CHAPTER 1 – AUDIT: AN OVERVIEW
1.
Recording, classifying and summarizing economic events in a logical manner for the purpose of providing
financial information for decision making is called:
a. Finance
b. Auditing
c. Accounting
d. Economics
2.
An audit involves ascertaining the degree of correspondence between assertions and established criteria. In the
case of financial statement audit, which of the following is not a valid criterion?
a. Philippine Standards on Auditing
c. Authoritative Financial Reporting Framework
b. International Accounting Standards
d. Accounting standards generally accepted in the Philippines
3.
The subject matter of the financial audit is the
a. Financial Statements
b. Economic Data
c.
Assertions
d.
Operating Data
4.
Whenever a CPA professional is engaged to perform an audit of financial statements according to Philippine
Standard on Auditing, he is required to comply with those standards in order to:
a. Eliminate audit risk
b. Meet the minimum requirement when providing audit services
c. To reduce the auditors responsibility
d. Eliminate the professional judgment in resolving audit issues
5.
The criteria for evaluating quantitative information vary. For example, in the case of an independent audit of
financial statement by CPA firms, the criteria are usually the
a. Philippine Standards on Auditing
b. Philippine Financial Reporting Standards
c. National Internal Revenue Code
d. Regulations of the Securities and Exchange Commission
6.
In “auditing” financial accounting data, the primary 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.
7.
An audit of financial statements is conducted to determine if the
a. Organization is operating efficiently and effectively
b. Auditee is following specific procedures or rules set down by some higher authority
c. Overall financial statements are stated in accordance with the applicable financial reporting framework
d. Clients internal control is functioning as intended
8.
In determining the primary responsibility of the external auditor for an audit of a company’s financial
statements, the auditor owes primary allegiance to:
a. Stockholders, creditors and the investing public
b. The management of the audit client because the auditor is hired and paid by management
c. The Auditing and Assurance Standards Council, because it determines auditing standards and auditor’s
responsibility
d. The audit committee of the audit client because that audit committee is responsible for coordinating and
reviewing all audit activities within the company.
9.
An audit involves ascertaining the degree of correspondence between assertions and established criteria. In the
case of an audit of financial statements, which of the following would be a valid criterion?
a. International Standards on Auditing
c. Generally accepted accounting principles
b. Philippines Standards on Auditing
d. Quality Control Standards
10. Most of the independent auditor’s work in formulating an opinion on financial statements consist of
a. Obtaining and examining evidence
c. Comparing recorded accountability with assets
b. Examining cash transactions
d. Studying and evaluating internal control
11. Which of the following is more difficult to evaluate positively
a. Efficiency and effectiveness of operations
b. Compliance with applicable government regulations
c. Presentation of financial statements in accordance with the applicable financial reporting criteria
d. All the given criteria are equally difficult to evaluate objectively
12. An audit that involves obtaining and evaluating evidence about the efficiency and effectiveness of an entity’s
operating activities in relation to specified objectives is a(n):
a. External audit
b. Compliance audit
c. Operational Audit
d. Financial Statement Audit
13. In financial statement audits, the audit process should be conducted in accordance with
a. The audit program
c. Philippines Accounting Standards
b. Philippines Standards on Auditing
d. Philippines Financial Reporting Standards
14. International auditors are expected to add value to the organization through improved operational effectiveness.
In addition, their responsibilities includes all the following except:
a. Reviewing the reliability and integrity of information
b. Ensuring compliance with the company’s accounting policies
c. Verifying accounting information for external users
d. Ensuring compliance with applicable governmental regulations
15. Which of the following types of audit uses laws and regulations as its criteria?
a. Operational audit
b. Financial statement audit
c. Compliance audit
d.
Performance audit
16. Which of the following best describes an operational audit?
a. It attempts of verifying the fair presentation of a company’s results of operation.
b. It concentrates on implementing financial and accounting control in a newly organized company
c. It concentrates on seeking out aspects of operations in which waste would be reduced by the introduction of
controls
d. It requires a constant review of the administrative controls by internal auditors as they relate to operations
of the company
17. A typical objective of an operational audit is to determine whether an entity’s
a. Internal control structure is adequately operating as designed
b. Operational information is in accordance with generally accepted accounting principles
c. Specific operating units are functioning efficiently and effectively
d. Financial statements present fairly the results of operations
18. One objective of an operational audit is to:
a. Determine whether the financial statements fairly presents the entity’s operations
b. Evaluate the feasibility of attaining the entity’s operational objectives
c. Make recommendations for improving performance
d. Report on the entity’s relative success in attaining profit maximization
19. An audit designed to provide reasonable assurance of detecting violations of a specific provisions of contracts
or grant agreements would be called a(n):
a. Performance audit
b. Management audit
c. Operational audit
d. Compliance audit
20. The auditor communicates the results of his or her work through the medium of the
a. Engagement letter
b. Audit report
c. Management letter
d.
Financial Statements
21. When performing an operational audit, the internal auditor team must first determine that:
a. A financial audit has been performed by an independent auditor
b. A financial audit has been performed by an internal auditor
c. A review was performed by either an independent or an internal auditor
d. Specific criteria are developed to define effectiveness.
22. Which of the following types of auditing is performed most commonly by CPA’s on a contractual basis?
a. Internal auditing
b. Income tax auditing
c. Government auditing
d. External auditing
23. An examination of part of an organization’s procedures and methods for the purpose of evaluating efficiency
and effectiveness is what type of audit?
a. Operational audit
b. Compliance audit
c. Financial statement audit
d. Production audit
24. Which of the following is not one of the major differences between financial and operational auditing?
a. The financial audit is oriented to the past but an operational audit concerns performance for the future
b. The financial audit report has widespread distribution but the operational audit report has limited
distribution
c. Financial audits deal with the information on the financial statements but operational audits are concerned
with the information in the ledgers and journals
d. Financial audits are limited to matters that directly affect the fairness of the financial statement presentation
but operational audits cover any aspect of efficiency and effectiveness
25. Independent external auditing can best be describe as a
a. Professional activity that measures and communicates financial accounting data
b. Subset of accounting
c. Professional activity that attests to the fair presentation of the financial statements
d. Regulatory activity that prevents the issuance of misleading financial information
26. Which of the following is not a major difference between operational and financial auditing?
a. Purpose of the audit
c. Testing the effectiveness of internal control
b. Distribution of the report
d. Audits of non-financial areas
27. The overall objective of internal auditing is to
a. Attest to the efficiency with which resources are employed
b. Ascertain that controls are cost justified
c. Provide assurance that financial data have been accurately recorded
d. Assist members of the organization in the effective discharge of their responsibilities
28. Internal auditors report to:
a. The audit committee of the board of directors
b. Management
c.
d.
