Practice-Examination-in-Auditing-Theory

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
COLLEGE OF ACCOUNTANCY AND FINANCE
Sta. Mesa, M a n i l a
PRACTICE EXAMINATION
AUDITING THEORY
“Why won’t you choose me” – Best Answer
ASSURANCE ENGAGEMENT
1.
What is an assurance engagement?
a.
b.
c.
d.
2.
Which of the following is not element of assurance engagement?
a.
b.
c.
d.
e.
3.
Intended user
Responsible party
Subject Matter
Yes
No
Yes
No
May be (a) or (b)
Neither (a) or (b)
c.
d.
Management
Client
Criteria
No
Yes
Yes
No
The subject matter of an assurance engagement may include
Financial Information
Yes
No
Yes
No
a.
b.
c.
d.
7.
c.
d.
An assurance engagement should have which of the following elements?
a.
b.
c.
d.
6.
Are from different entities
Are from the same entities
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.
b.
5.
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.
b.
4.
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.
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.
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.
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.
b.
Criteria
Norms
c.
d.
Conditions
Gauges
8.
The following are characteristics of suitable criteria, except:
a.
b.
9.
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
Skills and competence
Yes
No
Yes
No
Monitoring
Yes
No
No
Yes
Professional Requirements
Yes
No
Yes
No
Complying with laws and regulations
Using statistical sampling
c.
d.
Human resources
Considering audit risk and materiality
Complying with laws and regulations
Using statistical sampling techniques
c.
d.
Delegation
Considering audit risk and materiality
Independence
Competence and due care
c.
d.
Technical standards
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.
b.
c.
d.
17.
Audit
Independent
Ethical principles governing audit of financial statements do not include
a.
b.
16.
c.
d.
Which of the following is one of the elements of a CPA firm’s quality control system?
a.
b.
15.
Standard
Opinion
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.
b.
14.
Assurance Report,
which can be oral
No
Yes
Yes
No
The objectives of the quality control policies to be adopted by the audit firm will ordinarily incorporate
a.
b.
c.
d.
13.
Sufficient Appropriate
Evidence
Yes
No
Yes
No
The main purpose of implementing quality control policies and procedures is
a.
b.
c.
d.
12.
Neutrality
Understanding
The auditor’s report should be titled, and the title should include the word
a.
b.
11.
c.
d.
An assurance engagement should have the following elements?
a.
b.
c.
d.
10.
Relevance
Reliability
ABC Company is a multinational company that does business in various countries in the Asia-Pacific rim.
DEF Company does business with related parties.
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.
b.
c.
Errors in the application of the accounting principles
Misappropriation of assets or group of assets
Clerical error in accounting data underlying the financial statements
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d.
18.
The major reason an independent auditor gather evidence is to
a.
b.
c.
d.
19.
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.
b.
20.
Misinterpretation of facts that existed when financial statements were prepared
Window dressing
Lapping
c.
d.
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.
b.
c.
d.
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
21.
Republic Act 9298 is known as the
a.
b.
c.
d.
22.
Which of the following is not an objective of the Philippine Accountancy Act of 2004?
I.
II.
III.
IV.
V.
a.
b.
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
I, II, and IV
II, III, IV, and V
c.
d.
IV and V
I, II, III, IV, and V
c.
d.
I, II, and III
I, II, III, and IV
The practice in Accountancy includes
I.
II.
III.
IV.
a.
b.
24.
Revised Accountancy Law
Code of Ethics for Professional Accountants
Philippine Accountancy Act of 2004
Philippine Accountancy Law of 2004
Practice in public accountancy
Practice in education/academe
Practice in the government
Practice in commerce and industry
I, II, and IV
II, III, and IV
A CPA is in public accounting practice when he/she
a.
b.
c.
Represents his/her employer before the government agencies on tax and other matters related to
accounting
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
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d.
25.
The practice of accountancy includes the following except
a.
b.
c.
d.
26.
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)
Which of the following organizations is not directly/indirectly represented in the 15-member FRSC?
a.
b.
c.
d.
e.
32.
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.
b.
c.
d.
31.
6, President of the Philippines
5, President of the Philippines
6, Professional Regulation Commission
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.
b.
c.
d.
30.
