. 183.
Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern? a. Review compliance with the terms of debt agreements. b. Confirmation of accounts receivable from principal customers. c. Reconciliation of interest expense with debt outstanding. d. Confirmation of bank balances. 184.
Which of the following statements is correct? a. A letter of representation is documentation of management’s acceptance of responsibility for the financial statements and is deemed to be reliable evidence. b. A letter of representation is not deemed to be reliable evidence because of the potential incompetence of management. c. A letter of representation is not deemed to be reliable evidence because of the lack of independence of the preparers. d. None of the above is correct. 185.
When a client will not permit inquiry of outside legal counsel, the audit report will ordinarily contain a(an) a. disclaimer of opinion. b. qualified opinion. c. standard unqualified opinion. d. unqualified opinion with a separate explanatory paragraph. 186.
Which of the following auditing procedures is ordinarily performed last? a. Reading of the minutes of the directors’ meeting s. b. Confirming accounts payable. c. Obtaining a management representation letter. d. Testing of the purchasing function. 187.
As part of an audit, a CPA often requests a representation letter from the client. Which one of the following is not a valid purpose of such a letter? a. To provide audit evidence. b. To emphasize to the client the client’s responsibility for the correctness of the financial statements.
c. To satisfy the CPA by means of other auditing procedures when certain customary auditing procedures are not performed. d. To provide possible protection to the CPA against a charge of knowledge in cases where fraud is subsequently discovered to have existed in the accounts. 188.
In connection with the annual audit, which of the following is not a “subsequent events” procedure?
a. Review available interim financial statements. b. Read available minutes of meetings of stockholders, directors, and committees and, as to meetings for c. which minutes are not available, inquire about matters dealt with at such meetings. Make inquiries with respect to the financial statements covered by the auditor’s previously issued report if new information has become available during the current examination that might affect that report. d. Discuss with officers the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data. 189.
An auditor performs interim work at various times throughout the year. The auditor’s subsequent events work should be extended to the date of a. The auditor’s report.
b. A post-dated footnote. c. The next scheduled interim visit. d. The final billing for audit services rendered. 23 |
Which event that occurred after the end of the fiscal year under audit but prior to issuance of the auditor’s report would not require disclosure in the financial statements? a. Sale of a bond or capital stock issue. b. Loss of plant or inventories as a result of fire or flood. c. A major drop in the quoted market price of the stock of the corporation. d. Settlement of litigation when the event giving rise to the claim took place after the balance sheet date. 191.
Which of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued? a. Loss of a plant as a result of a flood. b. Sale of long-term debt or capital stock. c. Settlement of litigation in excess of the recorded liability. d. Major purchase of a business that is expected to double the sales volume. 192.
Although there is no professional requirement to do so on audit engagements, CPAs normally issue a formal “management” letter to their clients. The primary purpose of this letter is to provide a. evidence indicating whether the auditor is reasonably certain that internal accounting control is operating as prescribed. b. a permanent record of the internal accounting control work performed by the auditor during the course of the engagement. c. a written record of discussions between auditor a nd client concerning the auditor’s observations and suggestions for improvements. d. a summary of the auditor’s observations that resulted from the auditor’s special study of internal control.
Why must audit documentation be reviewed? a. To ensure that the audit meets the CPA firm’s standard of performance.
b. To evaluate the performance of inexperienced personnel. c. To counteract bias that often enters into the auditor’s judgment.
d. All of the above are reasons for review of audit documentation. The process of “final evidence accumulation” is always done late in the engagement. Which one of the following would be done the earliest in the engagement? a. Final analytical procedures. b. Search for contingent liabilities. c. Evaluate the going concern assumption. d. Acquire the client’s letter of representation.
Which of the following is not a reason why the auditor requests that the client provide a letter of representation? a. Professional auditing standards requires the auditor to obtain a letter of representation. b. It impresses upon management its responsibility for the accuracy of the information in the financial statements. c. It provides written documentation of the oral responses already received to inquiries of management. d. It provides writt en documentation which is a higher quality of evidence than management’s oral responses to inquiries. A CPA has received an attorney’s letter in which no significant disagreements with the client’s assessments of contingent liabilities were noted. The res ignation of the client’s lawyer shortly after receipt of the letter should alert the auditor that a. an adverse opinion will be necessary. b. undisclosed unasserted claims may have arisen. c. the auditor must begin a completely new examination of contingent liabilities. d. the attorney was unable to form a conclusion with respect to the significance of litigation, claims, and assessments. 24 |
Management furnishes the independent auditor with information concerning litigation, claims, and assessments. Which of the following is the auditor’s primary means of initiating action to corroborate such information? a. Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination. b. Request that client management send a letter of audit inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments. c. Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments. d. Request that client management engage outside attorneys to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments. 198.
