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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDITING THEORY
Overview of Auditing
Related PSAs : PSA 100, 120, 200 and 610
1.
Certain fundamental beliefs called "postulates" underlie auditing theory. Which of the
following is not a postulate of auditing?
a. No long-term conflict exists between the auditor and the management of the enterprise
under audit.
b. Economic assertions can be verified.
c. The auditor acts exclusively as an auditor.
d. An audit has a benefit only to the owners.
2.
In all cases, audit reports must
a. Be signed by the individual who performed the audit procedures.
b. Certify the accuracy of the quantitative information which was audited.
c. Communicate the auditor’s finding to the general public.
d. Inform readers of the degree of correspondence between the quantifiable information and
the established criteria.
3.
The auditor communicates the results of his or her work through the medium of the
a. Engagement letter
c. Management letter.
d. Financial statements.
b. Audit report
4.
As used in auditing, which of the following statements best describes "assertions"?
a. Assertions are the representations of management as to the reliability of the information
system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial
statements.
d. Assertions are found only in the footnotes to the financial statements.
5.
The expertise that distinguishes auditors from accountants is in the
a. Ability to interpret generally accepted accounting principles.
b. Requirement to possess education beyond the Bachelor’s degree.
c. Accumulation and interpretation of evidence.
d. Ability to interpret ASC Statements.
6.
The framework for auditing and related services as addressed by PSA excludes
a. Review
c. Compilation
b. Tax services
d. Agreed upon procedure
7.
It refers to the level of auditor’s satisfaction as to the reliability of an assertion being made by
one party for use by another party.
a. Confidence level
c. Assurance level
b. Reasonableness level
d. Tolerable level
8.
Indicate the level of assurance provided by audit and related services.
a
b
c
High
High
Negative
• Audit
Moderate
None
Moderate
• Review
None
None
None
• Agreed-upon procedures
None
None
None
• Compilation
9.
d
Absolute
High
Limited
None
Which of the following is true of the report based on agreed-upon-procedures?
a. The report is restricted to those parties who have agreed to the procedures to be
performed.
b. The CPA provides the recipients of the report limited assurance as to reasonableness of
the assertion(s) presented in the financial information.
c. The report states that the auditor has not recognized any basis that requires revision of
financial statements.
d. The report should state that the procedures performed are limited to analytical procedures
and inquiry.
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10.
Which of the following is an objective of a review engagement?
a. Expressing a positive opinion that the financial information is presented in conformity with
generally accepted accounting principles.
b. Expressing a limited assurance to users who have agreed as to procedures that will be
performed by the CPA.
c. Reporting whether material modifications should be made to such financial statements to
make them conform with generally accepted accounting principles.
d. Reporting that the financial statements, in all materials respects, fairly present the
financial position and operating results of the client.
11.
According to Philippine Standard on Auditing, the procedures employed in doing compilation
are:
a. Designed to enable the accountant to express a limited assurance.
b. Designed to enable the accountant to express a negative assurance.
c. Not designed to enable the accountant to express any form of assurance.
d. Less extensive than review procedures but more extensive than agreed-upon procedures.
12.
Any services in which the CPA firm issues a written communication that express a conclusion
with respect to the reliability of a written assertion that is the responsibility of another party is
a (n)
a. Accounting and bookkeeping service
c. Attestation service
b. Management advisory service
d. Tax service
13.
The three types of attestation services are:
a. Audits, review, and compilations
b. Audits, compilations, and other attestation services
c. Reviews, compilations, and other attestation services
d. Audits, reviews, and other attestation services
14.
Which of the following is not primary category of attestation report?
a. Compilation report
b. Review report
c. Audit report
d. Special audit report based on a basis of accounting other than generally accepted
accounting principles.
15.
The primary goal of the CPA in performing the attest function is to
a. Detect fraud
b. Examine individual transactions so that the auditor may certify as to their validity
c. Determine whether the client's assertions are fairly stated
d. Assure the consistent application of correct accounting procedures
16.
Which of the following criteria is unique to the independent auditor’s attest function?
a. General competence
b. Familiarity with the particular industry of each client
c. Due professional care
d. Independence
17.
Assurance engagement
a. Is an engagement in which a practitioner is engaged to issue, or does issue, a written
communication that expresses a conclusion about the reliability of a written assertion that
is the responsibility of another party.
b. Is a systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence
between those assertions and established criteria and communicating the results to
interested users.
c. Is an engagement in which the auditor provides a moderate level of assurance that the
information subject to the engagement is free of material misstatement.
d. Is an engagement intended to enhance the credibility of information about a subject
matter by evaluating whether the subject matter conforms in all material respects with
suitable criteria, thereby improving the likelihood that the information will meet the needs
of an intended user.
18.
The single feature that most clearly distinguishes auditing, attestation, and assurance is
a. Type of service.
c. Scope of services.
b. Training required to perform the service
d. CPA’s approach to the service
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19.
Identify the following as financial audit (FA), compliance audit (CA), and operational audit
(OA).
• A supervisor is not carrying out his assigned responsibilities.
• A company’s tax return does not conform to income tax laws and regulations.
• A municipality’s financial statements correctly show actual cash receipts and
disbursements.
• A company’s receiving department is inefficient.
c. OA, CA, FA, OA
a. CA, CA, FA, OA
b. OA, CA, CA, OA
d.
CA, CA, FA, CA
20.
The criteria for evaluating quantitative information vary. For example, in the audit of historical
financial statements by CPA firms, the criteria are usually
a. Generally accepted auditing standards.
b. Generally accepted accounting principles.
c. Regulations of the Internal Revenue Service.
d. Regulations of the Securities and Exchange Commission.
21.
Which of the following types of audit uses as its criteria laws and regulations?
a. Operational audit
c. Financial statement audit
b. Compliance audit
d. Financial audit
22.
An operational audit is designed to
a. Assess the efficiency and effectiveness of management’s operating procedures
b. Assess the presentation of management’s financial statements in accordance with
generally accepted accounting principles
c. Determine whether management has complied with applicable laws and regulations
d. Determine whether the audit committee of the board of directors is effectively discharging
its responsibility to oversee management’s operations
23.
A review of any part of an organization’s procedures and methods for the purpose of
evaluating efficiency and effectiveness is classified as a (n)
a. Audit of financial statements
c. Operational audit
b. Compliance audit
d. Production audit
24.
Which one of the following is more difficult to evaluate objectively?
a. Efficiency and effectiveness of operations.
b. Compliance with government regulations.
c. Presentation of financial statements in accordance with generally accepted accounting
principles.
d. All three of the above are equally difficult..
25.
Independent auditing can best be described as a
a. Branch of accounting
b. Discipline that attests to the results of accounting and other operations and data
c. Professional activity that measures and communicates financial and business data
d. Regulatory function that prevents the issuance of improper financial information
26.
A financial statement audit:
a. Confirms that financial statement assertion are accurate.
b. Lends credibility to the financial statements.
c. Guarantees that financial statements are presented fairly.
d. Assures that fraud had been detected.
27.
Which of the following best describes the objective of an audit of financial statements?
a. To express an opinion whether the financial statements are prepared in accordance with
prescribed criteria.
b. To express an assurance as to the future viability of the entity whose financial statements
are being audited.
c. To express an assurance about the management’s efficiency or effectiveness in
conducting the operations of entity.
d. To express an opinion whether the financial statements are prepared, in all material
respect, in accordance with an identified financial reporting framework.
28.
Because an external auditor is paid a fee by a client company, he or she
a. Is absolutely independent and may conduct an audit
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b. May be sufficiently independent to conduct an audit
c. Is never considered to be independent
d. Must receive approval of the Securities and Exchange Commission before conducting an
audit
29.
Which of the following is responsible for an entity’s financial statements?
c. The entity’s audit committee
a. The entity’s management
b. The entity’s internal auditors
d. The entity’s board of directors
30.
The best statement of the responsibility of the auditor with respect to audited financial
statement is:
a. The audit of the financial statements relieves management of its responsibilities
b. The auditor’s responsibility is confined to his expression of opinion about the audited
financial statements.
c. The responsibility over the financial statements rests with the management and the
auditor assumes responsibility with respect to the notes of financial statements.
d. The auditor is responsible only to his unqualified opinion but not for any other type of
opinion.
31.
Which of the following least likely limits the auditors ability to detect material misstatement?
a. Most audit evidences are conclusive rather than being persuasive.
b. The inherent limitations of any accounting and internal control system.
c. Audit is based on testing
d. Audit procedures that are effective in detecting ordinary misstatements are ineffective in
detecting intentional misstatements.
32.
Because an examination in accordance with generally accepted auditing standards is
influenced by the possibility of material errors, the auditor should conduct the examination
with an attitude of
a. Professional responsiveness
c. Objective judgment
d. Professional skepticism
b. Conservative advocacy
33.
Which of the following best describes why an independent auditor reports on financial
statements?
a. Independent auditors are likely to detect fraud
b. Competing interests may exist between management and the users of the statements
c. Misstated account balances are generally corrected by an independent audit.
d. Ineffective internal controls may exist.
34.
An audit can have a significant effect on
a. Information Risk
b. The risk-free interest rate
c. Business Risk
d. All of these
35.
The main way(s) to reduce information risk is to have
a. The user verify the information
b. The user share the information risk with management
c. Audited financial statements provided
d. All of the above
36.
Which of the following is an appraisal activity established within an entity as a service to the
entity?
a. External auditing
c. Financial auditing
b. Internal auditing
d. Compliance auditing
37.
The scope and objectives of internal auditing vary widely and depend on the size and
structure of the entity and the requirements of its management. Ordinarily, internal auditing
activities include one or more of the following:
a
b
c
d
• Review of the accounting and internal control
Yes
Yes
Yes
Yes
systems
• Examination of financial and operating
Yes
Yes
Yes
No
information
• Review of the economy, efficiency and
Yes
Yes
No
No
effectiveness of operations
• Review of compliance with laws, regulations
Yes
No
No
No
and other external requirements
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38.
To operate effectively, an internal auditor must be independent of
a. The line functions of the organizations
b. The entity
c. The employer-employee relationship which exists for other employees in the organization
d. All of the above
39.
Internal auditors cannot be independent
a. Since they do not possess the CPA license.
b. Because they don’t audit financial statements.
c. Unless their immediate supervisor is a CPA.
d. As long as an employer-employee relationship exists.
40.
To provide for the greatest degree of independence in performing internal auditing functions,
an internal auditor most likely should report to
a. Board of Directors.
c. Corporate Controller.
b. Vice-President for Finance.
d. Corporate Stockholders.
41.
Which statement is correct regarding the relationship between internal auditing and the
external auditor?
a. Some judgments relating to the audit of the financial statements are those of the internal
auditor.
b. The external audit function's objectives vary according to management's requirements.
c. Certain aspects of internal auditing may be useful in determining the nature, timing and
extent of external audit procedures.
d. The external auditor is responsible for the audit opinion expressed, however that
responsibility may be reduced by any use made of internal auditing.
42.
Which of the following statements is not a distinction between independent auditing and
internal auditing?
a. Independent auditors represent third party users external to the auditee entity, whereas
internal auditors report directly to management.
b. Although independent auditors strive for both validity and relevance of evidence, internal
auditors are concerned almost exclusively with validity.
c. Internal auditors are employees of the auditee, whereas independent auditors are
independent contractors.
d. The internal auditor's span of coverage goes beyond financial auditing to encompass
operational and performance auditing.
43.