Bureau of Internal Revenue
Securities and Exchange Commission
Board of Accountancy
Insurance Commission
The Board of Accountancy shall be composed of a chairman and ________ members to be appointed by the
______________________.
a.
b.
c.
d.
29.
Two years on or before December 31
Two years on or before September 30
Three years on or before December 31
Three years on or before September 30
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.
b.
c.
d.
28.
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.
b.
c.
d.
27.
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,
Bureau of Internal Revenue (BIR)
Commission on Audit (COA)
Securities and Exchange Commission (SEC)
Professional Regulations Commission (PRC)
None of the above
Which of the following is the accredited national professional organization of CPAs?
a.
b.
PICPA
ASC
c.
d.
AASB
FRSC
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33.
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.
b.
34.
1 year
2 years
3 years
5 years
3 years
5 years
3 years
Indefinite period of time
c.
d.
12 years
1 year
c.
d.
12 years
1 year
An applicant for the CPA licensure examination should be
I.
II.
III.
a.
b.
38.
c.
d.
No person shall serve the BOA for more than
a.
b.
37.
12 years
1 year
No person who has served two (2) successive complete terms shall be eligible for reappointment until the
lapse of __________ year.
a.
b.
36.
c.
d.
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?
a.
b.
35.
3 years
5 years
A Filipino Citizen
Of good moral character
A holder of the degree of Bachelor of Science in Accountancy
I and II only
I and III only
c.
d.
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.
b.
39.
c.
d.
Conditioned
None of the choices
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.
b.
40.
Passed
Failed
4
8
c.
d.
16
24
Which of the following is correct?
a.
b.
c.
d.
The Certificate of Registration issued to successful examinees is renewable every three years
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
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
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41.
How many credit units are earned by a CPA who serves as a resource at a CPD seminar?
a.
b.
c.
d.
42.
How many credit units are earned by a CPA who serves as a resource at a CPD seminar?
a.
b.
c.
d.
43.
60 CU per hour
5 CU per hour
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.
b.
c.
d.
44.
60 CU per hour
5 CU per hour
3 CU per hour
Full credit units for compliance period upon completion of degree
If he is at least 65 years old
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
The statement of the Management’s Responsibility to accompany the financial statements to be filed with the
SEC shall be signed by the
I.
II.
III.
a.
b.
Chairman of the Board of Directors
Chief Executive Officer
Chief Financial Officer
II and III only
I only
c.
d.
I and Ii
I, II, and III
Professional Regulatory Board of Accountancy
Resolution No. 18, Series of 2018 and the Code of Ethics
45.
The underlying reason for a code of professional conduct for any profession is
a.
b.
c.
d.
46.
The need for public confidence in the quality of service of the profession
That it provides a safeguard to keep unscrupulous people out
That it is required by legislation
That it allows licensing agencies to have a yardstick to measure deficient behavior
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.
b.
c.
d.
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
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
47.
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.
b.
Integrity
Objectivity
c.
d.
Professional competence and due care
Confidentiality
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48.
According to the code of ethics, which of the following is not a fundamental principle?
a.
b.
49.
Integrity
Independence
c.
d.
Professional Competence and Due Care
Confidentiality
Under the code of ethics, independence is most likely impaired when
a.
b.
c.
d.
An immediate family member of a member of the audit team is a director of the client
The firm purchases goods and services from the client
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
50.
Fundamental principles are potentially affected by
I.
II.
III.
IV.
V.
a.
b.
51.
c.
d.
I, II, and III
I only
A financial interest in a client or jointly holding a financial interest with a client
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 agreedupon 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.
b.
c.
d.
53.
I, II, III, IV, and V
I, II, III, and IV
Which of the following circumstance may create a self-interest threats for a professional accountant in public
practice?
a.
b.
c.
d.
52.
Self-interest threat
Self-review threat
Advocacy threat
Familiarity threat
Intimidation threat
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
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.
b.
c.
d.
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
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
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54.
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.
b.
55.
c.
d.
c.
d.
Advocacy threat
Intimidation threat
Self-review and intimidation threats
Self-interest and advocacy threats
Familiarity and intimidation threats
Self-interest and self-review threats
Promoting shares in an audit client
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.
b.
c.
d.
61.
Self-review threat
Self-interest threat
The following circumstances create advocacy threats for a professional account in public practice except
a.
b.
c.
d.
60.