An attorney is responding to an independent auditor as a result of the audit client’s letter of inquiry. The attorney may appropriately limit the response to a. asserted claims and litigation. b. asserted, overtly threatened, or pending claims and litigation. c. items which have an extremely high probability of being resolved to the client’s detriment.
d. matters to which the attorney has given substantive attention in the form of legal consultation or representation. 199.
A company guarantees the debt of an affiliate. Which of the following best describes the audit procedure that would make the auditor aware of the guarantee? a. Review minutes and resolutions of the board of directors. b. c. Review the possibility of such guarantees with the chief accountant. d. Review prior year’s audit files with respect to such guarantees.
Review the legal letter returned by the company’s outside legal counsel.
Alej Inc., is an affiliate of the audit client and is audited by another firm of auditors. Which of the following is most likely to be used by the auditor to obtain assurance that all guarantees of the affiliate’s indebtedness have been detected? a. Send the standard bank confirmation request to all of the client’s lender banks.
b. Review client minutes and obtain a representation letter. c. Examine supporting documents for all entries in intercompany accounts. d. Obtain written confirmation of indebtedness from the auditor of the affiliate. An auditor must obtain written client representations that normally should be signed by a. the treasurer and the internal auditor. b. the president and the chairperson of the board. c. the chief executive officer and the chief financial officer. d. the corporate counsel and the audit committee chairperson. Subsequent events affecting the realization of assets ordinarily will require adjustments of the financial statements under examination because such events typically represent a. the culmination of conditions that existed at the balance sheet date. b. the discovery of new conditions occurring in the subsequent events period. c. the final estimates of losses relating to casualties occurring in the subsequent events period. d. the preliminary estimate of losses relating to new events that occurred subsequent to the balance sheet date. An auditor’s decision concerning whether or not to “dual date” the audit report is based upon the auditor’s willingness to a. extend auditing procedures. b. accept responsibility for subsequent events. c. permit inclusion of a footnote captioned: event (unaudited) subsequent to the date of the auditor’s report. d. assume responsibility for events subsequent to the issuance of the auditor’s report.
The statement that best expresses the auditor’s responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is that a. The auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork. b. The auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period. c. The auditor’s responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred. d. The auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date. 207.
The first section of the auditor’s report shall have the heading a.
Responsibilities for the financial statements b.
Auditor’s responsibilities for the audit of the financial statements Basis for opinion 209.
Which of the following sections in the auditor’s report shall be placed immediately after the Opinion section?
Management’s responsibilities for the financia Basis for opinion Other reporting responsibilities l statements Auditors responsibilities for the audit of the financial statements The basis for Opinion section of the auditor’s report shall a.
State that the financial statements have been audited Sta te that the objective of the auditor is to issue an auditor’s report that include the auditor’s opinion Describe management responsibility for preparing the financial statements in accordance with the applicable financial reporting framework State that the audit was conducted in accordance with PSA 210.
Which of the following management’s responsibilities shall be described in the responsibilities for the financial statements section of the auditor’s report?
Responsibility for preparing the financial statements in accordance with the applicable financial reporting framework Responsibility for obtaining reasonable assurance about whether the financial statements as a whole are c.
free from material misstatement Responsibility to exercise professional judgment and maintain professional skepticism throughout the audit Responsibility to identify and assess the risks of material misstatement of the financial statements After an auditor has issued an audit report on a nonpublic entity, there is no obligation to make any further audit tests or inquiries with respect to the audited financial statements covered by that report unless a. material adverse events occur after the date of the auditor’s b. final determination or resolution was made of a contingency which had been disclosed in the financial statements. report. c. final determination or resolution was made on matters which had resulted in a qualification in the auditor’s report.
d. new information comes to the auditor’s attention concerning an event that occurred prior to the date of the auditor’s report that may have affected the auditor’s report.
A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of these subsequent events might result in adjustment of the December 31 financial statements? a. Sale of a major subsidiary. b. Adoption of accelerated depreciation methods. c. Write-off of a substantial portion of inventory as obsolete. d. Collection of 90% of the accounts receivable existing at December 31. 26 |
The description of the auditor’s responsibilities for the audit of the financial statement shall be included I.