External auditors
The government regulations
29. Which of the following is not a similarity between external and internal auditors?
a. Both must be independent of the company
b. Both must be competent
c. Both follow a similar methodology in performing their audits
d. Both consider risk and materiality deciding the extent of their tests and evaluating results
30. Internal auditing is an independent appraisal function established within an organization to examine and
evaluate its activities. To that end internal auditing provides assistance to:
a. External auditors
c. Management and the board of directors
b. Stockholders
d. Government
31. Which of the following groups could not be involved in an operational audit?
a. External auditors
c. Government auditors
b. Internal auditors
d. All of the above could be involved
32. Which of the following statements is not a distinction between independent auditors and internal auditors?
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.
33. Which of the following has the primary responsibility for the fairness of the representations made in the
financial statements?
a. Client’s management
c. Independent auditor
b. Audit committee
d. Board of Accountancy
34. An audit of the financial statements of JMV Corporation is being conducted by an external auditor. The external
auditor is expected to
a. Express an opinion as to the fairness of JMV’s financial statements
b. Express an opinion as to the attractiveness of JMV for investment purposes
c. Certify the correctness of JMV’s financial statements
d. Examine all evidence supporting JMV’s financial statements
35. Which of the following statements about independent financial statement audit is correct?
a. The audit of financial statements relieves management of its responsibilities for the financial statements
b. An audit is designed to provide limited assurance that the financial statements taken as a whole are free of
material misstatement
c. The procedures required to conduct an audit in accordance with PSA’s should be determined by the client
who engaged the services of the auditor
d. The auditor’s opinion is not an assurance as to the future viability of the entity as well as the effectiveness
and efficiency with which management has conducted the affairs of the entity.
36. The primary purpose of an independent financial audit is to
a. Provide a basis for assessing management’s performance
b. Comply with government regulatory requirements
c. Assure the management that the financial statements are unbiased and free from material error
d. Provide users with an unbiased opinion about the fairness of information reported in the financial
statements
37. Financial statements normally prepared in accordance with one or a compilation of:
Philippine Standards
Philippine Accounting
Other authoritative or
on Auditing
Standards
Comprehensive financial
reporting framework
a.
YES
YES
YES
b.
NO
YES
YES
c.
NO
YES
NO
d.
YES
NO
NO
Philippine
Financial Reporting
Standards
YES
YES
YES
NO
38. By providing high level of assurance on audit reports on financial statements, the auditor
a. Guarantee the fair presentation of the financial statements
b. Confirms the accuracy of the financial statements
c. Enhances the credibility of the financial statements
d. Assures the leaders that fraudulent activities of the employees have been detected
39. The reason independent auditors gather evidence is to
a. Form an opinion on the financial statements
b. Detect fraud
c.
d.
Evaluate management’s performance
Evaluate the entity’s internal control
40. The trait that distinguishes the auditors from accountants is the:
a. Auditor’s ability to interpret accounting standards
b. Auditor’s education beyond the bachelors degree
c. Auditor’s ability to interpret PFRS
d. Auditor’s accumulation and interpretation of evidence related to the company’s financial statements
41. The level of assurance provided by an auditor on an audit report is:
a. Low
b. High
c. Moderate
d.
None
42. Theoretically, it is possible to provide an infinite range of assurance from a very low level of assurance to an
absolute level of assurance. In practice, the professional accountants cannot provide absolute assurance because
of the following except,
a. The internal control has its inherent limitations
b. The professional accountants employ testing process
c. The lack of expertise of the professional accountants in doing a systematic engagement process
d. The use of judgment in gathering evidence and drawing conclusions based on that evidence
43. Which of the following is not one of the limitations of an audit?
a. The use of testing
c.
b. Limitations imposed by client
d.
Human error
Nature of evidence that the auditor obtains
44. Which of the following statements does not properly describe a limitation of an audit?
a. Many audit conclusions are made on the basis of examining a sample of evidence
b. Some evidence supporting peso representation in the financial statements must be obtained by oral or
written representation of management
c. Fatigue can cause auditor to overlook pertinent evidence
d. Many financial statement assertions cannot be audited
45. Which of the following is one of the limitations of an audit?
a. The possibility that management may prevent the auditor from performing the necessary audit procedures
b. The likelihood that the auditor may not be able to detect material misstatements in the financial statements
because the auditor is engaged only after year-end
c. The fact that most audit evidence is persuasive rather than conclusive in nature
d. The risk that the auditor may not possess the training and proficiency required by the engagement
46. The independent audit is important to readers of financial statements because it
a. Determines the future stewardship of the management of the company whose financial statements are
audited
b. Measures and communicates financial and business data involved in financial statements
c. Involves the objective examination of and reporting on management prepared statements
d. Reports on the accuracy of all information in the financial statements
47. The primary reason for an audit by an external audit firm is
a. To satisfy governmental regulatory requirements
b. To guarantee that there are no misstatements in the financial statements
c. To provide increased assurance to users as to the fairness of the financial statements
d. To ensure that any fraud will be discovered
48. Which of the following is not one of the general principles governing the audit of financial statements?
a. The auditor should plan and perform the audit with an attitude of professional skepticism
b. The auditor should obtain sufficient appropriate evidence primarily through inquiry and analytical
procedures to be able to draw reasonable conclusions
c. The auditor should conduct the audit in accordance with PSA
d. The auditor should comply with the Philippine Code of Professional Ethics
49. Financial statement users often receive unreliable financial information from companies. Which of the
following is not a common reason for this?
a. Complex exchange transactions
b. Voluminous data
c. Bias in the preparation of financial statements
d. Each of these choices is a common reason for unreliable financial information
50. Which one of the following is not among the conditions that give rise to a demand by external users for
independent audits of financial statements?
a. Remoteness of users
b. Complexity of making economic decisions
c. Potential conflict of interest between users and preparers of the statements
d. Consequence for making decisions
51. Which of the following would not represent one of the primary problems that would lead the users to demand
for independent audits of a company’s financial statements?
a. The downsizing of business and financial markets
b. Management bias in preparing financial statements
c. The complexity of transactions affecting financial statements
d. The remoteness of the user to directly obtain financial information from the company
52. The need for independent audits of financial statements can be attributed to all of the following conditions
except:
a. Remoteness
b. Consequence
c. Complexity of subject matter
d. Validity
53. Which of the following best describes the reason why an independent auditor reports on financial statements?
a. A management fraud may exist and it is more likely to be detected by independent auditors
b. Different interest may exist between the company preparing the statements and the persons using the
statements
c. A misstatement of account balances may exist and is generally corrected as the result of the independent
auditor’s work
d. A poorly designed internal control system may be in existence.