A member of the engagement team is the spouse of the accounting manager of the client
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
What threats to independence are created when a contingent fee is charged by a firm in respect of an
assurance engagement?
a.
b.
c.
d.
59.
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
Which threat is present if an auditor promotes the position of the client in a specific situation?
a.
b.
58.
Advocacy threat
Intimidation threat
Familiarity threat could be created under the following circumstances, except
a.
b.
57.
c.
d.
Which of the following will not create self-interest threat to professional account in public practice?
a.
b.
c.
d.
56.
Self-review threat
Self-interest threat
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
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.
b.
Disclosing to the audit committee, or others charged with governance, the extent and nature of the
litigation
If the litigation involves a member of the assurance team, removing that individual from the assurance
team
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c.
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
Withdraw from, or refuse to accept, the assurance engagement
d.
62.
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.
b.
Follow the established policies of the employing organization to seek a resolution of such conflict
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
accountancy body or regulatory body to obtain an understanding of possible courses of action
Report the matter to the Securities and Exchange Commission
c.
d.
63.
Which of the following safeguards to eliminate or reduce threats to independence is provided by the
profession, legislation, or regulation?
a.
b.
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
to independence
Continuing professional development requirements
Rotation of senior personnel
c.
d.
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
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
b.
c.
d.
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.
b.
c.
d.
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
a.
b.
c.
d.
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.
II.
III.
IV.
V.
VI.
Inquiries of management and others within the entity
Confirmation
Reperformance
Analytical procedures
Observation
inspection
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a.
b.
68.
Maintenance
Yes
No
No
Yes
Control Activities
Monitoring of controls
c.
d.
Control Environment
Entity's risk assessment process
Integrity and ethical values
Commitment to competence
c.
d.
Organizational structure
Information and communication system
Assesses the need to apply PSAs
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
Risk assessment procedures
Test of controls
c.
d.
Substantive procedures
Both a and c
As the acceptable level of detection risk decreases, an auditor may change the
a.
b.
c.
d.
75.
Implementation
Yes
Yes
No
No
The auditor is not always required to perform
a.
b.
74.
Design
Yes
Yes
Yes
No
After obtaining a sufficient understanding of the client’s internal control, the auditor
a.
b.
c.
d.
73.
Design appropriate audit
procedures
Yes
Yes
No
No
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 include all of the
following except.
a.
b.
72.
Identify and assess the risk of
material misstatement
Yes
Yes
Yes
No
It sets the tone of the organization, provides discipline and structure, and influences the control consciousness
of employees
a.
b.
71.
I, IV, V and VI only
I, II, III, IV, V and VI
When obtaining understanding of the entity’s control, the auditor should obtain knowledge about the internal
control’s
a
b
c
d
70.
c.
d.
The auditor should obtain sufficient understanding of the entity and its environment, including its internal
control in order to
a
b
c
d
69.
I, II, III, IV only
I, II, IV, V, and VI only
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.
b.
Analytical procedures
Test of details of transactions
c.
d.
Test of controls
Test of details of balances
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GATHERING SUFFICIENT APPROPRIATE AUDIT EVIDENCE
76.
The best evidence regarding year-end bank balances is documented in the
a.
b.
77.
b.
c.
d.
The audit client
The auditor
c.
d.
The regulators
Either a or b
Recomputation of the allowance for bad debts
Inspection of accounts for current versus non-current status in the statement of financial position
Inspection of the aging schedule and credit records of past due accounts
Comparison of the allowance for bad debts with pas records
Existence
Completeness
c.
d.
Rights and obligations
Valuation and allocation
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.
b.
c.
d.
84.
This is not a request for payment; remittances should not be sent to our auditors in the enclosed
envelope
Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this
amount agrees with your records
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
Purchase cut-off procedures should be designed to test whether all inventory
a.
b.
c.
d.
83.
Simultaneous verification
Simultaneous surprise cash count
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 evidence concerning
a.
b.
82.
c.
d.
All of the following are examples of substantive tests to verify the valuation of net accounts receivable except
the
a.
b.
c.
d.
81.
Simultaneous confirmation
Simultaneous bank reconciliation
Who should receive the confirmation replies?
a.
b.
80.
Interbank transfer schedule
Bank deposit lead schedule
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.
79.
c.
d.
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?
a.
b.
78.