Within the body of the auditor’s report II.
Within an appendix to the auditor’s report By a specific reference with the auditor’s report to the location of such a description on a website of an appropriate authority a.
I only II only c.
I or II only I, II, or III 212.
Which of the following statements concerning communication of key audit matters in the auditor’s report is incorrect? a.
Communicating key audit matters in the auditor’s report enhances the communicative val ue of the auditor’s report by providing greater transparency about the audit that was performed b.
Communicating key audit matters provides additional information to intended users of the financial statements to assist them in understanding those matters tha t, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current and prior periods. c.
Communicating key audit matters may assist intended users in understanding the entity and areas of significant management judge men in the audited financial statements. The auditor’s determination of key audit matters is limited to those matters of most significance in the audit of the financial statements of the current period, even when comparative financial statements are presented. 213.
Communicating key audit matters in the auditor’s report is A substitute for disclosures in the financial statements A Yes B Yes C No D No A substitute for the auditor’s expression of a modified opinion Yes No No No A substitute for reporting in accordance with PSA 570 when material uncertainty exists relating to the entity’s ability to continue as going concern A separate opinion on individual matters No Yes Yes Yes Yes No PSA 705 prohibits the auditor from communicating key audit matters when the auditor expresses No No a.
Unmodified opinion Qualified opinion Adverse opinion Disclaimer of opinion
Common sense not so common
Choose the sentence that uses complement or compliment correctly a.
After the last hiring phase, we finally had a full compliment of customer service reps ready to answer calls b.
It always seemed like Mr. Larken complemented the boys in the class for their hard work more than the girls Jake beamed when his peers complimented him on his performance in the school talent show d.
The complements she received did not make Chelsea feel better about her defeat in the golf tournament In your thesis writing, whenever you use data from another study or literature, make sure you < (a) site (b) cite > your sources. The business rationale, as understood by the auditor does not < (a) jibe (b) jive (c) gibe > with evidences gathered about the client reported revenues. As part of good control, only 1 person should know his password and other < (a) login (b) log in > information. 27 |
During the planning phase of the audit engagement, the in-charge was writing the following account as part of his business rationale. He wishes to identify critical areas of risk in order to plan well. He wishes to determine whether a tight set of evidence is presented and would not be in conflict with how he understands the economy participated in by his client. His client happens to be in the manufacture of food items exported to European countries such as Spain, France, and Italy. “Asheville, North Carolina is the larges t city in Western North Carolina where it continues to grow and prosper. The Asheville Metropolitan area estimates just over 400,000 people live within four country area near the city of Asheville. Locals practice a comfortable, laid-back approach to life that involves many festivals and outdoor activities throughout the year. The city presented a calm, gentle quality life passes slowly in Asheville, where people spend time visiting in the local establishments or shopping in farmer’s markets. The architectu re reflects the city’s rich history and culture, nestled in the foothills and forests of Appalachia. At night, restaurants and venues come alive with bluegrass and fold music performances. While most areas of the South have suffered in the economic problems of this last decade. Asheville continues to grow. American industries have moved industrial work overseas. Prosperous towns and cities operate commercial economies of transitioning away from blue-collar trades into more white-collar, commercial businesses. The city teems with entrepreneurship. Streets are lined with local shops and eateries. Many corporations have recently relocated offices to downtown Asheville. If this trend continues, then the city will continues to grow in the years to come. What would the in-charge most likely predict to happen if Asheville fails to make a successful transition to a commercial economy? a.
Workers will go on strike, and riots will erupt in the streets. The city will have to transition back to blue-collar trades North Carolina will be forced to secede from the European Union The economy will stagnate, and the city’s growth will be slow.
Courage is not only the basis of virtue; it is its expression. Faith, hope, charity, and all the rest don't become virtues until it takes courage to exercise them. There are roughly two types of courage. The first an emotional state which urges a man to risk injury or death, is physical courage. Second, more reasoning attitude which enables him to take coolly his career, happiness, his whole future or his judgment of what he thinks either right or worthwhile, is moral courage. I have known many men, who had marked physical courage, but lacked moral courage. Some of them were in high places, but they failed to be great in themselves because they lacked moral courage. On the other hand I have seen men who undoubtedly possessed moral courage but were very cautious about taking physical risks. But I have never met a man with moral courage who couldn't, when it was really necessary, face a situation boldly. A man with moral courage can a.
defy his enemies overcome all difficulties face a situation boldly be very pragmatic 28 |