54. Which of the following statements does not describe a condition that creates a demand for auditing?
a. Conflict between an information preparer and a user can result in biased information
b. Information can have substantial economic consequences for a decision-maker
c. Expertise is often required for information preparation and verification
d. Users can directly assess the quality of information
55. There are four conditions that give rise to the need for independent audits of financial statements. One of these
conditions is consequence. In this context, consequence means that the:
a. Users of the statements may not fully understand the consequences of their actions
b. Auditor must anticipate all possible consequences of the report issued
c. Impact of using different accounting methods may not be fully understood by the users of the statements
d. Financial statements are used for important decisions
56. Which of the following statements does not properly describe an element of theoretical framework of auditing?
a. The data to be audited can be verified
b. Short-term conflict may exist between managers who prepare the data and auditors who examine the data
c. Auditors act on behalf of the management
d. An audit benefits the public
57. Auditing is based on the assumption that financial data are verifiable. Data are verifiable when two or more
qualified individuals,
a. Working together, can prove, beyond doubt, the accuracy of the data
b. Working independently, each reach essentially similar conclusions
c. Working independently, can prove, beyond reasonable doubt, the truthfulness of the data
d. Working together, can agree upon the accuracy of the data
58. The best statement of the responsibility of the auditor with respect to audited financial statement is:
a. The auditor’s responsibility on fair presentation of financial statements is limited only up to the date of the
audit report
b. The auditor’s responsibility is confined to the expression of opinion on the financial statements audited
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 unmodified opinion but not for any other types of opinion.
59. Which of the following is incorrect about responsibility for financial statements?
a. Management is responsible for fair presentation of the financial statements
b. Auditor is responsible for expressing an opinion on the financial statements
c. Audit of financial statements does not reduce management’s responsibility
d. Fair presentation of financial statements is an implicit part of the auditor’s responsibility.
60. Which of the following is one of the assumptions when auditing financial statements?
a. The data in the financial statements are verifiable
b. Compliance to PFRS results in fair presentation of financial statements
c. Effective internal control system contributes little to the reliability of financial information
d. The auditor should be independent.
CHAPTER 2 – THE PROFESSIONAL STANDARDS
1.
In the auditing environment, failure to meet auditing standards is often:
a.
b.
An accepted practice
A suggestion of negligence
c.
d.
Conclusive evidence of negligence
Tantamount to criminal behavior
2.
Audit standard requires an auditor to:
a. Perform procedures that are designed to detect all instances of fraud.
b. Provide reasonable assurance that the financial statements are not materially misstated.
c. Issue an unmodified opinion only when the auditor is satisfied that no instances of fraud have occurred.
d. Design the audit program to meet financial statement users’ expectations concerning fraud.
3.
Which of the following underlies the application of generally accepted auditing standards, particularly the
standards of field work and reporting?
a.
b.
Element of internal control
Elements of materiality and risk.
c.
d.
Element of reasonable assurance.
Element of corroborating evidence.
4.
Which of the following best describes what is meant by generally accepted auditing standards?
a. Audit objectives generally determined on audit engagements.
b. Acts to be performed by the auditor.
c. Measures of the quality of the auditor’s performance.
d. Procedure to be used to gather evidence to support financial statement.
5.
Requirements for training, independence and due professional care are included in which group of the generally
accepted auditing standards?
a.
Fieldwork.
b.
General.
c.
Reporting.
d.
Quality control.
6.
The general standards of the generally accepted auditing standards include a requirement that
a. The fieldwork to be adequately planned.
b. The auditor’s report to state whether the financial statement are presented in conformity with PFRS.
c. Due professional care be exercise by the auditor.
d. The auditor to obtain sufficient, competent evidential matter.
7.
Under GAAS, which are the following reflects a concept from the general group?
a. The confirmation of accounts receivable.
b. Completing an internal control questionnaire.
c. The initial planning of the audit with the audit partner, manager, senior, staff and client personnel.
d. The assignment of audit personnel to an engagement where they have no financial interest.
8.
What is the general character of the three generally accepted auditing standards classified as general standards?
a. Criteria for competence, independence, and professional care of individuals performing the audit.
b. Criteria of evidence gathering.
c. Criteria for the content of the auditor’s report on financial statements and related footnote disclosures.
d. The requirements of the planning of the audit and supervision of assistants, if any.
9.
What is the general character of the three generally accepted auditing standards under standards of fieldwork?
a. The competence of persons performing the audit.
b. Criteria for the content of auditor’s report on financial statements and related footnote disclosures.
c. The criteria of audit planning and evidence-gathering.
d. The need to maintain independence in mental attitude in all matters relating to the audit.
10. Which of the following does not pertain to the standards of fieldwork?
a. Adequate planning and supervision.
b. Obtaining sufficient competent evidential matter.
c. Proper study and evaluation of internal control as a basis for reliance thereon.
d. Technical training and proficiency.
11. While performing audit services for their clients ,professional accountants have a duty to provide a level of care
which is
a.
Reasonable.
b.
Greater than average.
c.
Superior.
d.
Guaranteed to be free from error.
12. The standards of due audit care requires the auditor to
a. Make perfect judgment decision in all cases.
b. Ensure the financial financials are free rom error.
c. Possess skills clearly above the average for the profession.
d. Apply judgment in a conscientious manner, carefully weighing the relevant factors before reaching the
decision.
13. The third standards of field work states that sufficient competent evidential matter may in park be obtain to the
following methods except a.
a.
Inspection
b.
Observation
c.
Confirmation
d.