Cutoff bank statement
Bank reconciliations
An auditor’s objective is to determine whether the securities are authentic
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
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?
a.
b.
c.
To determine whether securities are authentic
To determine whether securities are the property of the client
To determine whether securities actually exist
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d.
85.
An auditor is most likely to verify the interest earned on bond investment by
a.
b.
c.
d.
86.
b.
c.
d.
Completeness
Rights and obligations
A patent attorney
The SEC
c.
d.
The patent inventor
The patent owner
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
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.
b.
c.
d.
92.
c.
d.
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
a.
91.
Valuation
Existence
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.
b.
90.
Inspecting documents and physically examining assets
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.
b.
89.
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.
b.
c.
d.
88.
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.
b.
c.
d.
87.
To determine whether securities are properly classified on the balance sheet date
Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and
accounted for
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 that
a.
b.
c.
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
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d.
Changes in the accounts are verified by a bank serving as a registrar and stock transfer agent
93.
The auditor does not expect the client to debit retained earnings for which of the following transactions?
94.
a. A 10% stock dividend
b. An appropriation of retained earnings for treasury shares
c. A large stock dividend
d. A four for one stock split
Which is true about substantive analytical procedure?
a.
b.
c.
d.
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
95.
Which of the following exclusively pertains to sampling risks, as opposed to non-sampling risks?
I.
II.
III.
a.
b.
96.
Failure to draw a random sample
Component of detection risk
Failure to perform a procedure
I only
I and II
c. systematic sample selection.
d. computerized sample selection.
Sampling risk is
a.
b.
c.
d.
101.
c. judgment sample.
d. representative sample.
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.
100.
c. poor judgment.
d. none of the above.
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.
b. statistical sample.
99.
c. attributes sample.
d. random sample.
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.
98.
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.
97.
c.
d.
the risk that an auditor reaches an incorrect conclusion because the sample is not representative of the
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.
Which of the following statements is correct?
a.
b.
c.
d.
A sample of all items of a population will eliminate sampling risk, but increase nonsampling risk.
The use of an appropriate sample selection technique ensures a representative sample.
The auditor’s failure to recognize an exception is a significant cause of sampling risk.
The use of inappropriate audit procedures is a significant cause of nonsampling risk.
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102.
The risk which the auditor is willing to take of accepting a control as being effective when it is not is the
a.
b.
c.
d.
103.
finite correction factor.
tolerable exception rate.
acceptable risk of assessing control risk too low.
estimated population exception rate.
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.
b. estimated population exception rate.
104.
A statistical method used to estimate the proportion of items in a population containing a characteristic of
interest is
a.
b.
c.
d.
105.
attributes sampling.
variables sampling.
estimation sampling.
population-proportional-to-size sampling.
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.
b. estimated population exception rate.
106.
The auditor can define the population to include whatever data is desired.
The auditor may generalize only about that population which has been sampled.
The population represents the body of data about which the auditor wishes to generalize.
The auditor can randomly sample from whatever part of the population that he or she chooses.
The tolerable exception rate (TER) has a significant effect on sample size. The relationship of TER to sample size
is
a.
b.
c.
d.
110.
can conclude that the sample exception rate is 2%.
can conclude that the population exception rate is 2%.
can calculate the highest exception rate expected in the population.
cannot make any conclusions about either the sample or the population.
Which of the following statements regarding the process of defining the population is not correct?
a.
b.
c.
d.
109.
c. experience of the previous year.
d. computed upper exception rate (CUER).
If an auditor, without statistical sampling, selects a sample of one hundred items from a population and finds
two exceptions, the auditor
a.
b.
c.
d.
108.
c. sample exception rate.
d. tolerable exception rate.
The auditor’s best estimate of the population exception rate is the
a. sample exception rate.
b. tolerable exception rate (TER).
107.
c. acceptable risk of overreliance.
d. sample exception rate.
direct (larger TER = larger sample).
inverse (larger TER = smaller sample).
variable (sometimes larger, sometimes smaller).
not determinable.
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.
b.
c.
d.
variable (sometimes larger, sometimes smaller).
direct (larger ARACR = larger sample).
inverse (larger ARACR = smaller sample).
nonexistent.
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111.
Which of the following combinations of attributes and exception conditions is inappropriate.
a.
b.
c.
d.
112.
A means of reducing the potential bias in systematic sample selection is to
a.
b.