Which of the following is a correct qualification of the Chairman and Two Commissioners of
the Commission on Audit?
a. A citizen of the Philippines.
b. At least 40 years of age upon appointment.
c. CPA’s with no less than 5 years of auditing experience or members of Philippine bar who
have been engaged in law practice for at least 5 years.
d. Must not have been candidates for any elective position preceding appointment.
44.
The 1986 Constitution provides that the Chairman and Commissioners of the Commission on
Audit shall be
a. All Certified Public Accountants
b. All lawyers
c. One or two lawyers and one or two CPAs for a total of three
d. Two lawyers and one CPA
45.
Which of the following is not one of the duties of the Commission on Audit
a. Define the scope of its audit and examination
b. Assume fiscal responsibility for the government and its instrumentalities
c. Keep the general accounts of the government
d. Promulgate accounting rules and regulations
46.
A governmental audit may extend beyond an examination leading to the expression of an
opinion on the fairness of financial presentation to include
Program results
Compliance
Economy and efficiency
a.
Yes
Yes
No
b.
Yes
Yes
Yes
c.
No
Yes
Yes
d.
No
No
Yes
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47.
An audit designed to determine the extent to which the desired results of an activity
established by the legislative or other authorizing body are being achieved is a (an)
a. Economy audit
c. Program audit
b. Efficiency audit
d. Financial related audit
48.
A government auditor evaluates a disbursement to determine if it is necessary, excessive or
extravagant in accordance with existing rules and regulations. What kind of audit is he
conducting?
Compliance audit
Economy audit
a.
Yes
No
b.
No
Yes
c.
Yes
Yes
d.
No
No
QUIZZERS
1.
Which of the following is an incorrect phrase?
a. Auditing is a systematic process.
b. Auditing subjectively obtains and evaluates evidence.
c. Auditing evaluates evidence regarding assertions.
d. Auditing communicates results to interested users.
2.
Which of the following is a correct statement relating to the theoretical framework of auditing?
a. The financial data to be audited can be verified.
b. Short-term conflicts do not exist between managers who prepare data and auditors who
examine data.
c. Auditors do not necessarily need independence.
d. An audit has a benefit only to the owners.
3.
The essence of the attest function is to
a. Detect fraud
b. Examine individual transactions so that the auditor can certify as to their validity
c. Determine whether the client’s financial statements are fairly stated
d. Ensure the consistent application of correct accounting procedures
4.
In “auditing” accounting data, the concern is with
a. Determining whether recorded information properly reflects the economic events that
occurred during the accounting period.
b. Determining if fraud has occurred.
c. Determining if taxable income has been calculated correctly.
d. Analyzing the financial information to be sure that it complies with government
requirements.
5.
Users of financial statements demand independent audit because
a. Users demand assurance that fraud does not exist
b. Management may not be objective in reporting.
c. Users expect auditors to correct management errors.
d. Management relies on the auditor to improve internal control.
6.
Which of the following types of audits is performed to determine whether an entity’s financial
statements are fairly stated in conformity with generally accepted accounting principles?
c. Financial statement audit
a. Operational audit
b. Compliance audit
d. Performance audit
7.
Which of the following types of auditing is performed most commonly by CPAs on a
contractual basis?
a. Internal auditing
c. Government auditing
b. BIR auditing
d. External auditing
PSA 100 – Assurance engagements
8.
Which of the following is incorrect regarding the Philippine Standards on Assurance
Engagements (PSAE)?
a. It provides an overall framework for assurance engagements intended to provide either a
high or moderate level of assurance.
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b. It provides basic principles and essential procedures for engagements intended to provide
a moderate level of assurance.
c. When a professional accountant is engaged to perform an assurance engagement for
which specific standards exist, those standards apply.
d. If no specific standards exist for an assurance engagement, PSAE apply.
9.
An assurance engagement should exhibit the following elements except
c. Appropriate professional fee
a. A three party relationship
b. A conclusion
d. A subject matter
10.
Which of the following is incorrect regarding the “three-party relationship” element of
assurance engagements?
a. Professional accountants as those persons who are members of an IFAC member body,
which should be in public practice.
b. The responsible party and the intended user will often be from separate organizations but
need not be.
c. The responsible party is the person or persons, either as individuals or representatives of
an entity, responsible for the subject matter.
d. The intended user is the person or class of persons for whom the professional accountant
prepares the report for a specific use or purpose.
11.
The following are assurance engagements except
a. Financial statements audit
c. Review of financial statements
d. Tax consulting
b. Information system reliability services
12.
Engagements frequently performed by professional accountants that are not assurance
engagements include the following except
a. Agreed-upon procedures.
c. Compilation
b. Compliance audit
d. Management consulting.
13.
The subject matter of an assurance engagement may take many forms, including
a. Data
b. Systems and processes
c. Behavior
d. All of these
14.
The decision as to whether the criteria are suitable involves considering whether the subject
matter is capable of reasonably consistent evaluation against or measurement using such
criteria. The characteristics for determining whether criteria are suitable include the following,
except
d. Sufficiency
a. Relevance
b. Reliability:
c. Understandability:
15.
When the professional accountant has obtained sufficient appropriate evidence to conclude
that the subject matter conforms in all material respects with identified suitable criteria, he or
she can provide what level of assurance?
a. None
b. High
c. Moderate
d. Absolute
16.
Absolute assurance is generally not attainable as a result of such factors as:
a
b
Yes
Yes
• the use of selective testing,
Yes
Yes
• the inherent limitations of control systems
• the fact that much of the evidence available to
the professional accountant is persuasive
Yes
Yes
rather than conclusive
• the use of judgment in gathering evidence and
Yes
No
drawing conclusions based on that evidence
c
Yes
Yes
d
No
Yes
No
Yes
No
No
PSA 120 – Framework of PSA
17.
18.
19.
The Framework of PSA applies to
a. Taxation
b. Consultancy
c. Accounting advice
Agreed-upon procedures provides what level of assurance?
a. None
b. High
c. Moderate
d. Compilation
d. Absolute
Which of the following procedures ordinarily performed during an audit are also performed in
review?
a. Assessment of accounting and internal control systems
b. Test of controls
c. Tests of records and of responses to inquiries
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d. Inquiry and analytical procedures
20.
The objective of a review of financial statements
a. Is to enable 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. Is to enable 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.
c. Is to carry 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. Is to use accounting expertise as opposed to auditing expertise to collect, classify and
summarize financial information.
21.
An auditor is associated with financial information when
•
•
the auditor attaches a report to that
information
consents to the use of the auditor’s name in a
professional connection
a
b
c
d
Yes
No
Yes
No
Yes
Yes
No
No
PSA 200 – Objective and general principles governing an audit of FS
22.
The auditor’s opinion
a. Enhances the credibility of the financial statements.
b. Is an assurance as to the future viability of the entity.
c. Is an assurance as to the efficiency with which management has conducted the affairs of
the entity, but not effectiveness.
d. Certifies the correctness of the financial statements.
23.
Which of the following is incorrect regarding the general principles of an audit?
a. The auditor should comply with the “Code of Ethics for Professional Ethics for Certified
Public Accountants” promulgated by the Philippine Professional Regulation Commission.
b. The auditor should conduct an audit in accordance with PSAs.
c. The auditor should plan and perform an audit with an attitude of professional skepticism
recognizing that circumstances may exist that cause the financial statements to be
materially misstated.
d. The auditor would ordinarily expect to find evidence to support management
representations and assume they are necessarily correct.
24.
It refers to the audit procedures deemed necessary in the circumstances to achieve the
objective of the audit.
a. Scope of an audit
c. Objective of an audit
b. Audit program
d. Reasonable assurance
25.
Which of the following are sources of procedures to be considered by the auditor to conduct
an audit in accordance with PSAs?
a.
b.
c.
d.
PSA
Yes
No
No
Yes
Legislation
No
No
Yes
Yes
Terms of Audit Engagement
No
Yes
Yes
Yes
- end of AT-5901 -
Type of Opinion
No
Yes
No
No
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDITING THEORY
Professional Accounting Practice
Related PSA : Preface to PSA and Related Services
1.
The following statements relate to the accounting profession:
I.
To merit public trust and confidence, the professional person must convince the public that
he will place public service ahead of personal reward.
II. A CPA certificate is evidence of basic competence in the discipline of accounting at the time
the certificate is granted.
III. A code of professional conduct is one of the most important distinguishing characteristics of
a profession.
State whether the foregoing statements are true or false.
a. All of the statements are true.
c. Only two of the statements are true.
b. Only one of the statements is true.
d. All of the statements are false.
2.
Which of the following is not normally a service rendered by public accountants?
a.
Management consultation service
c. Internal auditing
b.
Attest function
d. Taxation
3.
A CPA firm offers management advisory services to clients. Its primary purpose is to
a. Furnish professional advice and assistance which will enable the client to improve
operations.
b. Keep the CPA firm competitive with other firms.
c. Establish the firm as a consultant, thus ensuring its future expansion and growth.
d. Permit the firm’s staff members to acquire expertise in other areas of practice.
4.
The government agency tasked by law of implementing and enforcing the regulatory policies
of the national government with respect to the regulation and licensing of the various
professions and occupations under its jurisdiction is
a. PRC
b. BOA
c. COA
d. SEC
5.
Which of the following mostly describes the function of ASPC?
a. To monitor full compliance by auditors to PSAs.
b. To promulgate auditing standards, practices and procedures that shall be generally
accepted by the accounting profession in the Philippines.
c. To assist the Board of Accountancy in conducting administrative proceedings on erring
CPAs in audit practice.
d. To undertake continuing research on both auditing and financial accounting in order to
make them responsive to the needs of the public.
6.
In the absence of pronouncements issued by the ASPC and the PICPA, published
statements and guidelines issued by other authoritative bodies like AICPA, IAASB and AFA
are the bases of determining generally accepted auditing standards (GAAS). What effect do
these pronouncements provide in determining the GAAS?
b. Persuasive
c. Parallel
d. Alternative
a. Authoritative
7.
Which statement is incorrect regarding the pronouncements of ASPC?
a. The PSAs and Interpretations may also have application, as appropriate, to other related
activities of auditors.
b. PSAs contain basic principles and essential procedures (identified in bold type black
lettering) together with related guidance in the form of explanatory and other material.
c. PSAs need only be applied to material matters.
d. The Interpretations have the same authority as the PAPSs.
8.
The Philippine Standards on Auditing issued by ASPC
a. Apply to independent examination of financial statements of any entity when such an
examination is conducted for the purpose of expressing an opinion thereon.
b. Must not apply to other related activities of auditors
c. Need to be applied on all audit related matters.
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d. Require that in no circumstances would an auditor may judge it necessary to depart from
a PSA, even though such a departure may result to more effective achievement of the
objective of an audit
9.
These statements are issued to provide practical assistance to auditors in implementing the
PSAs
c. PAPS
d. SPA
a. Interpretations
b. SASP
10.
A body that is created through the Philippine Accountancy Act of 2004 and is intended to
replace the ASPC.
a. Auditing and Assurance Standards Council (AASC)
b. Financial Reporting Standards Council (FRSC)
c. Education Technical Council (ETC)
d. Philippine Institute of Certified Public Accountants (PICPA)
11.
Which of the following government agencies is represented both to the Auditing Standards
and Practices Council and the Auditing and Assurance Standards Council?
a. Bangko Sentral ng Pilipinas
c. Securities and Exchange Commission
b. Bureau of Internal Revenue
d. Commission on Higher Education
12.