Reconciliation
14. The general accepted standards of reporting encompass all of the following except
a.
b.
Consideration of an entity’s internal control
Consistent application of accounting principles
c.
d.
Informative disclosure
Conformity of financial statements with GAAP.
15. The third general accepted of reporting in auditing refers to
a. Whether financial statements are presented in conformity with GAAP.
b. Whether accounting principles have been consistently observed.
c. Adequacy of disclosure.
d. An expression of opinion of the financial statement taken as whole.
16. The objective of the consistency standard is to provide assurance that
a. There are no variation in the format and presentation of financial statements.
b. Substantially different transaction and events are not accounted for on an identical basis.
c. The auditor is consulted before materials are changes are made in the application of accounting principle.
d. The comparability of financial statement between period in not materially affected by changes in
accounting principle without disclosures.
17. The fourth generally accepted auditing standards of reporting requires an auditor to render a report whenever an
auditor’s name is associated with financial statements. The overall purpose of the fourth standards of reporting
is to require that reports:
a. State that the examination of financial statement has been conducted in accordance with generally accepted
auditing standards.
b. Indicated the character of the auditor’s examination and the degree of responsibility assumed by the
auditor.
c. Imply that the auditor is independent in mind as well as in appearance with respect to the financial
statements under examination.
d. Express whether the accounting principles used in preparing the financial statements have been applied
consistently in the period under examination.
18. The fourth reporting standard requires the auditor’s report to contain an expression of opinion regarding the
financial statements taken as a whole, or an assertion to the effect that an opinion cannot be expressed. The
objective of the fourth standard is to prevent
a. An auditor from reporting on one basic financial statement and not on the others.
b. An auditor from expressing different opinions on each of the basic financial statements.
c. Management from reducing its final responsibility for the basic financial statements.
d. Misinterpretations’ regarding the degree of responsibility the auditor is assuming.
19. The auditor is not liable to his client for
a.
Negligence
b.
Fraud
c.
Dishonesty
d.
Errors in application of judgment
20. The Philippine Standards on Auditing issued by the Auditing and Assurance Standards Council:
a. Are interpretations of GAAS.
b. Are the criteria used in evaluating the fair presentation of financial statements.
c. are interpretations of GAAP.
d. are optional guidelines which an auditor may choose to follow or not follow when conducting an audit.
21. According to Philippine Standards on Auditing, because there are inherent limitations in an audit that affect the
auditor’s ability to detect material misstatements, the auditor is:
a. A guarantor but not an insurer of the statements.
b. An insurer but not a guarantor of the statements.
c. Neither a guarantor nor an insurer of financial statements.
d. Both a guarantor and an insurer of the financial statements.
22. An auditor need not abide with the specific requirement of PSA if the auditor believes that:
a.
b.
c.
d.
The amount is insignificant.
The requirement of the PSA is impractical to perform.
The requirement of the PSA is impossible to perform.
Any of the given three choices is correct.
23. The Philippine Standards on Auditing can be described as
a. Providing very specific guidance about the specific activities an auditor must perform on each engagement.
b. Similar to Philippine Financial Reporting Standards (PFRS).
c. Defining the minimum standards of performance for an auditor.
d. Providing assurance that an auditor will not issue an inappropriate audit opinion.
24. Which of the following best describes the function of Auditing and Assurance Standards Council (AASC)?
a. To establish and promulgate GAAP in the Philippines.
b. To investigate violations of Accountancy Law.
c. To promulgate auditing standards, practices and procedures that shall be generally accepted by the
accounting profession in the Philippines.
d. To determine the minimum requirements for admission in the accounting profession.
25. Pronouncements issued by AASC may be in the form of
a.
b.
c.
d.
Philippine
Standards on
Auditing
YES
YES
YES
NO
Philippine Standards on
Assurance Engagements
Philippine Standards on
Review Engagements
YES
NO
YES
YES
Philippine Standards
on Related Services
YES
YES
YES
NO
YES
NO
NO
YES
26. Which of the following is correct about Philippine Auditing Practices Statements (PAPS)?
a. These are issued to resolve issues relating to PSAs.
b. These statements are intended to have the authority of PSAs.
c. These statements are issued to provide practical assistance to auditors in implementing PSAs.
d. These statements are forms of interpretations issued by AASC.
27. Which of the following pronouncements issued by AASC is designed to resolve issues relating to PSAs?
a.
b.
Philippine Auditing Practices Statements.
Interpretations
c.
d.
Statements of Auditing Standards in the Philippines.
GAAS
28. Based on the structure of AASC pronouncements, related services include:
Assurance
Review
Agreed-Upon Procedures
1.
YES
YES
YES
2.
YES
NO
YES
3.
YES
YES
YES
4.
NO
YES
NO
29. The risk that an auditor will fail to uncover a material misstatement is eliminated
a.
b.
If client has good internal control.
If auditor observes the Code of Professional Ethics.
c.
d.
Compilation
YES
NO
NO
YES
When the auditor complies with PSA.
Under no circumstances.
30. The auditor’s best defense when material misstatements are not uncovered is to have conducted the audit:
a. In accordance with PSA.
b. As effectively as reasonably possible.
c. In a timely manner.
d. Only after an adequate investigation of the management team.
31. The failure of the auditor to meet the requisites of PSA is
a.
b.
An accepted practice.
A suggestion of negligence.
c.
d.
An evidence of negligence.
Tantamount to criminal behavior.
32. A firm of independence auditors must establish and follow quality control policies and procedures because
these standards
a. Are necessary to meet increasing requirements of auditors’ liability as insurers.
b. Are required by the SEC for auditors of all firms.
c. Include formal filing of records of such policies and procedures to regulatory agency.
d. Give reasonable assurance that the firm as a whole will comply with professional standards.
33. The main purpose of implementing a system of quality control is to provide the firm with reasonable assurance
that:
a. The firm and its personnel will comply with regulatory and legal requirements.
b. The audit will be performed in accordance with PSA.
c. The firm will issue a report that is appropriate in the circumstances.
d. All of the above.
34. The nature and extent of a CPA firm’s quality control policies and procedures depend on
a.
b.
c.
d.