113.
b.
c.
d.
Testing of internal controls.
Substantive testing of transactions.
Substantive testing of details of balances.
Tests for rates of occurrence are appropriate for all of the above.
statistical sampling.
nonstatistical sampling.
c.
d.
monetary-unit sampling.
all of the above.
attributes sampling.
variables sampling.
c.
d.
discovery sampling.
monetary-unit sampling.
The primary factor affecting the auditor’s decision about ARIA is
a.
b.
c.
d.
118.
Accept the sample results as support for planned reliance on the control because the tolerable rate less
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.
The most commonly used method of statistical sampling for tests of details of balances is
a.
b.
117.
include a large block of the population.
include only the high-Peso-value items.
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.
b.
116.
c.
d.
Tests for rates of occurrence are appropriately used in all but which of the following situations?
a.
b.
c.
d.
115.
use multiple starts.
use a random number table.
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.
114.
Existence of sales invoice number in the sales journal – No record of sales invoice number in the sales
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.
assessed control risk.
assessed inherent risk.
the interaction between control risk and inherent risk.
sample size.
In monetary-unit sampling, the relationship between the tolerable misstatement size and the required sample
size is
a.
b.
c.
d.
direct; that is, larger tolerable misstatement leads to larger sample size.
inverse; that is, larger leads to smaller.
varied; that is, sometimes larger = larger, and sometimes larger = smaller.
indeterminable.
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119.
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.
b.
c.
d.
120.
When using monetary-unit sampling, evaluating the likelihood of unrecorded items in the population
a.
b.
121.
attributes and variables.
variables and attributes.
c.
d.
constants and attributes.
constants and variables.
attributes sampling.
monetary-unit sampling.
c.
d.
block sampling.
variables sampling.
ratio estimation.
discovery sampling.
c.
d.
difference estimation.
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.
b.
c.
d.
125.
is possible but difficult.
is an automatic outcome of the process.
Stratified sampling is applicable to difference, mean-per-unit, and ratio estimation, but it is most commonly
used with
a.
b.
124.
c.
d.
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.
b.
123.
is unnecessary.
is impossible.
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.
b.
122.
the upper bound.
the tolerable risk.
the acceptable risk of incorrect acceptance.
the lower bound.
sample mean.
standard deviation.
standard error of the sample mean.
estimated population total minus the actual population.
Using statistical sampling to assist in verifying the year-end accounts payable balance, an auditor has
accumulated the following data:
Balance
Number of
Book
determined by
accounts
balance
the auditor
Population:
4,100
P5,000,000
?
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.
b.
P5,050,000.
P5,125,000.
c.
d.
P6,000,000.
P6,150,000.
Factors influencing sample size for tests of control
a
b
126.
An increase in the auditor’s intended reliance on accounting and
internal control systems.
Increase
Decrease
127.
An increase in the rate of deviation from the prescribed control
procedure that the auditor is willing to accept. Tolerable error.
Increase
Decrease
128.
An increase in the rate of deviation from the prescribed control
procedure that the auditor expects to find in the population. Expected
error.
Increase
Decrease
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Factors influencing sample size for tests of control
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.
130.
An increase in the number of sampling units un the population
a
b
Increase
Decrease
Negligible
effect
Factors influencing sample size for substantive procedures
a
b
131.
An increase in the auditor’s assessment of inherent risk.
Increase
Decrease
132.
An increase in the auditor’s assessment of control risk.
Increase
Decrease
133.
An increase in the use of other substantive procedures directed at the
same financial statement assertion
Increase
Decrease
134.
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).
Increase
Decrease
135.
An increase in the total error that the auditor is willing to accept.
Tolerable error.
Increase
Decrease
136.
An increase in the amount of error that auditor expects to find in the
population. Expected error.
Increase.
Decrease
137.
Stratification of the population when appropriate
Increase
Decrease
138.
The number of sampling units in the population
Negligible
effect
AUDITING IN A CIS ENVIRONMENT
139.
______ involves implementing a system in one part of the organization, while other locations continue to use
the current system.
a. Parallel testing.
b. Online testing.
140.
Which of the following statements about general controls is not correct?
a.
b.
c.
d.
141.
Backup and disaster recover plans should identify alternative hardware to process company data.
Successful IT development efforts require the involvement of IT and non-IT personnel.