Are the following government agencies represented both to Auditing Standards and Practices
Council (ASPC) and the new Auditing and Assurance Standards Council (AASC)?
a
b
c
d
Yes
Yes
Yes
Yes
• Board of Accountancy
Yes
Yes
No
No
• Securities and Exchange Commission
Yes
Yes
Yes
Yes
• Commission on Audit
Yes
No
Yes
No
• Bangko Sentral ng Pilipinas
13.
Which statement is correct regarding AASC?
a. The AASC shall be composed of 15 members plus a Chairman.
b. The chairman and members of the AASC shall be appointed by the President of the
Philippines upon the recommendation of PRC.
c. The chairman and members of the AASC shall have a non-renewable term of 3 years.
d. The chairman should have been or presently a senior practitioner in public accountancy.
14.
The following sectors represented by the PICPA to the membership of AASC have one
representative, except
a. Government
c. Commerce and industry
d. Academe
b. Public practice
15.
Statements on financial accounting standards constituting GAAP are issued by the
a. Philippine Institute of CPAs.
c. Audit Standards and Practices Council.
d. Accounting Standards Council.
b. Securities and Exchange Commission.
16.
Indicate whether the following functions would be performed by:
P – Partner
S – Senior
M – Manager
AS – Audit Assistant
(1) Supervises two or more concurrent audit engagements
(2)
Performs detailed audit procedures
(3)
Overall responsibility for audit
(4)
Signs audit report
(1)
(2)
(3)
(4)
a.
P
AS
S
M
b.
M
S
M
P
c.
M
AS
P
P
d.
P
AS
S
M
17.
The amount of audit fees depend largely on the
a. Size and capitalization of the company under audit.
b. Amount of profit for the year.
c. Availability of cash.
d. Volume of audit work and degree of competence and responsibilities involved.
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18.
In determining audit fees, an auditor may take into account each of the following except
a. Volume and intricacy of work involved.
c. Number and cost of manhours needed.
d. Size and amount of capital of client.
b. Degree of responsibility assumed.
19.
Under this method of billing a client, the external auditors charges on the basis of time spent
by principals/partners, supervisors, seniors and juniors at predetermined rates agreed upon
with the client
a.
Maximum fee basis
c. Flat sum basis
b.
Retainer basis
d. Per diem basis
RA No. 9298 – Philippine Accountancy Act of 2004 and its IRR
1.
Which of the following is not one of the specified objectives of the Accountancy Act of 2004?
a. Examination for registration of CPAs.
b. Supervision, control, and regulation of accounting practice.
c. Standardization and regulation of accounting education.
d. Promulgation of accounting and auditing standards.
2.
In all of the following situations except one, a person is deemed to be engaged in
professional accounting practice. Which of them is the exception?
a. Performing audits or verification of financial transactions and records for more than one
client.
b. Employed as the department chairman that supervises the BSA program of an
educational institution.
c. Employment as controller of a private business enterprise and such employment requires
that the holder thereof should be a CPA.
d. Appointment in the government where first grade civil service eligibility is a prerequisite.
3.
A person is not deemed to be engaged in professional accounting practice if
a. Her merely holds himself out as skilled in the science and practice of accounting and
qualified to render services as a CPA.
b. He merely offers to render services as a CPA to the public, but does not actually render
such services.
c. He offers or renders bookkeeping services to more than one client.
d. He installs and revises accounting systems for more than one client.
4.
Practice in Public Accountancy shall constitute in a person
a. Involved in decision making requiring professional knowledge in the science of
accounting, or when such employment or position requires that the holder thereof must be
a certified public accountant.
b. In an educational institution which involve teaching of accounting, auditing, management
advisory services, finance, business law, taxation, and other technically related subjects.
c. Who 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,
d. 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; or offering or rendering, or both, to more than one client on a fee basis or
otherwise.
5.
Any position in any business or company in the private sector which requires supervising the
recording of financial transactions, preparation of financial statements, coordinating with the
external auditors for the audit of such financial statements and other related functions shall
be occupied only by a duly registered CPA. Provided (choose the incorrect one)
a. That the business or company where the above position exists has a paid-up capital of at
least P5,000,000 and/or an annual revenue of at least P10,000,000.
b. The above provision shall apply only to persons to be employed after the effectivity of the
Implementing Rules and Regulations of RA 9298.
c. The above provision shall not result to deprivation of the employment of incumbents to
the position.
d. None of the above.
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6.
The integrated national professional organization of Certified Public Accountants accredited
by the BOA and the PRC per PRC accreditation No. 15 dated October 2, 1975.
a. Auditing and Assurance Standards Council (AASC)
b. Financial Reporting Standards Council (FRSC)
c. Education Technical Council (ETC)
d. Philippine Institute of Certified Public Accountants (PICPA)
7.
As defined in the IRR of RA 9298, it is an organization engaged in the practice of public
accountancy, consisting of sole proprietor, either alone or with one or more staff members.
a. Firm
b. Individual CPA
c. Partnership
d. Sector
8.
The following statements relate to the Board of Accountancy. Which statement is correct?
a. The Board consists of a Chairman and six members.
b. The chairman and members are appointed by the President of the Philippines upon
recommendation of PICPA.
c. The Professional Regulation Commission may remove from the Board any member
whose certificate to practice has been removed or suspended.
d. Majority of the board members shall as much as possible be in public practice.
9.
The APO shall submit its nominations with complete documentation to the Commission not
later than _____ prior to the expiry of the term of an incumbent chairman or member.
a. 30 days
b. 60 days
c. 90 days
d. 120 days
10.
A member of the BOA shall, at the time of his/her appointment, possess the following
qualifications, except
a. Must be a natural-born citizen and resident of the Philippines.
b. Must be a duly registered CPA with more than ten (10) years of work experience in any
scope of practice of accountancy.
c. Must be of good moral character and must not have been convicted of crimes involving
moral turpitude.
d. Must not be a director or officer of the APO at the time of his/her appointment.
11.
Which statement is incorrect regarding the term of office of the chairman and the members of
the Board of Accountancy (BOA)?
a. The Chairman and members of the Board shall hold office for a term of three years.
b. No person who has served two (2) successive complete terms shall be eligible for
reappointment until the lapse of one (1) year.
c. A person may serve the BOA for not more than twelve years.
d. A member of the BOA may continuously serve office for more than nine years.
12.
The Board shall exercise the following specific powers, functions and responsibilities:
a
b
c
• To supervise the registration, licensure and
practice of accountancy
Yes
Yes
Yes
• To issue, suspend, revoke, or reinstate the
Certificate of Registration for the practice of
Yes
No
Yes
the accountancy profession
• To monitor the conditions affecting the practice
Yes
Yes
No
of accountancy
• To conduct an oversight into the quality of
audits of financial statements
Yes
No
Yes
• To issue a cease or desist order to any
person, association, partnership or corporation
Yes
Yes
No
engaged in violation of any provision of the Act
d
Yes
Yes
Yes
No
Yes
13.
Which of the following is not one of the penalties that can be imposed by the Board of
Accountancy?
a. Fine or imprisonment
c. Reprimand
b. Revocation of CPA certificate
d. Suspension of CPA certificate
14.
The creation of FRSC and AASC is intended to assist the BOA in carrying out its function to
a. To monitor the conditions affecting the practice of accountancy and adopt such
measures, rules and regulations and best practices as may be deemed proper for the
AT-5902
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enhancement and maintenance of high professional, ethical, accounting and auditing
standards.
b. To supervise the registration, licensure and practice of accountancy in the Philippines.
c. To prescribe and adopt the rules and regulations necessary for carrying out the provisions
of RA 9298.
d. To prepare, adopt, issue or amend the syllabi of the subjects for examinations.
15.
A body that is created to assist the BOA in the attainment of the objective of continuously
upgrading the accountancy education in the Philippines to make the Filipino CPAs globally
competitive.
a. Philippine Institute of Certified Public Accountants (PICPA)
b. Education Technical Council (ETC)
c. Financial Reporting Standards Council (FRSC)
d. Associations of CPAs in Education (ACPAE)
16.
Which of the following is are grounds for suspension or removal of members of BOA?
I. Neglect of duty or incompetence.
II. Violation or tolerance of any violation of the CPA’s Code of Ethics.
III. Final judgment of crimes involving moral turpitude.
IV. Rigging of the certified public accountant’s licensure examination results.
a. I, II, III and IV
b. I, II and III
c. III and IV
d. I, III and IV
17.
The following statements relate to CPA examination ratings. Which of the following is
incorrect?
a. To pass the examination, candidates should obtain a general weighted average of 75%
and above, with no rating in any subject less than 65%.
b. Candidates who obtain a rating of 75% and above in at least four subjects shall receive a
conditional credit for the subjects passed.
c. Candidates who failed in four complete examinations shall no longer be allowed to take
the examinations the fifth time.
d. Conditioned candidates shall take an examination in the remaining subjects within two
years from the preceding examination.
18.
The Board, subject to the approval of the Commission, may revise or exclude any of the
subjects and their syllabi, and add new ones as the need arises. Provided that the change
shall not be more often than every
a. 2 years
b. 3 years
c. 4 years
d. 5 years
19.
The BOA shall submit to the PRC the ratings obtained by each candidate within how many
calendar days after the examination?
b. 10 days
c. 15 days
d. 30 days
a. 5 days
20.
A Professional Identification Card bearing the registration number, date of issuance, expiry
date, duly signed by the chairperson of the Commission, shall be issued to every registrant
renewable every
a. Two years
b. Three years
c. Four years
d. Five years
21.
The certified public accountant shall be required to indicate which of the
on the documents he/she signs, uses or issues in connection with the
profession?
A
b
His/her
Certificate
of
Registration
Yes
Yes
•
Yes
Yes
• Professional Identification Card
Yes
Yes
• Professional Tax Receipt
Yes
No
• Telephone
22.
following numbers
practice of his/her
c
Yes
Yes
No
No
d
No
Yes
Yes
No
The BOA shall not refuse the registration of any person who successfully passed the CPA
examinations if
a. Convicted by a court of competent jurisdiction of a criminal offense involving moral
turpitude
b. Convicted for a political offense.
c. Guilty of immoral and dishonorable conduct
d. None of the above.
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23.
Which of the following is not one of the grounds for proceedings against a CPA?
a. Gross negligence or incompetence in the practice of his profession.
b. Engaging in public practice while being employed in a private enterprise.
c. Insanity.
d. Immoral or dishonorable conduct.
24.
A person whose CPA certificate has been revoked
a. Can no longer be reinstated as a CPA
b. Is automatically reinstated as a CPA after two years if the has acted in an exemplary
manner
c. May be reinstated as a CPA by the Board of Accountancy after two years if he has acted
in an exemplary manner
d. May be reinstated by the PRC after two years if he has acted in an exemplary manner
25.
Who is not permitted by law to practice accountancy?
a. A corporation whose stockholders are all CPAs
b. A partnership of CPAs
c. An individual CPA practitioner
d. A partnership of CPAs with some non-CPA staff
26.
A certificate of accreditation shall be issued to certified public accountants in public practice
only upon showing, in accordance with rules and regulations promulgated by the Board and
approved by the Commission, that such registrant has acquired how many years of
meaningful experience in any of the areas of public practice?
c. Three
d. Four
a. One
b. Two
27.