The CPA Firm’s Size
YES
YES
YES
NO
The Nature of the CPA Firm’s Practice
YES
YES
NO
YES
Cost-Benefit Considerations
YES
NO
YES
YES
35. Which of the following is not an essential component of quality control?
a. Policies and procedures to ensure that firm personnel are actively engaged in marketing strategies.
b. Policies and procedures to ensure that the work performed by the firm personnel meet applicable
professional standards.
c. Policies to ensure that personnel maintain their independence in fact and in appearance.
d. Policies that ensure that monitoring activities are effectively applied.
36. The objective of the quality control policies to be adopted by an audit firm will ordinarily incorporate all of the
following except:
a.
b.
Risk assessment
Leadership responsibilities
c.
d.
Engagement performance
Human resources
37. The person responsible for the audit engagement and its performance, and for the auditor’s report that is issued
in behalf of the firm is the
a.
b.
Quality control reviewer
Engagement partner
c.
d.
Client’s management
Audit manager
38. Which of the following is an element of a CPA firm’s quality control system that should be considered in
establishing its quality control policies and procedures?
a.
b.
Complying with laws and regulations
Using statistical sampling techniques
c.
d.
Independence
Consideration of audit risk and materiality
39. Elements of a CPA firm’s quality control that should be considered in establishing its quality control policies
and procedures must include:
a.
b.
c.
d.
Monitoring
YES
YES
YES
NO
Ethical Requirements
YES
YES
NO
YES
Engagement Performance
YES
NO
YES
YES
40. Which of the following is one of the elements of a CPA firm’s quality control system?
a.
b.
Leadership responsibilities
Computer assisted audit techniques
c.
d.
Control activities
Control environment
41. Which of the following quality control objectives would be least important to the auditor?
a.
b.
Engagement performance
Human resources
c.
d.
Determination of audit fee
Independence
42. A quality control policy that requires personnel in the firm to adhere to independence, integrity, objectivity,
confidentiality and professional behavior, relate to
a.
Ethical requirements
b.
Human resources
c.
Assignment
d.
Consultation
43. Which of the following quality control policies and procedures does not relate to human resources and
assignment?
a. Emphasize independence of mental attitude in training programs and in supervision and review of the
audits.
b. Monitor the effectiveness of recruiting programs.
c. Identify criteria which will be considered in evaluating individual performance and expected proficiency.
d. Identify on a timely basis the staffing requirements of specific audits.
44. In pursuing a CPA firm’s quality control objectives, a CPA firm may maintain records indicating which
partners or employees of the CPA firm were previously employed by the CPA firm’s clients. Which quality
control element would this be most likely to satisfy?
a.
Monitoring
b.
Assignment
c.
Independence
d.
Skills and competence
45. A procedure in which a quality control partner periodically test the application of quality control procedures is
most directly related to which quality control element?
a.
b.
Engagement performance
Independence, integrity, and objectivity
c.
d.
Monitoring
Personnel management
46. In connection with the element of engagement performance, a CPA firm’s system of quality control should
ordinarily provide that all personnel
a. Have the knowledge required to enable them to fulfill responsibilities assigned.
b. Review and test compliance with the firm’s quality control policies and procedures.
c. Seek assistance from persons having appropriate levels of knowledge, judgment and authority.
d. Appropriately maintain independence when providing assurance services.
47. Maintaining or providing access to adequate reference libraries and other authoritative sources is a procedure
that is most likely performed to comply with the policy of
a.
Monitoring
b.
Skills and competence
c.
Consultation
d.
Assignment
48. Which of the ff. quality control procedures relates to engagement performance?
a.
Hiring
b.
Direction
c.
Professional development
d.
Advancement
49. Within the context of quality control, the primary purpose of continuing professional education and training
activities is to enable the CPA firm to provide its personnel with:
a. Technical training that assures proficiency as a valuation expert.
b. Professional education that is required in order to perform with due professional care.
c. Knowledge required to fulfill assigned responsibilities.
d. Knowledge required to perform a peer review.
50. In compliance with the element of human resources, the firm should address issues relating to
a.
b.
Engagement performance
Assignment of engagement teams
c.
d.
Consultation
Differences of opinion
51. In pursuing the firms quality control objectives with respect to assigning personnel to engagements, the auditors
may use policies and procedures such as
a. Designating senior qualified personnel to provide advice on accounting or auditing questions throughout
the engagement.
b. Requiring timely identification of the staffing requirements of specific engagements so that enough
qualified personnel can be made available.
c. Establishing at entry levels a policy for recruiting that includes minimum standards of academic
preparation and accomplishments.
d. Evaluate clients upon occurrence of specified events to determine whether the relationship ought to be
continued.
52. In connection with the element of assignment, a CPA firm’s system of quality control should ordinarily
establish procedures that
a. Provide adequate supervision at all levels, considering the training, ability and experience of the personnel
assigned.
b. Encourage personnel to use authoritative sources on complex or unusual matter.
c. Require preparation for time budgets for audits to determine manpower requirements and to schedule the
audit work.
d. Establish qualifications deemed necessary for various levels of responsibility within the firm.
53. Which of the ff. is a policy that must be established to comply with the quality control engagement
performance?
a. The firm is to be staffed by personnel who have attained and maintained the technical standards and
professional competence required to enable them to fulfill their responsibilities.
b. There is a sufficient direction, supervision, and review of work performed meets appropriate standards of
quality.
c. The firm should assign responsibility for each engagement to an engagement partner.
d. The continued adequacy and operational effectiveness of quality control policies and procedures are to be
observed.
54. The work performed by the assistants should be reviewed by personnel of at least equal competence to consider
all of the following except:
a. Whether the conclusions expressed are consistent with the results of the work performed.
b. Whether the work was adequately performed and documented.
c. Whether the objectives of the audit have been achieved.
d. Whether the engagement personnel maintained independence.
55. The primary factor that should be considered in determining the extent of supervision needed by an assistant is
the assistant’s
a.
b.
Willingness to exercise due care
Competence
c.
d.
Professional certification
Independence
56. The primary purpose of establishing quality control policies and procedures for deciding whether to accept a
new client is to
a. Enable the CPA firm to attest to the integrity of the client management.
b. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
c. Minimize the likelihood of association with clients whose management lacks integrity.
d. Anticipate before performing any field work whether an unmodified opinion can be expressed.
57. In making decision to accept or retain a client, the firm should consider
a.
b.
Its competence
Its ability to comply with ethical requirements
c.
d.