The chief information officer should report to senior management and the board.
Programmers should have access to computer operations to aid users in resolving problems.
In complex IT systems, which of the following factors does not increase the likelihood of material
misstatements in the financial statements?
a.
b.
c.
d.
142.
Reduced human involvement.
Uniformity of processing.
Ease of access to data.
Specialists are needed to write computer programs.
A control which relates to all parts of the IT system is called a(n)
a. general control.
b. systems control.
143.
c. Pilot testing.
d. None of the above.
c. universal control.
d. applications control.
Controls which apply to a specific use of the system are called
a. user controls.
b. general controls.
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c. systems controls.
d. applications controls.
144.
Auditors usually evaluate the effectiveness of
a.
b.
c.
d.
145.
hardware controls first.
sales-cycle controls first.
general controls before applications controls.
applications controls first.
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.
146.
c. output controls.
d. general controls.
An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions
such as
a.
b.
c.
d.
time tickets with invalid job numbers.
overtime not approved by supervisors.
deductions not authorized by employees.
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.
b.
c.
d.
149.
Which of the following is an incorrect combination of the “likelihood of occurrence” and financial statement
treatment?
a.
b.
c.
d.
150.
Remote – no disclosure.
Probable (amount is estimable) – financial statements are adjusted.
Reasonably possible (amount is estimable) – financial statements are adjusted.
Probable (amount is not estimable) – footnote disclosure is required.
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.
b.
151.
disclosed in footnotes, but not accrued.
neither accrued nor disclosed in footnotes.
accrued and indicated in the body of the financial statements.
disclosed in the auditor’s report but not disclosed on the financial statements.
management letter.
letter of inquiry.
c.
d.
letters testamentary.
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.
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152.
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.
b.
153.
late unusual occurrences.
subsequent events.
presentation and disclosure.
completeness.
c.
d.
existence.
rights and obligations.
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.
b.
c.
d.
155.
c.
d.
Audit procedures related to contingent liabilities are initially focused on
a.
b.
154.
contingent liabilities.
subsequent year’s transactions.
Inquire of management about the potential for unrecorded liabilities.
Review the minutes of directors’ meetings for indication of lawsuits or other contingencies.
Review of personnel files for evidence of potential employment lawsuits.
Analyze legal expenses for the period under audit.
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.
b.
c.
d.
157.
took place before year-end.
did not take place until after year-end.
occurred both before and after year-end.
are reimbursable through insurance policies.
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. the auditor’s date on the report (3/30/19) and the review required when the client files a registration
statement with the SEC (5/30/19).
c. 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 before the auditor’s report
was issued.
d. 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.
b.
c.
d.
Company management.
Auditors.
Company’s legal counsel at the direction of company management.
All of the above.
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160.
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.
b.
c.
d.
161.
To evaluate the performance of inexperienced personnel.
To counteract the bias that frequently enters into the auditor’s judgment.
To make sure that the audit meets the CPA firm’s standard of performance.
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.
162.
“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.
b.
c.
d.
163.
Which of the following is a required condition for a contingent liability to exist?
a.
b.
c.
d.
164.
Controller.
President.
Accounts receivable clerk.
Vice president of sales.
At what stages of the audit must analytical procedures be used?
a.
b.
c.
d.
166.
The amount of the future payment is known.
The liability resulted from an existing condition.
The outcome has been resolved by a current event.
There is a potential liability to an employee of the client.
With which of the following client personnel would it not generally be appropriate to inquire about
commitments or contingent liabilities?
a.
b.
c.
d.
165.
current liability.
long-term liability.
accrued liability.
none of the above.
Planning and testing.
Testing and completion.
Planning and completion.
Planning, testing, and completion.
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. Knowledge of the client’s business gained throughout the audit.
d. All of the above are important procedures and methods used in assessing going concern.
167.
Inquiries of management regarding the possibility of unrecorded contingencies will not be useful in uncovering
a.
b.
c.
d.
management’s intentional failure to disclose existing contingencies.
a particular type of contingency which management has overlooked.
when management does not comprehend accounting disclosure requirements.
all three of the above items.
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168.
Which of the following procedures might be useful in discovering a contingent liability for a lawsuit that
management is intentionally neglecting to disclose?
a.
b.
c.
d.
169.