A meaningful experience shall be considered as satisfactory compliance with the
requirements of Section 28 of RA 9298 if it is earned in (Choose the incorrect one)
a. Commerce and industry and shall include significant involvement in general accounting,
budgeting, tax administration, internal auditing, liaison with external auditors, representing
his/her employer before government agencies on tax and matters related to accounting or
any other related functions.
b. Academe/education and shall include teaching for at least three (3) trimesters or two (2)
semesters subjects in either financial accounting, business law and tax, auditing
problems, auditing theory, financial management and management services.
c. Government and shall include significant involvement in general accounting, budgeting,
tax administration, internal auditing, liaison with the Commission on Audit or any other
related functions.
d. Public practice and shall include at least two years as audit assistant and at least one
year as auditor in charge of audit engagement covering full audit functions of significant
clients.
28.
The Accountancy Law provides that all working papers made during an audit shall be the
property of the auditor. These working papers shall include the following, except:
a. Schedules and memoranda made by the CPA and his staff.
b. Working papers prepared and submitted by the client.
c. Excerpts or copies of documents furnished the auditor.
d. Reports submitted by the CPA to the client.
29.
Individual CPAs, Firms or Partnerships of CPAs, including partners and staff members
thereof shall register with the BOA and the PRC. If the application for registration of AB and
Co., CPAs was approved on August 30, 2005, it shall file for renewal on or before
a. September 30, 2007
c. December 31, 2007
b. September 30, 2008
d. August 30, 2008
30.
Which statement is correct regarding CPE requirements for renewal of professional license?
a. The total CPE credit units required for CPAs shall be sixty (60) units for three (3) years,
provided that a minimum of twenty (20) credit units shall be earned in each year.
b. A registered professional shall be permanently exempted from CPE requirements upon
reaching the age of 60 years old.
c. A registered professional who is working abroad shall be temporarily exempted from
compliance with CPE requirement during his/her stay abroad, provided that he/she is has
been out of the country for at least one year immediately prior to the date of renewal.
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d. Those who failed to renew professional licenses for a period of five (5) continuous years
from initial registration, or from last renewal shall be declared delinquent.
31.
Any person who shall violate any of the provisions of RA 9298 or any of its implementing
rules and regulations as promulgated by the Board subject to the approval of the
Commission, shall, upon conviction, be punished by
a. A fine of not less than fifty thousand pesos (P 50,000.00) or by imprisonment for a period
not exceeding two (2) years or both.
b. A fine of not less than one hundred thousand pesos (P 100,000.00) or by imprisonment
for a period not exceeding two (2) years or both.
c. A fine of not less than fifty thousand pesos (P 50,000.00) or by imprisonment for a period
not exceeding three (3) years or both.
d. A fine of not less than one hundred thousand pesos (P 100,000.00) or by imprisonment
for a period not exceeding three (3) years or both.
32.
The primary duty to enforce the provisions of RA 9298 and its IRR rests with
c. The PRC and BOA
a. The PRC
b. The BOA
d. The AASC
33.
The PICPA shall renew its Certificate of Accreditation once every how many years after the
date of the Resolution granting the petition for re-accreditation and the issuance of the said
certificate upon submission of the requirements?
b. 3 years
c. 4 years
d. 6 years
a. 2 years
34.
Below are the names of three CPA firms and pertinent facts relative to each firm. Unless
otherwise indicated, the individuals named are CPAs and partners, and there are no other
partners. Which firm name and related facts indicates a violation of the IRR of RA 9298?
a. Joyce, Ara and Angela, CPAs (Joyce died about 10 years ago, Ara and Angela are
continuing the firm)
b. Lupin and Fujico, CPAs ( the name of Goymon a third active partner is omitted in the firm
name)
c. Hugo and Pugo, CPAs (Hugo died 25 months ago, Pugo is continuing the firm as a sole
proprietor)
d. Bubu and Bibi, CPAs (Bibi died 3 years ago, Bobot was admitted into the partnership 2
months after Bibi’s death.)
- end of AT-5902 -
AT-5902
Page 1 of 10
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDITING THEORY
PROFESSIONAL AND LEGAL RESPONSIBILITIES
Related PSAs : PSA 240rev, 250 and 260
PSA 240(rev) – The Auditor’s Responsibility to Consider Fraud and Error in the Audit of FS
1.
The primary responsibility for the prevention and detection of fraud and error rests with
a. The auditor.
c. The management of an entity.
d. Both b and c.
b. Those charged with governance.
2.
When planning and performing audit procedures and evaluating and reporting the results
thereof, the auditor should
a. Search for errors that would have a material effect and for fraud that would have either
material or immaterial effect on the financial statements.
b. Consider the risk of misstatements in the financial statements resulting from fraud or error.
c. Search for fraud that would have a material effect and for errors that would have either
material or immaterial effect on the financial statements.
d. Consider the risk of material misstatements in the financial statements resulting from fraud
or error.
3.
The following are examples of error, except
a. A mistake in gathering or processing data from which financial statements are prepared.
b. An incorrect accounting estimate arising from oversight or misinterpretation of facts.
c. A mistake in the application of accounting principles relating to measurement, recognition,
classification, presentation, or disclosure.
d. Misrepresentation in the financial statements of events, transactions or other significant
information.
4.
The term “fraud” refers to an intentional act by one or more individuals among management,
those charged with governance, employees, or third parties, involving the use of deception to
obtain an unjust or illegal advantage. Which statement is correct regarding fraud?
a. Auditors make legal determinations of whether fraud has actually occurred.
b. Misstatement of the financial statements may not be the objective of some frauds.
c. Fraud involving one or more members of management or those charged with governance is
referred to as “employee fraud”.
d. Fraud involving only employees of the entity is referred to as “management fraud”.
5.
The types of intentional misstatements that are relevant to the auditor’s consideration of fraud
include
I. Misstatements resulting from fraudulent financial reporting
II. Misstatements resulting from misappropriation of assets
a. I and II
b. I only
c. II only
d. Neither I nor II
6.
Fraudulent financial reporting involves intentional misstatements or omissions of amounts or
disclosures in financial statements to deceive financial statement users. Fraudulent financial
reporting least likely involve
a. Deception such as manipulation, falsification, or alteration of accounting records or
supporting documents from which the financial statements are prepared.
b. Misrepresentation in, or intentional omission from, the financial statements of events,
transactions or other significant information.
c. Intentional misapplication of accounting principles relating to measurement, recognition,
classification, presentation, or disclosure.
d. Embezzling receipts, stealing physical or intangible assets, or causing an entity to pay for
goods and services not received.
7.
Which of the following illustrates a perceived opportunity to commit fraud?
a. Individuals are living beyond their means.
b. Management is under pressure, from sources outside or inside the entity, to achieve an
expected (and perhaps unrealistic) earnings target.
AT-5904
Page 2 of 10
c. An individual believes internal control could be circumvented because the individual is in a
position of trust or has knowledge of specific weaknesses in the internal control system.
d. All of the above.
8.
Which statement is incorrect regarding the auditor’s responsibility to consider fraud and error in
an audit of financial statements?
a. The auditor is not and cannot be held responsible for the prevention of fraud and error.
b. In planning the audit, the auditor should discuss with other members of the audit team the
susceptibility of the entity to material misstatements in the financial statements resulting from
fraud or error.
c. The auditor should design test of controls to reduce to an acceptably low level the risk that
misstatements resulting from fraud and error that are material to the financial statements
taken as a whole will not be detected.
d. When the auditor encounters circumstances that may indicate that there is a material
misstatement in the financial statements resulting from fraud or error, the auditor should
perform procedures to determine whether the financial statements are materially misstated.
9.
The risk of not detecting a material misstatement resulting from fraud is higher than the risk of
not detecting a material misstatement resulting from error because
a. The effect of fraudulent act is likely omitted in the accounting records.
b. Fraud is ordinarily accompanied by acts specifically designed to conceal its existence.
c. Fraud is always a result of connivance between or among employees.
d. The auditor is responsible to detect errors but not fraud.
10.
Which of the following statements describes why a properly designed and executed audit may
not detect a material fraud?
a. Audit procedures that are effective for detecting an unintentional misstatement may be
ineffective for an intentional misstatement that is concealed through collusion.
b. An audit is designed to provide reasonable assurance of detecting material errors, but there
is no similar responsibility concerning material fraud.
c. The factors considered in assessing control risk indicated an increased risk of intentional
misstatements, but only a low risk of unintentional errors in the financial statements.
d. The auditor did not consider factors influencing audit risk for account balances that have
pervasive effects on the financial statements taken as a whole.
11.
The auditor’s ability to detect a fraud depends on factors such as
I. The skillfulness of the perpetrator.
II. The frequency and extent of manipulation.
III. The degree of collusion involved.
IV. The relative size of individual amounts manipulated.
V. The seniority of those involved.
a. All of the above
b. I, III and V only c. I, II, III and V only
d. III and V only
12.
In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the
fraud is
a. Greater for employee fraud because of the higher crime rate among blue collar workers.
b. Greater for management fraud because of management’s ability to override existing internal
controls.
c. Greater for employee fraud because of the larger number of employees in the organization.
d. Greater for management fraud because managers are inherently smarter than employees.
13.
The subsequent discovery of a material misstatement of the financial statements resulting from
fraud or error, in and of itself, indicates:
a
b
c
d
Yes
Yes
Yes
No
• a failure to obtain reasonable assurance
Yes
No
No
No
• inadequate planning, performance or judgment
• the absence of professional competence and
Yes
Yes
No
No
due care
Yes
No
No
No
• a failure to comply with PSAs
AT-5904
Page 3 of 10
14.
Whether the auditor has performed an audit in accordance with PSAs is determined by
a. The adequacy of the audit procedures performed in the circumstances and the suitability of
the auditor’s report based on the result of these procedures.
b. The absence of material misstatements.
c. The absence of material errors.
d. The Securities and Exchange Commission.
15.
When planning the audit, which of the following is least likely a purpose of the auditor’s inquiries
of management?
a. To obtain an understanding of management’s assessment of the risk that the financial
statements may be materially misstated as a result of fraud.
b. To obtain knowledge of management’s understanding regarding the accounting and internal
control systems in place to prevent and detect error.
c. To determine whether management has discovered any material errors.
d. To determine extent of authentication of documentation.
16.
Which of the following best describes what is meant by the term “fraud risk factor”?
a. Factors whose presence indicates that the risk of fraud is high.
b. Factors whose presence often has been observed in circumstances where frauds have
occurred.
c. Factors whose presence requires modifications of planned audit procedures.
d. Reportable conditions identified during an audit.
17.
Which of the following is least likely a category of fraud risk factors that relate to misstatements
resulting from fraudulent financial reporting?
a. Management’s characteristics and influence over the control environment.
b. Industry conditions.
c. Operating characteristics and financial stability.
d. Susceptibility of assets to misappropriation.
18.
Fraud risk factors relating to management’s characteristics and influence over the control
environment
a. Pertain to management’s abilities, pressures, style, and attitude relating to internal control
and the financial reporting process.
b. Involve the economic and regulatory environment in which the entity operates.
c. Pertain to the nature and complexity of the entity and its transactions, the entity’s financial
condition, and its profitability.
d. Involve the lack of controls designed to prevent or detect misappropriation of assets.
19.
Which of the following is least likely an example of fraud risk factors relating to management’s
characteristics and influence over the control environment?
a. There is motivation for management to engage in fraudulent financial reporting.
b. There is a failure by management to display and communicate an appropriate attitude
regarding internal control and the financial reporting process.
c. Non-financial management participates excessively in, or is preoccupied with, the selection
of accounting principles or the determination of significant estimates.
d. New accounting, statutory or regulatory requirements that could impair the financial stability
or profitability of the entity.