The integrity of the client’s management.
All three should be considered.
58. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client would most
likely include
a. Inquiry of management as to whether disagreements between the predecessor auditor and the prospective
client were resolved satisfactorily.
b. Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable
basis for opinion.
c. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about information regarding
the prospective client and its management.
d. Consideration of whether the internal control structure is sufficiently effective to permit a reduction in the
required substantive tests.
59. Quality control policies and procedures should provide the firm reasonable assurance that the policies and
procedures relating to the other elements of quality control are being effectively applied. This statement defines
the quality control element of
a.
b.
Planning
Independence, integrity and objectivity
c.
d.
Assignment
Monitoring
60. In connection with the element of monitoring, a CPA firm’s system of quality control should ordinarily provide
for the maintenance of
a.
b.
c.
d.
A file of minutes of staff meetings.
Updated personnel files.
Documentation to demonstrate compliance with its policies and procedures.
Documentation to demonstrate compliance with peer review directives.
CHAPTER 3 – AUDITOR’S RESPONSIBILITY
1.
Material misstatements may emanate from all of the following except
a. Fraud
c. Noncompliance with laws and regulations
b. Error
d. Inadequacy of accounting records
2.
Which of the following factors is most important concerning an auditor’s responsibility to detect errors and
fraud?
a. The susceptibility of the accounting records to intentional manipulations, alterations, and the
misapplication of accounting policies.
b. The probability that unreasonable accounting estimates result from unintentional bias or intentional
attempts to misstate the financial statements.
c. The possibility that management fraud, defalcations, and the misappropriation of assets may indicate the
existence of illegal acts.
d. The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material
misstatements.
3.
The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her
name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are
unlikely to mislead
a. Investors
b. Management
c. A prudent user
d. The reader
4.
The level of assurance provided by an audit of detecting a material misstatement is referred to as:
a. Reasonable assurance
b. Moderate assurance
c. Absolute assurance
d. Negative assurance
5.
The responsibility for the detection and prevention of errors, fraud and noncompliance with laws and
regulations rests with
a. Auditor
b. Client’s legal counsel
c. Client management
d. Internal auditor
6.
The responsibility for adopting sound accounting policies, maintaining adequate internal control, and making
fair representation in the financial statements rests
a. With the management.
c. Equally with management and the auditor.
b. With the independent auditor.
d. With the internal audit department.
7.
The management responsibility to detect and prevent fraud and error is accomplished by
a. Implementing adequate quality control system.
b. Having an annual audit of financial statements.
c. Implementing adequate accounting and internal control system.
d. Issuing a representation letter to the auditor.
8.
Which of the following statements best describes the auditor’s responsibility regarding the detection of material
errors and frauds?
a. The auditor is responsible for the failure to detect material errors and frauds only when such failure results
from the misapplication of PSA.
b. Audit should be designed to provide reasonable assurance that material errors and frauds will be detected.
c. The auditor is responsible for the failure to detect material errors and fraud only when the auditor fails to
confirm receivables or observe inventories.
d. Extended auditing procedures are required to detect unrecorded transactions even if there is no evidence
that material errors and frauds may exist.
9.
The auditor’s best defense when material misstatements in the financial statements are not uncovered in the
audit is that
a. The audit was conducted in accordance with GAAP.
b. Client is guilty of contributory negligence.
c. The audit was conducted in accordance with PSA.
d. The financial statements are client’s responsibility.
10. The following statements relate to the auditor’s responsibility for the detection of errors and fraud. Identify the
correct statements.
I.
Due to the inherent limitations of the audit, there is a possibility that material misstatements in the
financial statements may not be detected.
II.
The subsequent discovery of material misstatement of the financial information resulting from fraud or
error does not, in itself, indicate that the auditor failed to follow the basic principles and essential
procedures of an audit.
a. I only
b. II only
c. Both statements are correct
d. Both statements are incorrect
11. The auditor’s responsibility for failure to detect fraud arises
a. When the failure clearly results from non-compliance to PSA.
b.
c.
d.
Whenever the amounts involved are material.
Only when the examination was specifically designed to detect fraud.
Only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the
part of the auditor.
12. An intentional act by one or more individuals among management, employees, or third parties which results in
misrepresentation of financial statements refers to
a. Error
b. Noncompliance
c. Fraud
d. Illegal acts
13. The factor which distinguishes an error from fraud is
a. Materiality
b. Intent
c.
d.
Whether it is a peso amount or a process
Whether it is a caused by the auditor or the client
14. Which of the following statements is correct regarding errors and fraud?
a. An error is unintentional, whereas fraud is intentional.
b. Frauds occur more often than errors in financial statements.
c. Errors are always fraud and frauds are always errors.
d. Auditors have more responsibility for finding fraud than error.
15. The primary factor that distinguishes errors from fraud is
a. Whether the underlying cause of misstatement relates to misapplication of accounting principles or to
clerical processing.
b. Whether the misstatements is perpetrated by an employee or by a member of management.
c. Whether the misstatement is concealed.
d. Whether the underlying cause of misstatement is intentional or unintentional.
16. In the context of financial statement presentation, fraud occurs when:
a. A misstatement is made and there is both knowledge of its falsity and the intent to deceive.
b. A misstatement is made and there is knowledge of its falsity but no intent to deceive.
c. The auditor fails to comply with PSA.
d. The auditor has an absence of reasonable care in the performance of the audit.
17. Which of the following statements best identifies the two types of fraud?
a. Theft of assets and employee fraud
b. Misappropriation of asset and defalcation
c. Management fraud and employee fraud
d. Fraudulent financial reporting and management fraud
18. Fraudulent financial reporting is often called
a. Management fraud
b. Defalcation
c.
d.
Misappropriation of assets
Employee fraud
19. Fraudulent financial reporting is most likely to be committed by whom?
a. Line employees of the company
c.
b. Outside members of the company’s board of directors
d.
Company’s management
The company’s auditor
20. The auditor has considerable responsibility for notifying users as to whether or not the statements are properly
stated. This imposes upon the auditor a duty to
a. Provide reasonable assurance that material misstatements will be detected.
b. Be a guarantor of the fairness in the statements.
c. Be equally responsible with management for the preparation of the financial statements.
d. Be an insurer of the fairness in the statements.