The standard letter of inquiry from the client’s legal counsel should be prepared on
a.
b.
c.
d.
170.
Inquiries (orally and in writing) of management.
Analyzing legal expense and review invoices and statements from outside legal counsel.
Reviewing current and previous years’ internal revenue agent reports.
Obtaining a letter of representation from management that it is aware of no undisclosed
contingent liabilities.
plain paper (no letterhead) and be unsigned.
lawyer’s stationery and signed by the lawyer.
auditor’s stationery and signed by an audit partner.
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.
b.
c.
d.
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.
b.
c.
d.
173.
A customer declared bankruptcy on 1/31/19.
Investments on the books at a cost of P100,000 were sold on 2/l/19 for P60,000.
Uninsured inventory valued at P100,000 on 12/31/18 was destroyed in a fire on 2/l/19.
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.
When should auditors generally assess a client’s ability to continue as a going concern?
a.
b.
c.
d.
174.
be dated as of the end of the period under audit.
be dated as of the audit report date.
be dated as of any date decided upon by the client and auditor.
be left undated.
Upon completion of the audit.
During the planning stages of the audit.
Throughout the entire audit process.
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.
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175.
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-ofcost-or-market valuation.
176.
Which of the following is not a matter that is typically included in the letter of representation obtained from an
audit client.
a.
b.
c.
d.
177.
Which of the following statements regarding the letter of representation is not correct?
a.
b.
c.
d.
178.
It is prepared on the client’s letterhead.
It is addressed to the CPA firm.
It is signed by high-level corporate officials, usually the president and chief financial officer.
It is optional, not required, that the auditor obtain such a letter from management.
Refusal by a client to prepare and sign the representation letter would require a(n)
a.
b.
c.
d.
179.
Availability of all financial records and related data.
Absence of unrecorded transactions.
Compliance with aspects of contractual agreements that may affect the financial statements.
Assessment of management’s effectiveness.
qualified opinion or a disclaimer.
adverse opinion or a disclaimer.
qualified or an adverse opinion.
unqualified opinion with an explanatory paragraph.
A client representation letter is a written statement from a non-independent source and, therefore,
a.
b.
c.
d.
cannot be regarded as reliable evidence.
can be regarded as reliable evidence only if the auditor finds a strong internal control system.
can be regarded as reliable evidence if the high-level corporate officials who sign it are trustworthy.
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.
182.
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.
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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.
b.
c.
d.
184.
Review compliance with the terms of debt agreements.
Confirmation of accounts receivable from principal customers.
Reconciliation of interest expense with debt outstanding.
Confirmation of bank balances.
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.
b.
c.
d.
186.
Which of the following auditing procedures is ordinarily performed last?
a.
b.
c.
d.
187.
disclaimer of opinion.
qualified opinion.
standard unqualified opinion.
unqualified opinion with a separate explanatory paragraph.
Reading of the minutes of the directors’ meetings.
Confirming accounts payable.
Obtaining a management representation letter.
Testing of the purchasing function.
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
which minutes are not available, inquire about matters dealt with at such meetings.
c. 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.
b.
c.
d.
The auditor’s report.
A post-dated footnote.
The next scheduled interim visit.
The final billing for audit services rendered.
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190.
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.
b.
c.
d.
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.
b.
c.
d.
192.
Sale of a bond or capital stock issue.
Loss of plant or inventories as a result of fire or flood.
A major drop in the quoted market price of the stock of the corporation.
Settlement of litigation when the event giving rise to the claim took place after the balance sheet date.
Loss of a plant as a result of a flood.
Sale of long-term debt or capital stock.
Settlement of litigation in excess of the recorded liability.
Major purchase of a business that is expected to double the sales volume.
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 and 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.
193.
Why must audit documentation be reviewed?
a.
b.
c.
d.
194.
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.
b.
c.
d.
195.
To ensure that the audit meets the CPA firm’s standard of performance.
To evaluate the performance of inexperienced personnel.
To counteract bias that often enters into the auditor’s judgment.
All of the above are reasons for review of audit documentation.
Final analytical procedures.
Search for contingent liabilities.
Evaluate the going concern assumption.
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 written documentation which is a higher quality of evidence than management’s oral
responses to inquiries.
196.