20.
The following are examples of fraud risk factors relating to industry conditions, except
a. There is a high turnover of management, counsel or board members.
b. A high degree of competition or market saturation, accompanied by declining margins.
c. A declining industry with increasing business failures and significant declines in customer
demand.
d. Rapid changes in the industry, such as high vulnerability to rapidly changing technology or
rapid product obsolescence.
AT-5904
Page 4 of 10
21.
Which of the following is most likely an example of fraud risk factor relating to management’s
characteristics and influence over the control environment?
a. There is a strained relationship between management and the current or predecessor
auditor.
b. Inability to generate cash flows from operations while reporting earnings and earnings
growth.
c. Significant related party transactions which are not in the ordinary course of business.
d. Significant, unusual or highly complex transactions (especially those close to year-end) that
pose difficult questions concerning substance over form.
22.
Examples of fraud risk factors relating to susceptibility of assets to misappropriation include the
following, except
a. Large amounts of cash on hand or processed.
b. Inventory characteristics, such as small size combined with high value and high demand.
c. Easily convertible assets, such as bearer bonds, diamonds or computer chips.
d. Lack of appropriate management oversight.
23.
Judgments about the risk of material misstatements resulting from fraud may affect the audit in
the following ways, except
a. The application of professional skepticism may include increased sensitivity in the selection
of the nature and extent of documentation to be examined in support of material
transactions.
b. The knowledge, skill and ability of members of the audit team assigned significant audit
responsibilities need to be commensurate with the auditor’s assessment of the level of risk
for the engagement.
c. The auditor may decide to consider further management’s selection and application of
significant accounting policies, particularly those related to revenue recognition, asset
valuation or capitalizing versus expensing.
d. The auditor’s ability to assess control risk at high level may be reduced.
24.
The nature, timing and extent of procedures may need to be modified in the following ways as
possible responses to the auditor’s assessment of the risk of material misstatement resulting
from both fraudulent financial reporting and misappropriation of assets.
a. The nature of audit procedures performed may need to be changed to obtain evidence that
is more reliable or to obtain additional corroborative information.
b. The timing of substantive procedures may need to be altered to be closer to, or at, year-end.
c. The extent of the procedures applied will need to reflect the assessment of the risk of
material misstatement resulting from fraud.
d. All of the above.
25.
The auditor may encounter circumstances that, individually or in combination, indicate the
possibility that the financial statements may contain a material misstatement resulting from fraud
or error. These circumstances include the following, except
a. Unrealistic time deadlines for audit completion imposed by management.
b. Conflicting or unsatisfactory evidence provided by management or employees.
c. Information provided unwillingly or after unreasonable delay.
d. Transactions recorded in accordance with management’s general or specific authorization.
26.
Which of the following circumstances most likely indicate the possibility of fraud or error?
a. Management engages in frank communication with appropriate third parties, such as
regulators and bankers.
b. Evidence of an unduly lavish lifestyle by officers or employees.
c. Conservative application of accounting principles.
d. Minimal differences from expectations disclosed by analytical procedures.
27.
Which of the following should the auditor likely to do when the application of planned audit
procedures indicates the possible existence of fraud or error?
a. The auditor should resign in order to avoid legal responsibility.
b. He should discuss the matter with the person whom he believes is involved with the
irregularities.
c. He should consider the potential effect on the financial statements.
d. He should refer the suspected fraud or error to the internal auditor.
AT-5904
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28.
If the auditor believes an indicated fraud or error could have a material effect on the financial
statements, the nature, timing and extent of the procedures to be performed depends on the
auditor’s judgment as to
a. The type of fraud or error.
b. The likelihood that a particular type of fraud or error could have a material effect on the
financial statements.
c. The likelihood of their occurrence.
d. All of the above.
29.
The auditor should document
a. Fraud risk factors identified as being present during the auditor’s assessment process.
b. The auditor’s response to fraud risk factors identified.
c. Both a and b.
d. Neither a nor b.
30.
The auditor least likely obtains written representations from management that the management:
a. Acknowledges its responsibility for the implementation and operations of accounting and
internal control systems that are designed to prevent and detect fraud and error.
b. Believes the effects of those uncorrected financial statement misstatements aggregated by
the auditor during the audit are material, both individually and in the aggregate, to the
financial statements taken as a whole.
c. Has disclosed to the auditor all significant facts relating to any frauds or suspected frauds
known to management that may have affected the entity.
d. Has disclosed to the auditor the results of its assessment of the risk that the financial
statements may be materially misstated as a result of fraud.
31.
Communication of a misstatement resulting from fraud, or a suspected fraud, or error to the
appropriate level of management on a timely basis is important because it enables management
to take action as necessary. Ordinarily, the appropriate level of management is
a. At least equal to the level of the persons who appear to be involved with the misstatement or
suspected fraud.
b. At least one level above the persons who appear to be involved with the misstatement or
suspected fraud.
c. The audit committee of the board of directors.
d. The head of internal audit department.
32.
The auditor may encounter exceptional circumstances that bring into question the auditor’s
ability to continue performing the audit, including where
a. The entity does not take the remedial action regarding fraud that the auditor considers
necessary in the circumstances, even when the fraud is not material to the financial
statements.
b. The auditor’s consideration of the risk of material misstatement resulting from fraud and the
results of audit tests indicate a significant risk of material and pervasive fraud.
c. The auditor has significant concern about the competence or integrity of management or
those charged with governance.
d. All of the above.
PSA 250 – Consideration of Laws and Regulations in an Audit of Financial Statements
1.
When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an
understanding of the nature of the act to
a. Increase the assessed level of control risk.
b. Recommend remedial actions to the audit committee.
c. Evaluate the effect on the financial statements.
d. Determine the reliability of management’s representations.
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2.
Mac, CPA, is auditing the financial statements of TL’s Retailing, Inc. What assurance does Mac
provide that direct effect illegal acts that are material to TL’s financial statements, and illegal acts
that have a material, indirect effect on the financial statements will be detected?
Direct effect illegal acts
Indirect effect illegal acts
a.
Reasonable
None
b.
Reasonable
Reasonable
c.
Limited
None
d.
Limited
Reasonable
3.
The most likely explanation why the auditor’s examination cannot reasonably be expected to
bring all illegal acts by the client to the auditor’s attention is that
a. Illegal acts are perpetrated by management override of internal accounting controls.
b. Illegal acts by clients often relate to operating aspects rather than accounting aspects.
c. The client’s system of internal accounting control may be so strong that the auditor performs
only minimal substantive testing.
d. Illegal acts may be perpetrated by the only person in the client’s organization with access to
both assets and the accounting records.
4.
An auditor who finds that the client has committed an illegal act would be most likely to withdraw
from the engagement when the
a. Illegal act affects auditor’s ability to rely on management representations.
b. Illegal act has material financial statement implications.
c. Illegal act has received widespread publicity.
d. Auditor cannot reasonably estimate the effect of the illegal act on the financial statements.
5.
If an auditor believes a client may have committed illegal acts, which of the following actions
should the auditor take?
a. Consult with the client’s counsel and the auditor’s counsel to determine how the suspected
illegal acts will be communicated to stockholders.
b. Extend auditing procedures to determine whether the suspected illegal acts have a material
effect on the financial statements.
c. Make inquiries of the client’s management and obtain an understanding of the
circumstances underlying the acts and of other evidence to determine the effects of the acts
on the financial statements.
d. Notify each member of the audit committee of the board of directors about the nature of the
acts and request that they advise an approach to be taken by the auditor.
6.
An audit client’s board of directors and audit committee refused to take action about an
immaterial illegal act that was brought to their attention by the auditor. Because of their failure
to act, the auditor withdrew from the engagement. The auditor’s decision to withdraw was
primarily due to doubt concerning
a. Inadequate financial statement disclosures.
b. Compliance with the laws.
c. Scope limitations resulting from the inaction.
d. Reliance on management’s representation.
7.
Which of the following is incorrect about the auditor’s responsibility of evaluating noncompliance
by the entity to laws and regulations?
a. An audit cannot be expected to detect noncompliance with all laws and regulations.
b. Noncompliance refers to acts of omission or commission by the entity being audited which
are contrary to prevailing laws or regulations.
c. Noncompliance includes personal misconduct of entity management or employers though
they are unrelated to the entity’s business activities.
d. Detection of noncompliance, regardless of materiality, requires considerations of the
implications for the integrity of management or employees.
8.
What is expected of auditor in determining noncompliance by an entity to existing laws and
regulations?
a. Whether an act constitutes noncompliance is a legal determination that is ordinarily within
the auditor’s professional competence.
b. The auditor’s training, experience and understanding of the entity and its industry cannot
provide a basis for recognition that some acts coming to the auditor’s attention may
constitute noncompliance with laws and regulations.
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c. The determination as to whether a particular act constitutes or is likely to constitute
noncompliance is generally based on the understanding of the auditor but ultimately can only
be determined by an expert who is qualified to practice law.
d. In order to plan the audit, the auditor should obtain a general understanding of the legal and
regulatory framework applicable to the entity and the industry and how the entity is
complying with the framework.
9.
When the auditor becomes aware of information concerning a possible noncompliance to laws
or regulations, the auditor should appropriately:
a. Obtain an understanding of the nature of the act and the circumstances in which it has
occurred, and evaluate the possible effect on the financial statements.
b. Discuss his suspicion with the management.
c. Ask management to determine whether a violation is really committed.
d. Consult with the entity’s legal counsel as to what appropriate action the auditor should do.
10.
If the auditor suspects that members of senior management, including members of the board of
directors, are involved in noncompliance to laws as regulations, and he believes his report may
not be acted upon, he would:
a. Do nothing.
b. Issue a disclaimer of opinion.
c. Consider seeking legal advice.
d. Make special investigation in order to fully determine the extent of client’s noncompliance.
11.
Which of the following circumstances regarding the entity’s noncompliance to laws or regulations
may cause the auditor to resign from an engagement?
a. The auditor is unable to determine whether noncompliance has occurred.
b. If the auditor concludes that the noncompliance has a material effect on the financial
statements and has not been properly reflected in the financial statements.
c. When the entity does not take remedial action that he considers necessary in the
circumstances even when the noncompliance is not material to financial statements.
d. When the disclosure of the effect of noncompliance to legal authority is necessary.
12.
Examples of the type of information that may come to the auditor's attention that may indicate
that noncompliance with laws or regulations has occurred least likely include
a. Investigation by government departments or payment of fines or penalties.
b. Sales commissions or agent's fees that appear reasonable in relation to those ordinarily paid
by the entity or in its industry or to the services actually received.
c. Unusual transactions with companies registered in tax havens.
d. Media comment.
PSA 260 – Communications of Audit Matters with Those Charged with Governance
1.
Which statement is incorrect regarding PSA 260?
a. The purpose of this PSA is to establish standards and provide guidance on communication
of audit matters arising from the audit of financial statements between the auditor and those
charged with governance of an entity.
b. These communications relate to audit matters of governance interest as defined in this PSA.
c. This PSA provides guidance on communications by the auditor to parties outside the entity,
for example, external regulatory or supervisory agencies.
d. All the above statements are correct.
2.
Which statement is incorrect regarding the auditor’s communications of audit matters with those
charged with governance?
a. The auditor should communicate audit matters of governance interest arising from the audit
of financial statements with those charged with governance of an entity.
b. Those charged with governance ordinarily are accountable for ensuring that the entity
achieves its objectives, financial reporting, and reporting to interested parties.
c. “Audit matters of governance interest” are those that arise from the audit of financial
statements and, in the opinion of the auditor, are either important or relevant to those
charged with governance in overseeing the financial reporting and disclosure process.
d. Audit matters of governance interest include only those matters that have come to the
attention of the auditor as a result of the performance of the audit.