21. Which of the following statement is true?
a. It is usually easier for the auditor to uncover fraud than errors
b. It is usually easier for the auditor to uncover errors than fraud
c. It is usually equally difficult for the auditor to uncover errors or fraud
d. Usually, none of the above statement is true
22. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is
a. Greater for management fraud because managers are inherently smarter than employees
b. Greater for management fraud because of management’s ability to override existing internal controls
c. Greater for employee fraud because of the higher crime rate among blue collar workers
d. Greater for employee fraud because of the larger number of employees in organization
23. If there is fraud involving top management, the probability that the fraud would be uncovered in a financial
statement audit is
a. Zero
b. Unlikely
c. Likely
d. Very high
24. The term “error” refers to unintentional misrepresentation of financial information. Examples of errors are when
I.
Assets have been misappropriated
II.
Transactions without substance have been recorded
III.
Records and documents have been manipulated and falsified
IV.
The effects of the transactions have been omitted from the records
a. All of the above statements are true
c. Al of the above statements are false
b. Only statements I and II are true
d. Only statements II and IV are true
25. Which of the following is an example of an error?
a. Defalcation
b. Suppression or omission of the effects of transactions from the records or documents
c. Recording of transactions without substance
d. Misapplication of accounting policies
26. Which of the following is an “error” as distinguished from “fraud”?
a. Embezzlement of company’s fraud
c. Clerical mistakes in the processing of transactions
b. Window dressing
d. Lapping
27. Which of the following could be an example of fraud?
a. Mistakes in the application of the accounting policies
b. Clerical errors in accounting data underlying the financial statements
c. Misinterpretation of facts that existed when financial statements were prepared
d. Misappropriation of assets or group of assets
28. Which of the following is an example of fraudulent financial reporting?
a. Company management changes inventory count tags and overstates ending inventory, while understating
cost of goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense
account, thus overstating expenses.
c. An employee steals small tools from the company and neglects to return them, the cost is reported as a
miscellaneous operating expense.
d. An employee omitted an entry to record a ban transfer to cover a cash shortage.
29. Which one of the following terms relates to the embezzling of receipts?
a. Manipulation
b. Misrepresentation
c. Misappropriation
d.
Misapplication
30. Which of the following statements best describes an auditor’s responsibility to detect errors and fraud?
a. An auditor should assess the risk that errors and fraud may cause the financial statements to contain
material misstatements and should design the audit to provide reasonable assurance of detecting errors and
fraud that are material to the financial statements.
b. An auditor is responsible to detect material fraud errors, but has no responsibility to detect material frauds
that are concealed through employee collusion or management override of the internal control source.
c. An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of
transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements
were materially misstated.
d. An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an audit
does not constitute a guarantee.
31. In connection with the audit of financial statements, an independent auditor could be responsible for failure to
detect a material fraud if:
a. Statistical sampling techniques were not used on the audit engagement.
b. The auditor planned the audit in a negligent manner.
c. Accountants performing important parts of the work failed to discover a close relationship between the
treasurer and the cashier.
d. The fraud was perpetrated by one employee who circumvented the existing internal controls.
32. An auditor should recognize that the application of auditing procedures may produce evidential matter
indicating the possibility of errors or fraud and therefore should
a. Plan and perform the engagement with an attitude of professional skepticism.
b. Not depend on internal accounting control features that are designed to prevent or detect errors or fraud.
c. Design audit tests to detect unrecorded transactions.
d. Extend the work to audit most recorded transactions and records of an entity.
33. “The auditor should not assume that management is dishonest, but the possibility of dishonesty must be
considered.” This is
a. Unprofessional behavior
c. Due diligence
b. An attitude of professional skepticism
d. Reasonable assurance
34. Professional skepticism requires auditors to possess a _________ mind.
a. Introspective
b. Questioning
c. Intelligent
d.
Unbelieving
35. Professional skepticism dictates that when management makes a statement to the auditors, the auditors should
a. Require that the statement be out in writing.
b. Disregard the statement because it ranks low of the evidence quality scale.
c. Corroborate the evidence with other supporting documentation whenever possible.
d. Believe on the statement in order to maintain the professional client – auditor relationship.
36. Which of the following statements is not true?
a. It is usually easier for the auditor to uncover fraud than error.
b. It is usually easier for the auditor to uncover error than fraud.
c. The auditor’s responsibility for the detection of fraud and error is ordinarily the same.
d. Usually, the auditor designs procedures to uncover fraud or error that could materially affect the financial
statements.
37. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is:
a. Greater for management fraud because managers are inherently more deceptive than employees.
b. Greater for management fraud because of management’s ability to override existing internal controls.
c. Greater for employee fraud because of the higher crime rate among blue collar workers.
d. Greater for employee fraud because of the larger number of employees in the organization.
38. The most difficult type of misstatement to detect is fraud based on
a. The over recording of transactions.
c. Recorded transactions in subsidiaries.
b. The nonrecording of transactions.
d. Related party receivable.
39. If several employees collude to falsify documents, the chance a normal audit would uncover such acts is:
a. Very low
b. Very high
c. Zero
d. None of the above
40. If an auditor conducted an audit in accordance with auditing standards, which of the following would the
auditor likely detect?
a. Unrecorded transactions
c. Counterfeit signatures on paid checks
b. Errors in posting of recorded transactions
d. Fraud involving collusion
41. If an auditor was engaged to discover errors and fraud and the auditor performed extensive detail work, the
auditor is expected to detect:
a. Omitted transactions
c. Non-compliance with laws and regulations
b. Misclassification of account
d. Misappropriation of assets
42. Which of the following statements is incorrect?
a. The responsibility for the prevention and detection of fraud and error rests with management.
b. The auditor is not and cannot be held responsible for the detection of fraud or error.
c. In planning an audit, the auditor should assess the risk that fraud or error may cause the financial statements
to contain material misstatements.
d. The risk of not detecting material fraud is higher than the risk of not detecting a material misstatement
arising from error.
43. Which of the following statements about fraud or error is incorrect?
a. The auditor is not and cannot be held responsible for the prevention of fraud and error.
b. The responsibility for the prevention and detection of fraud and error rests with management.
c. The auditor should plan and perform the audit with an attitude of professional skepticism, recognizing that
conditions or events may be found that fraud or error may exist.
d. The likelihood of detecting fraud is ordinarily higher than that of detecting error.