A CPA has received an attorney’s letter in which no significant disagreements with the client’s assessments of
contingent liabilities were noted. The resignation of the client’s lawyer shortly after receipt of the letter should
alert the auditor that
a.
b.
c.
d.
an adverse opinion will be necessary.
undisclosed unasserted claims may have arisen.
the auditor must begin a completely new examination of contingent liabilities.
the attorney was unable to form a conclusion with respect to the significance of litigation, claims, and
assessments.
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197.
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.
b.
c.
d.
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.
b.
c.
d.
200.
the treasurer and the internal auditor.
the president and the chairperson of the board.
the chief executive officer and the chief financial officer.
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.
b.
c.
d.
203.
Send the standard bank confirmation request to all of the client’s lender banks.
Review client minutes and obtain a representation letter.
Examine supporting documents for all entries in intercompany accounts.
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.
b.
c.
d.
202.
Review minutes and resolutions of the board of directors.
Review prior year’s audit files with respect to such guarantees.
Review the possibility of such guarantees with the chief accountant.
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.
b.
c.
d.
201.
asserted claims and litigation.
asserted, overtly threatened, or pending claims and litigation.
items which have an extremely high probability of being resolved to the client’s detriment.
matters to which the attorney has given substantive attention in the form of legal consultation or
representation.
the culmination of conditions that existed at the balance sheet date.
the discovery of new conditions occurring in the subsequent events period.
the final estimates of losses relating to casualties occurring in the subsequent events period.
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.
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204.
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 report.
b. final determination or resolution was made of a contingency which had been disclosed in the financial
statements.
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.
205.
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.
b.
c.
d.
206.
Sale of a major subsidiary.
Adoption of accelerated depreciation methods.
Write-off of a substantial portion of inventory as obsolete.
Collection of 90% of the accounts receivable existing at December 31.
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.
b.
c.
d.
208.
Which of the following sections in the auditor’s report shall be placed immediately after the Opinion section?
a.
b.
c.
d.
209.
Management’s responsibilities for the financial statements
Auditors responsibilities for the audit of the financial statements
Basis for opinion
Other reporting responsibilities
The basis for Opinion section of the auditor’s report shall
a.
b.
c.
d.
210.
Responsibilities for the financial statements
Opinion
Auditor’s responsibilities for the audit of the financial statements
Basis for opinion
State that the financial statements have been audited
State 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
Which of the following management’s responsibilities shall be described in the responsibilities for the financial
statements section of the auditor’s report?
a.
b.
c.
d.
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
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
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211.
The description of the auditor’s responsibilities for the audit of the financial statement shall be included
I.
II.
III.
a.
b.
212.
b.
c.
d.
214.
I only
II only
c.
d.
I or II only
I, II, or III
Which of the following statements concerning communication of key audit matters in the auditor’s report is
incorrect?
a.
213.
Within the body of the auditor’s report
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
Communicating key audit matters in the auditor’s report enhances the communicative value of the
auditor’s report by providing greater transparency about the audit that was performed
Communicating key audit matters provides additional information to intended users of the financial
statements to assist them in understanding those matters that, in the auditor’s professional judgment,
were of most significance in the audit of the financial statements of the current and prior periods.
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.
Communicating key audit matters in the auditor’s report is
A
B
C
D
A substitute for disclosures in the financial statements
Yes
Yes
No
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
No
Yes
Yes
No
A separate opinion on individual matters
Yes
Yes
No
No
PSA 705 prohibits the auditor from communicating key audit matters when the auditor expresses
a.
b.
c.
d.
Unmodified opinion
Qualified opinion
Adverse opinion
Disclaimer of opinion
Common sense not so common
215.
Choose the sentence that uses complement or compliment correctly
a.
b.
c.
d.
After the last hiring phase, we finally had a full compliment of customer service reps ready to answer calls
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
The complements she received did not make Chelsea feel better about her defeat in the golf tournament
216.
In your thesis writing, whenever you use data from another study or literature, make sure you < (a) site (b) cite
> your sources.
217.
The business rationale, as understood by the auditor does not < (a) jibe (b) jive (c) gibe > with evidences
gathered about the client reported revenues.
218.
As part of good control, only 1 person should know his password and other < (a) login (b) log in > information.
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219.
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 largest 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 architecture
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.
b.
c.
d.
220.
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.
b.
c.
d.
defy his enemies
overcome all difficulties
face a situation boldly
be very pragmatic
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