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3.
The role of persons entrusted with the supervision, control and direction of an entity
c. Government
a. Governance
b. Board of directors
d. Management
4.
Which statement is correct regarding “audit matters of governance interest”?
a. These are matters that arise from the audit of financial statements and, in the opinion of the
auditor, are either important or relevant to those charged with governance in overseeing the
financial reporting and disclosure process.
b. These include only those matters that have come to the attention of the auditor as a result of
the performance of the audit.
c. The auditor is required, in an audit in accordance with PSAs, to design procedures for the
specific purpose of identifying these matters.
d. The auditor is not required to communicate these matters with those charged with
governance of an entity.
5.
Which statement is incorrect regarding the auditor’s communications of audit matters with those
charged with governance?
a. The auditor should communicate audit matters of governance interest upon completion of
the engagement.
b. The auditor’s communications with those charged with governance may be made orally or in
writing.
c. When audit matters of governance interest are communicated orally, the auditor documents
in the working papers the matters communicated and any responses to those matters.
d. Ordinarily, the auditor initially discusses audit matters of governance interest with
management, except where those matters relate to questions of management competence
or integrity.
Other Professional Responsibilities
1.
An auditor’s overall objective in a financial statement audit is to
a. Determine that all individual accounts and footnotes are fairly presented.
b. Employ the audit risk model.
c. Express an opinion on the fair presentation of the financial statements in accordance with
generally accepted accounting principles.
d. Detect all errors and fraud.
2.
The primary responsibility for the adequacy of disclosure in the financial statements of a publicly
held company rests with the
a. Partner assigned to the audit engagement.
c. Auditor in-charge of field work.
b. Management of the company.
d. Securities and Exchange Commission.
3.
Reasonable assurance means:
a. Gathering of all available corroborating evidence for the auditor to conclude that there are no
material misstatements in the financial statements, taken as a whole.
b. Gathering of the audit evidence necessary for the auditor to conclude that there are no
material misstatements in the financial statements, taken as a whole.
c. Gathering of the audit evidence necessary for the auditor to conclude that the financial
statements, taken as a whole, are free from any misstatements.
d. Gathering of the audit evidence necessary for the auditor to conclude that the financial
statements are free of material unintentional misstatements.
4.
Which of the following ultimately determines the specific audit procedures necessary to provide
an independent auditor with a reasonable basis for the expression of an opinion?
a. the audit program.
c. generally accepted auditing standards.
b. the auditor’s judgment.
d. the auditor’s working papers.
5.
Which of the following best describes a trend in litigation involving CPAs?
a. A CPA cannot render an opinion on a company unless the CPA has audited all affiliates of
that company.
b. A CPA may successfully assert as a defense that the CPA had no motive to be part of a
fraud.
c. A CPA may be exposed to criminal as well as civil liability.
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d. A CPA is primarily responsible for a client’s footnotes in an annual report filed with the SEC.
6.
In performing MAS engagements, CPAs should not take any positions that might
a. Constitute advice and assistance
b. Provide technical assistance in implementation
c. Result in new organizational policies and procedures
d. Impair their objectivity
7.
An audit independence issue might be raised by the auditor’s participation in management
advisory services engagements. Which of the following statements is most consistent with the
profession’s attitude toward this issue?
a. Information obtained as a result of a management advisory services engagement is
confidential to that specific engagement and should not influence performance of the attest
function.
b. The decision as to loss of independence must be made by the client based upon the facts of
the particular case.
c. The auditor should not make management decisions for an audit client.
d. The auditor who is asked to review management decisions is also competent to make these
decisions and can do so without loss of independence.
8.
The form of communication with a client in a management advisory service consultation should
be
a. Either oral or written.
b. Oral with appropriate documentation in the work papers.
c. Written and copies should be sent to both management and the board of directors.
d. Written and a copy should be sent to management alone.
Legal Responsibilities
1.
Which one of the following, if present, would support a finding of constructive fraud on the part of
a CPA?
a. Privity of contract.
c. Intent to deceive.
b. Reckless disregard.
d. Ordinary negligence.
2.
The limitation of auditor liability under contract law is known as
c. Contributory liability.
a. Privity of contract.
b. Statutory liability.
d. Common law liability.
3.
The auditor's defense of contributory negligence is most likely to prevail when
a. Third party injury has been minimal.
b. The auditor fails to detect fraud resulting from management override of the control structure.
c. The client is privately held as contrasted with a public company.
d. Undetected errors have resulted in materially misleading financial statements.
4.
Mix and Associates, CPAs, issued an unqualified opinion on the financial statements of Glass
Corp. for the year ended December 31, 2005. It was determined later that Glass' treasurer had
embezzled P3,000,000 from Glass during 2005. Glass sued Mix because of Mix's failure to
discover the embezzlement. Mix was unaware of the embezzlement. Which of the following is
Mix's best defense?
a. The audit was performed in accordance with GAAS.
b. The treasurer was Glass' agent and, therefore, Glass was responsible for preventing the
embezzlement.
c. The financial statements were presented in conformity with GAAP.
d. Mix had no actual knowledge of the embezzlement.
5.
The factor that distinguishes constructive fraud from actual fraud is
a. Materiality
c. Quality of internal control.
b. Type of error or irregularity
d. Intent.
6.
Working papers prepared by a CPA in connection with an audit engagement are owned by the
CPA, subject to certain limitations. The rationale for this rule is to
a. Protect the working papers from being subpoenaed.
b. Provide the basis for excluding admission of the working papers as evidence because of the
privileged communication rule.
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c. Provide the CPA with evidence and documentation which may be helpful in the event of a
lawsuit.
d. Establish a continuity of relationship with the client whereby indiscriminate replacement of
CPAs is discouraged.
7.
Mead Corp. orally engaged Dex & Co., CPAs, to audit its financial statements. The
management of Mead informed Dex that it suspected that the accounts receivable were
materially overstated. Although the financial statements audited by Dex did, in fact, include a
materially overstated accounts receivable balance, Dex issued an unqualified opinion. Mead
relied on the financial statements in deciding to obtain a loan from City Bank to expand its
operations. City relied on the financial statements in making the loan to Mead. As a result of
the overstated accounts receivable balance, Mead has defaulted on the loan and has incurred a
substantial loss. If Mead sues Dex for negligence in failing to discover the overstatement, Dex's
best defense would be that
a. No engagement letter had been signed by Dex.
b. The audit was performed by Dex in accordance with generally accepted auditing standards.
c. Dex was not in privity of contract with Mead.
d. Dex did not perform the audit recklessly or with an intent to deceive.
8.
As a consequence of failure to adhere to generally accepted auditing standards in the course of
an audit of the Lamp Corp., Harrison, CPA, did not detect the embezzlement of a material
amount of funds by the company's controller. As a matter of common law, to what extent would
Harrison be liable to the Lamp Corp. for losses attributable to the theft?
a. No liability since the ordinary examination cannot be relied on to detect defalcations.
b. No liability because privity of contract is lacking.
c. Liable for losses attributable to her or his negligence.
d. Liable only if it could be proved that he or she was grossly negligent.
9.
Martin Corporation orally engaged Humm & Dawson to audit its year-end financial statements.
The engagement was to be completed within two months after the close of Martin's fiscal year
for a fixed fee of P250,000. Under these circumstances, what obligation is assumed by Humm
& Dawson?
a. None. The contract is unenforceable since it is not in writing.
b. An implied promise to exercise reasonable standards of competence and care.
c. An implied obligation to take extraordinary steps to discover all defalcations.
d. The obligation of an insurer of its work, which is liable without fault.
10.
In which of the following statements about a public accounting firm's action is scienter or its
equivalent absent?
a. Reckless disregard for the truth.
b. Actual knowledge of fraud.
c. Intent to gain monetarily by concealing fraud.
d. Performance of substandard auditing procedures.
11.
The leading precedent-setting auditing case in the third party liability is
a. Escott et al. v. Bar Chris Construction Corp.
b. Hochfelder v. Ernst & Ernst.
c. Ultramares Corporation v. Touche.
d. United States v. Simon.
12.
The leading case of criminal action against CPAs is the
a. 1136 Tenants case.
b. United States v. Simon case, aka Continental Vending.
c. Escott et al. v. Bar Chris case, aka Bar Chris.
d. Ultramares Corporation v. Touche case.
- end of AT-5904 -
AT-5904
Page 1 of 10
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDITING THEORY
AUDIT REPORT
Related PSAs: PSA 700, 710, 720, 560, 570, 600 and 620
1. When an independent auditor expresses an unqualified opinion he asserts that:
(1) He performed the audit in accordance with generally accepted auditing standards.
(2) The company is a profitable and viable entity.
(3) The financial statements examined are in conformity with GAAP.
(4) The financial statements are accurate and free of errors.
a.
b.
c.
d.
All of the above statements are true.
Only statements (1) and (3) are true.
Only statements (2) and (4) are true.
All of the above statements are false.
2. An audit report should be dated as of the
a. date the report is delivered to the entity audited.
b. date the financial statements were approved by the client management.
c. balance sheet date of the latest period reported on.
d. date a letter of audit inquiry is received from the entity’s attorney of record.
3. If a company’s external auditor expresses an unqualified opinion as a result of the audit of the
company’s financial statements, readers of the audit report can assume that
a. The external auditor found no fraud.
b. The company is financial sound and the financial statements are accurate.
c. Internal control is effective.
d. All material disagreements between the company and external auditor about the application
of accounting principles were resolved in the satisfaction of the external auditor.
4. A statement that the auditor’s responsibility is to express an opinion on the financial statements
is contained in the:
c. Opening and scope paragraph
a. Opening paragraph
b. Scope paragraph
d. Opinion paragraph
5. The description of an audit in the scope paragraph of the standard audit report includes all of
the following except:
a. Evaluating the overall financial statement presentation.
b. Assessing control risk.
c. Examining, on a test basis, evidence supporting the amount and disclosures in the financial
statements.
d. Assessing the accounting principles used and significant estimates made by management.
6. The audit report is normally addressed to the:
Board of directors
Stockholders
a.
No
Yes
b.
Yes
Yes
c.
Yes
Yes
d.
Yes
No
Chair of the Audit Committee
No
No
Yes
Yes
7. If comparative financial statements are presented and the present auditor has audited both
years, the auditor should:
a. Reissue the report
c. Redate the report
d. Update the report
b. Dual date the report
8. In which of the following situations would the auditor appropriately issue a standard unqualified
report with no explanatory paragraph concerning consistency?
a. A change in the method of accounting for specific subsidiaries that comprise the group of
companies for which consolidated statements are presented.
b. A change from an accounting principle that is not generally accepted to one that is
generally accepted.
c. A change in the percentage used to calculate the provision for warranty expense.
d. Correction of a mistake in the application of a generally accepted accounting principle.
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9. An auditor’s report contains the following sentences:
We did not audit the financial statements of B Company, a consolidated subsidiary,
whose statements reflect total assets and revenues constituting 20 percent and 22
percent, respectively, of the related consolidated totals. These statements were audited
by other auditors, whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for B Company, is based solely upon the report of the
other auditors.
These sentences
a. disclaim an opinion
b. qualify the opinion
c. divide responsibility
d. should not be part of the audit report
10. The management of a client company believes that the statement of cash flow is not a useful
document and refuses to include one in the annual report to stockholders. As a result, the
auditor’s opinion should be
a. qualified due to inadequate disclosure
c. adverse
b. qualified due to a scope limitation
d. unqualified
11. An auditor’s opinion reads as follows: “In our opinion, except for the above-mentioned
limitation on the scope of our audit…” This is an example of a(n)
a. review opinion
c. qualified opinion
b. emphasis on a matter
d. unacceptable reporting practice
12. Eagle Company’s financial statements contain a departure from generally accepted accounting
principles because, due to unusual circumstances, the statements would otherwise be
misleading. The auditor should express an opinion that is
a. Qualified and describe the departure in a separate paragraph.
b. Unqualified but not mention the departure in the auditor’s report.
c. Qualified or adverse, depending on materiality, and describe the departure in a separate
paragraph.
d. Unqualified and describe the departure in a separate paragraph.
13. An auditor is unable to determine the amounts associated with illegal acts committed by a
client. The auditor would most likely issue
a. Either a qualified opinion or a disclaimer of opinion.
b. An adverse opinion.
c. Either a qualified opinion or an adverse opinion.
d. A disclaimer of opinion.
14. The objective of the consistency standard is to provide assurance that
a. There are no variations in the format and presentation of financial statements.
b. Substantially different transactions and events are not accounted for on an identical basis.
c. The auditor is consulted before material changes are made in the application of accounting
principles.
d. The comparability of financial statements between periods is not materially affected by
changes in accounting principles without disclosure.
15. If management fails to provide adequate justification for a change from one generally accepted
accounting principle to another, the auditor should
a. Add an explanatory paragraph and express a qualified or an adverse opinion for lack of
conformity with generally accepted accounting principles.
b. Disclaim an opinion because of uncertainty.
c. Disclose the matter in a separate explanatory paragraph(s) but not modify the opinion
paragraph.
d. Neither modify the opinion nor disclose the matter because both principles are generally
accepted.
16. When an auditor qualifies an opinion because of inadequate disclosure, the auditor should
describe the nature of the omission in a separate explanatory paragraph and modify the
Introductory paragraph
Scope paragraph
Opinion paragraph
a.
Yes
No
No
b.
Yes
Yes
No
c.
No
Yes
Yes
d.
No
No
Yes
17. An auditor may not express a qualified opinion when
a. A scope limitation prevents the auditor from completing an important audit procedure.
b. The auditor’s report refers to the work of a specialist.
c. An accounting principles at variance with generally accepted accounting principles is used.
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Page 3 of 10
d. The auditor lacks independence with respect to the audited entity.
18. An auditor decides to express a qualified opinion on an entity’s financial statements because a
major inadequacy in its computerized accounting records prevents the auditor from applying
necessary procedures. The opinion paragraph of the auditor’s report should state that the
qualification pertains to
a. A client-imposed scope limitation.
b. A departure from generally accepted auditing standards.
c. The possible effects on the financial statements.
d. Inadequate disclosure of necessary information.
19. Totoy, CPA, was engaged to audit the financial statements of Bibo Co., a new client, for the
year ended December 31, 2004. Totoy obtained sufficient audit evidence for all of Bibo’s
financial statement items except Bibo’s opening inventory. Due to inadequate financial
records, Totoy could not verify Bibo’s January 1, 2004 inventory balances. Totoy’s opinion on
Bibo’s 2004 financial statements most likely will be
Balance Sheet
Income Statement
a.
Disclaimer
Disclaimer
b.
Unqualified
Disclaimer
c.
Disclaimer
Adverse
d.
Unqualified
Adverse
20. When management prepares financial statements on the basis of a going concern and the
auditor believes the company may not continue as a going concern, the auditor should issue
a(n)
a. qualified opinion
b. unqualified opinion with an explanatory paragraph
c. disclaimer of opinion
d. adverse opinion
21. A dual dated report contains the dates of a subsequent event and the date the:
a. Auditor completed work in the client’s office
c. Subsequent event was resolved
b. Financial statements were prepared
d. Audit report was delivered
22. If the principal auditor decides to take responsibility for the work of other auditors, the principal
auditor should:
a. Modify the opening paragraph
c. Modify all three paragraphs
b. Modify the opening and opinion paragraphs
d. Issue a standard report
23. An auditor who concludes that an uncertainty is not adequately disclosed in the financial
statements should issue a:
a. Disclaimer of opinion.
c. Special report.
b. Unqualified report with an explanatory paragraph. d. Qualified report.
24. An auditor may wish to emphasize a matter included in the financial statements by adding an
explanatory paragraph to the audit report. In this case the following paragraphs of the audit
report should be modified:
a. Introductory paragraph
c. Opinion paragraph
d. None
b. Scope paragraph
25. In the case of a client imposed scope limitation, the auditor must consider issuing a:
a. Qualified opinion or disclaimer of opinion
c. Disclaimer of opinion or adverse opinion
d. Disclaimer of opinion
b. Qualified opinion or adverse opinion
26. Which of the following modifications of the standard auditor’s report does not require an
explanatory paragraph.
a. Reference to other auditors
c. Scope limitation
b. Inconsistency
d. Adverse opinion
27. Pamela, CPA, was engaged to audit the financial statements of One Co. after its fiscal year
had ended. The timing of Pamela’s appointment as auditor and the start of field work made
confirmation of accounts receivable by direct communication with the debtors ineffective.
However, Pamela applied other procedures and was satisfied as to the reasonableness of the
account balances. Pamela’s auditor’s report most likely contained a(n)
a. Unqualified opinion.
b. Unqualified opinion with an explanatory paragraph.
c. Qualified opinion because of a scope limitation.
d. Qualified opinion because of a departure from GAAS.
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28. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will always
result when management
a. Engages the auditor after the year-end physical inventory count is completed.
b. Fails to correct a material internal control weakness that had been identified during the prior
year’s audit.
c. Refuses to furnish a management representation letter to the auditor.
d. Prevents the auditor from reviewing the working papers of the predecessor auditor.
29. When an auditor expresses an opinion other than unqualified opinion, a clear description of all
substantive reasons for the modification of the opinion should be included in the report. This
explanation should be presented:
a. As a separate paragraph that precedes the opinion paragraph of the audit report.
b. As a separate paragraph, preferably after the opinion paragraph, of the audit report.
c. In the opinion paragraph
d. As a separate paragraph in the notes to financial statements.
30. Where a limitation on the scope of the auditor’s work requires modification of an unqualified
opinion, the auditor’s report should describe the limitation and:
a. Indicate that the auditor is no longer responsible to his opinion.
b. Indicate the possible adjustments to the financial statements that might have been
determined to be necessary had the limitation not existed.
c. Refer the users to the particular note to financial statements that adequately discusses the
limitation
d. Indicate that the auditor is not satisfied of the results of the alternative procedures that he
had performed.
31. What is the purpose of the following paragraph in a particular audit report:
“…We draw attention to note X in the financial statements which discusses that the
company incurred a net loss of P6.4 million during the year ended December 31, 2004
and as of that date, the Company’s liabilities exceeded its total assets by P2,500,000...”
a.
b.
c.
d.
A standard reporting requirement.
Emphasis of matter about the going concern problems of the entity.
Inadequate disclosure qualification.
An inappropriate reporting.
32. An explanatory paragraph following an opinion paragraph that describes an uncertainty follows:
As discussed in Note X to the financial statements, the company is a defendant in a
lawsuit alleging infringement of certain patent rights and claiming damages. Discovery
proceedings are in progress. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result upon adjudication
has been made in the accompanying financial statements.
What type of opinion should the auditor express in this circumstance?
a. unqualified
b. qualified
c. disclaimer
d. adverse
33. If an amendment to other information in a document containing audited financial statements is
necessary and the entity refuses to make the amendment, the auditor would consider issuing:
a. Qualified or adverse opinion
c. Unqualified opinion with explanatory paragraph
b. Qualified or disclaimer of opinion
d. Unqualified opinion.
34. When management does not amend the financial statements in circumstances where the
auditor believes they need to be amended and the auditor’s report has not been released to the
entity, the auditor should express
a. Qualified or adverse opinion
c. Unqualified opinion with explanatory paragraph
b. Qualified or disclaimer of opinion
d. Unqualified opinion.
35. If subsequent to the issuance of the audited financial statements, the auditor becomes aware of
material misstatements in the financial statements that exist prior to the date of the audit report,
the auditor should
a. Notify the parties who currently relying on the financial statements.
b. Discuss the matter with management, and should take the action appropriate in the
circumstances.
c. Document such information in the audit plan for succeeding audit.
d. Submit revised copies of the financial statements and audit report to the stockholders.
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QUIZZERS
1. Which of the following is not explicitly included in the opening paragraph of an audit report?
a. Identification of the financial statements that have been audited.
b. A statement by the auditor that the audit provides a reasonable basis for the opinion.
c. Statement that the financial statements are the responsibility of the entity’s management.
d. Statement that the responsibility of the auditor is to express an opinion on the financial
statements based on his audit.
2. A measure of uniformity in the form and content of the auditor’s report is desirable because
a. It helps the auditors avoid legal liability.
b. It helps the readers understand the report.
c. It helps the auditor identify the usual circumstances that are expected to occur.
d. It makes the auditors more informed of their responsibilities with respect to audit report.
3. The most common type of audit report contains a(n):
a. Adverse opinion.
c. Disclaimer of opinion.
d. Unqualified
b. Qualified opinion.
4. If an auditor is certain an illegal act has a material effect on financial statements and the clients
agrees to adjust the statements accordingly, the auditor should:
a. Withdraw from the engagement.
b. Disclaim an opinion on the financial statements taken as a whole.
c. Issue a qualified opinion.
d. Issue an unqualified opinion.
5. It exists when other information contradicts information contained in the audited financial
statements.
c. Material inconsistency
a. Material misstatement of fact
b. Material error
d. Material deviation
6. After issuing a report, a auditor has no longer obligation to make continuing inquiries or perform
other procedures concerning the audited financial statements, unless
a. Management of the entity requests the auditor to reissue the auditor’s report.
b. Information about an event that occurred after the end of fieldwork comes to the auditor’s
attention.
c. Information, which existed at the report date and may affect the report, comes to the
auditor’s attention.
d. Final determinations or resolutions are made of contingencies that had been disclosed in
the financial statements.
7. Which of the following events occurring after the issuance of an auditor’s report most likely
would cause the auditor to make further inquiries about the previously issued financial
statements?
a. A technological development that could affect the entity’s future ability to continue as a
going concern.
b. The entity’s sale of a subsidiary that accounts for 30 percent of the entity’s consolidated
sales.
c. The discovery of information regarding a contingency that existed before the financial
statements were issued.
d. The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report
8. An auditor would issue an adverse opinion if
a. The audit was begun by other independent auditors who withdrew from the engagement.
b. The statements taken as a whole do not fairly present the financial condition and results of
operations of the company.
c. A qualified opinion cannot be given because the auditor lacks independence.
d. The restriction on the scope of the audit was significant.
9. An audit report contains the following paragraph:
"Because of the inadequacies in the company's accounting records during the year ended June
30, 2005, it was not practicable to extend our auditing procedures to the extent necessary to
enable us to obtain certain evidential matter as it relates to classification of certain items in the
consolidated statements of operations."
This paragraph most likely describes
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a.
b.
c.
d.
A material departure from GAAP requiring a qualified audit opinion.
An uncertainty that should not lead to a qualified opinion.
A material scope restriction requiring a qualification of the audit opinion.
A matter that the auditor wishes to emphasize and that does not lead to a qualified audit
opinion.
10. The auditor issued a qualified opinion covering the financial statements of Client A for the year
ended December 31, 2004. The reason for the qualification was a departure from GAAP. In
presenting comparative statements for the years ended December 31, 2004 and 2005, the
client revised the 2004 financial statements to correct the previous departure from GAAP. The
auditor's 2005 report on the 12/31/04 and 12/31/05 comparative financial statements will
a. Express unqualified opinions on both the 2004 and 2005 financial statements.
b. Express a qualified opinion on the 2004 financial statements and an unqualified opinion on
the 2005 statements.
c. Retain the qualified opinion covering the 2004 statements, but add an explanatory
paragraph describing the correction of the prior departure from GAAP.
d. Render qualified audit opinions for both 2004 and 2005 financial statements given the 2005
carryover effect of the 2004 error.
11. An auditor may reasonably issue an "except for" qualified opinion for
a.
b.
c.
d.
Inadequate disclosure
Yes
Yes
No
No
Scope limitation
Yes
No
Yes
No
12. Soon after Boyd's audit report was issued, Boyd learned of certain related party transactions
that occurred during the year under audit. These transactions were not disclosed in the notes
to the financial statements. Boyd should
a. Plan to audit the transactions during the next engagement.
b. Recall all copies of the audited financial statements.
c. Ask the client to disclose the transactions in subsequent interim statements.
d. Determine whether the lack of disclosure would affect the auditor's report.
13. An auditor includes an explanatory paragraph in an otherwise unqualified report in order to
emphasize that the entity being reported on is a subsidiary of another business enterprise. The
inclusion of this paragraph
a. Is appropriate and would not negate the unqualified opinion.
b. Is a qualification.
c. Is a violation of generally accepted reporting standards if this information is disclosed in
footnotes to the financial statements.
d. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing
explanation."
14. Which of the following best describes the auditor's responsibility for "other information" included
in the annual report to stockholders which contains financial statements and the auditor's
report?
a. The auditor has no obligation to read the "other information."
b. The auditor has no obligation to corroborate the "other information," but should read the
"other information" to determine whether it is materially inconsistent with the financial
statements.
c. The auditor should extend the examination to the extent necessary to verify the "other
information."
d. The auditor must modify the auditor's report to state that the "other information is
unaudited" or "not covered by the auditor's report."
15. In which of the following circumstances would an auditor be most likely to express an adverse
opinion?
a. The statements are not in conformity with the ASC Statements regarding the capitalization
of leases.
b. Information comes to the auditor's attention that raises substantial doubt about the entity's
ability to continue in existence.
c. The chief executive officer refuses the auditor access to minutes of board of directors'
meetings.
d. Control tests show that the entity's internal control is so poor that the financial records
cannot be relied upon.
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16. When a principal auditor decides to make reference to another auditor's examination, the
principal auditor's report should always indicate clearly, in the introductory, scope, and opinion
paragraphs, the
a. Magnitude of the portion of the financial statements examined by the other auditor.
b. Division of responsibility.
c. Disclaimer of responsibility concerning the portion of the financial statements examined by
the other auditor.
d. Name of the other auditor.
17. The independent auditor refers to both GAAP and GAAS when writing the standard audit report.
These terms are mentioned as follows:
a
b
c
d
Scope Paragraph
GAAP
GAAS
GAAP
GAAS
Opinion Paragraph
GAAS
GAAP
GAAP
GAAS
18. Which of the following best describes the reference to the expression “taken as a whole” in the
fourth generally accepted auditing standard of reporting?
a. It applies equally to a complete set of financial statements and to an individual financial
statement.
b. It applies only to a complete set of financial statements.
c. It applies equally to each item in each financial statement.
d. It applies equally to each material item in each financial statement.
19. If an accounting change has no material effect on the financial statements in the current year
but the change is reasonably certain to have a material effect in later years, the change should
be
a. Treated as a consistency modification in the auditor’s report for the current year.
b. Disclosed in the notes to the financial statements of the current year.
c. Disclosed in the notes to the financial statements and referred to in the auditor’s report for
the current year.
d. Treated as a subsequent event.
20. An auditor’s standard report expressed an unqualified opinion and includes an explanatory
paragraph that emphasizes a matter included in the notes to the financial statements. The
auditor’s report would be deficient if the explanatory paragraph states that the entity
a. Is a component of a larger business enterprise.
b. Has changed form the completed contract method to the percentage of completion method
to account for long-term construction contracts.
c. Has had a significant subsequent event.
d. Has accounting reclassifications that enhance the comparability between years.
21. In which of the following circumstances would an adverse opinion be appropriate?
a. The auditor is not independent with respect to the enterprise being audited
b. An uncertainty prevents the issuance of an unqualified report
c. The statements are not in conformity with authoritative statements regarding accounting for
pension plans
d. A client-imposed scope limitation prevents the auditor from complying with generally
accepted auditing standards
22. An auditor is confronted with an exception sufficiently material to warrant departing from the
standard wording of an unqualified report. If the exception relates to a departure from the
generally accepted accounting principles, the auditor must decide between a(n)
a. adverse opinion and an unqualified opinion
b. adverse opinion and a qualified opinion
c. adverse opinion and a disclaimer of opinion
d. disclaimer of opinion and a qualified opinion
23. An auditor had expressed a qualified opinion on the financial statements of a prior period
because the client’s financial statements departed from generally accepted accounting
principles. The prior period statements are restated in the current period to conform with
generally accepted accounting principles. The auditor’s updated report on the prior period
statements should
a. express an unqualified opinion about the restated financial statements
b. be accompanied by the auditor’s original report on the prior period
c. bear the same date as the auditor’s original report on the prior period
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d. qualify the opinion concerning the restated financial statements because of a change in
accounting principles
24. A successor auditor should refer to a predecessor auditor’s report in the
c. Opinion paragraph
a. Opening paragraph
b. Scope paragraph
d. Opening and opinion paragraph
25. Because of inadequate records the auditor is uncertain as to whether property and equipment
is stated at cost. The auditor should issue a (n):
c. Adverse opinion
a. Qualified opinion
b. Unqualified opinion
d. Standard opinion
26. The auditor’s report contains a paragraph explaining that the entity changed from the straightline to the declining balance method of depreciation. The auditor expressed an:
a. Adverse opinion
c. Qualified opinion
d. Disclaimer of opinion
b. Unqualified opinion
27. The following circumstances result in a modified, but unqualified report, except:
a. Inconsistent application of accounting principles.
b. Emphasis of a related party transaction that is disclosed in a footnote.
c. Lack of disclosure of a restriction on payment of dividends.
d. Other auditors perform work for which the principal auditor does not assume responsibility.
28. Under which of the following sets of circumstances might an auditor disclaim an opinion?
a. The financial statements contain a departure from GAAP, the effect of which is material.
b. The principal auditor decides to make reference to the report of another auditor who audited
a subsidiary.
c. There has been a material change between periods in the method of the application of
accounting principles.
d. There were significant limitations on the scope of the audit.
29. Which of the following description is not included in the scope paragraph of the auditor’s
report?
a. Examining, on a test basis, evidence to support the financial statement amounts and
disclosures.
b. Determining the accounting principles used in the preparation of the financial statements.
c. Assessing the significant estimates made by management in the preparation of the financial
statement.
d. Evaluating the overall financial statement presentation.
30. Which of the following statements is best described in the scope paragraph of the independent
auditor’s report?
a. The audit was planned and performed to obtain reliable assurance about whether the
financial statements are free of material misstatements.
b. The audit was conducted in accordance with financial reporting framework.
c. The auditor makes the significant estimates in the preparation of the financial statements.
d. A statement by the auditor that the audit provides a reasonable basis for the opinion.
31. When there is an assessed substantial doubt about the ability of the entity to continue as a
going concern and such information is adequately disclosed in the notes to financial
statements, the auditor should express a(n):
a. Standard unqualified opinion.
c. Qualified opinion
b. Unqualified opinion with explanatory paragraph.
d. Adverse opinion
32. If adequate disclosure is not made by the entity regarding substantial doubt about its ability to
continue as a going concern, the auditor should include in his report specific reference to the
substantial doubt as to ability of the company to continue as a going concern and should
express:
a. Unqualified opinion with explanatory paragraph
b. A subject to qualified opinion or adverse opinion.
c. Either an “except for” qualified opinion or an adverse opinion.
d. A disclaimer of opinion.
33. Which of the following factors, by itself, would not cause uncertainty about the ability of a
company to continue as a going concern?
a. A significant net loss.
b. Inability to pay its obligations as they come due.
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c. The occurrence of uninsured catastrophe.
d. Legal proceedings that might jeopardize the entity’s ability to operate.
34. If the auditor concludes that the fraud or error has a material effect on the financial statements
and has not been properly corrected in the financial statements, the auditor should issue a:
a. Unqualified opinion with explanatory paragraph.
c. Qualified or disclaimer of opinion.
b. Qualified or adverse opinion.
d. Adverse or disclaimer of opinion.
35. If the auditor is precluded by the entity from obtaining evidence to evaluate whether fraud or
error that may be material to the financial statements has, or is likely to have, occurred, the
auditor should issue a (n):
a. Unqualified opinion with explanatory paragraph.
b. Qualified or adverse opinion.
c. Qualified or disclaimer of opinion.
d. Adverse or disclaimer of opinion.
36. In which of the following circumstances would an auditor usually choose between expressing a
qualified opinion or disclaiming an opinion?
a. Departure from generally accepted accounting principles
b. Inadequate disclosure of accounting policies
c. Inability to obtain sufficient competent evidential matter
d. Unreasonable justification for a change in accounting principle
PSA 700 – The Auditor’s Report on Financial Statements
37. The element of the auditor’s report that distinguishes it from reports that might be issued by
others is
a. Title
c. Auditor’s signature
b. Addressee
d. Opinion paragraph
38. The financial statements audited by the auditor are identified in the
a. Opening paragraph
c. Opinion paragraph
b. Scope paragraph
d. All of the above.
39. Which of the following statements can be found on the scope paragraph of the standard audit
report?
a. The financial statements are the responsibility of the Company’s management.
b. Our responsibility is to express an opinion on these financial statements based on our audit.
c. We believe that our audit provides a reasonable basis for our opinion.
d. The financial statements ‘present fairly, in all material respects’.
40. Which statement is incorrect regarding the date of the auditor’s report?
a. The auditor should date the report as of the completion date of the audit.
b. The date of the report informs the reader that the auditor has considered the effect on the
financial statements and on the report of events and transactions of which the auditor
became aware and that occurred up to that date.
c. The auditor should not date the report earlier than the date on which the financial
statements are signed or approved by management.
d. The auditor should date the report as of date the report is delivered to the entity audited.
41. The following will usually result in a modified report but will not affect the auditor’s opinion,
except
a. Existence of going concern problem.
b. There is a significant uncertainty (other than a going concern problem), the resolution of
which is dependent upon future events and which may affect the financial statements.
c. Emphasis of a matter.
d. There is a disagreement with management regarding the acceptability of the accounting
policies selected.
42. In extreme cases, such as situations involving multiple uncertainties that are significant to the
financial statements, the auditor may consider it appropriate to express a
a. Qualified or adverse opinion
c. Unqualified opinion with explanatory paragraph
b. Disclaimer of opinion
d. Unqualified opinion.
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