44. In performing a financial statement audit, which of the following would an auditor least likely consider?
a. Internal control
b. Compliance with the applicable financial reporting framework
c. Quality of managements’ business decisions
d. Fairness of the financial statement amounts
45. Which of the following is not an assurance that the auditors give to the parties who rely on the financial
statements?
a. Auditors know how the amounts and disclosures in the financial statements were produced.
b. Auditors give assurance that the financial statements are accurate.
c. Auditors gathered enough evidence to provide a reasonable basis for forming an opinion.
d. If the evidence allows the auditors to do so, auditors give assurance in the form of opinion, as to whether
the financial statements taken as a whole are fairly presented in conformity with PFRS.
46. The risk of not detecting material misstatements resulting from fraud is greater than the risk of not detecting a
material misstatements arising from error, because:
a. The auditor designs only procedures to detect material error but no procedures are designed to detect
material fraud.
b. Fraud ordinarily involves acts designed to conceal it, such as collusion, forgery, or deliberate failure to
record transactions.
c. The professional standards do not require the auditor to discover information that is indicative of fraud.
d. It is the responsibility of the management to detect fraud and the auditor’s responsibility is confined only to
the detection of material errors.
47. When performing a financial statement audit, auditors are required to explicitly assess the risk of material
misstatement due to
a. Errors
b. Fraud
c. Noncompliance
d. Business risk
48. Audits of financial statements are designed to obtain assurance of detecting misstatement due to
Errors
Fraudulent Financial Reporting
Misappropriation of Assets
a.
YES
YES
YES
b.
YES
YES
NO
c.
YES
NO
YES
d.
NO
YES
NO
49. Which of the following best describes what is meant by the term “fraud risk factor”?
a. Factor whose presence indicates that the risk of fraud is high.
b. Factor whose presence often has been observed in circumstances where fraud has occurred.
c. Factor whose presence requires modification of planned audit procedures.
d. Factor that indicates internal control weaknesses.
50. At which stage(s) of the audit may fraud risk factors be identified?
Planning
Obtaining Understanding
a.
YES
YES
b.
YES
YES
c.
YES
NO
d.
NO
YES
Conducting Fieldwork
YES
NO
YES
NO
51. Which of the following is a category of risk factors that should be considered when assessing risk of
misstatements arising from misappropriation of assets?
a. Condition of internal control
c. Financial stability of the entity
b. Management characteristics
d. Industry condition
52. When considering fraud risk factors relating to management’s characteristics, which of the following is least
likely to indicate a risk of possible misstatement due to fraud?
a. Failure to correct known material internal control weaknesses on timely basis.
b. Nonfinancial management’s preoccupation with the selection of accounting principles.
c. Significant portion of management’s compensation represented by bonuses based upon achieving unduly
aggressive operating results.
d. Use of unusually conservative accounting policies.
53. Which of the following is most likely to be response to the auditor’s assessment that the risk of material
misstatement due to fraud for the existence of inventory is high?
a. Observe test counts of inventory at certain locations on an unannounced basis.
b. Perform analytical procedures rather than taking test counts.
c. Request that inventories be counted prior to year end.
d. Request that inventory counts at the various locations be counted on different dates so as to allow the same
auditor to be present at every count.
54. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of
intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low.
b. Insiders recently purchased additional shares of the entity’s stock.
c. Management places substantial emphasis on meeting earnings projections.
d. The rate of change in the entity’s industry is slow.
55. Individuals who commit fraud are ordinarily able to rationalize the act and also have an
a.
b.
c.
Incentive
YES
YES
NO
Opportunity
YES
NO
YES
d.
NO
NO
56. Which of the following most likely to be considered a risk factor relating to fraudulent financial reporting?
a. Domination of management by top executives.
c. Negative cash flows from operations.
b. Large amount of cash processed.
d. Small high-peso inventory items.
57. Which of the following is most likely to be presumed to represent fraud risk on an audit?
a. Capitalization of repairs and maintenance into the property, plant and equipment asset account.
b. Improper revenue recognition.
c. Improper interest expense accrual.
d. Introduction of significant new products.
58. Which of the following conditions or events would least likely increase the risk of fraud or error?
a. Questions with respect to competence or integrity of management.
c. Unusual transactions.
b. Unusual pressures within the entity.
d. Lack of transaction trail.
59. Which of the following condition identified during fieldwork of an audit is most likely to affect the auditor’s
assessment of the risk of misstatement due to fraud?
a. Checks for significant amounts outstanding at year end.
c. Missing documents.
b. Computer generated documents.
d. Year-end adjusting journal entries.
60. Which of the following would be least likely to suggest to an auditor that the client’s financial statements are
materially misstated?
a. There are numerous delays in preparing timely internal financial reports
b. Management does not correct material internal control weaknesses that it knows about.
c. Differences are reflected in the customers’ confirmation replies.
d. There have been two new controllers this year.
CHAPTER 4 – THE AUDIT PROCESS: ACCEPTING AN ENGAGEMENT
1.
The objective of the ordinary audit of financial statements is the expression of an opinion on:
a. The fairness of financial statements in all material respects
c. The accuracy of financial statements
b. The accuracy of the balance sheet and income statements
d. The accuracy of the annual report
2.
The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to:
a. The auditor
c. Both management and the auditor equally
b. Management
d. Management for the statements and the auditor for the notes
3.
Auditors accumulate evidence to:
a. Defend themselves in the event of a lawsuit
b. Justify the conclusions they have otherwise reached
c. Satisfy the requirements of the Securities and Exchange Commission
d. Enable them to reach conclusions about the fairness of the financial statements
4.
Management assertions are:
a. Directly related to the financial reporting framework used by the company
b. Stated in the footnotes to the financial statements
c. Explicitly expressed representations about the company’s financial condition
d. Provided to the auditor in the assertions letter, but are not disclosed on the financial statements
5.
Which of the following is not one of the five broad categories of management assertions?
a. General or specific transaction objectives
c. Valuation or allocation
b. Existence or occurrence
d. Presentation and disclosure
6.
This addresses whether all transactions that should be included in the financial statements are in fact included.
a. Occurrence
b. Completeness
c. Rights and obligations
d. Existence
7.
Which of the following statements is not correct?
a. It would be a violation of the completeness assertion if management would record a sale that didn’t happen
b. The completeness assertion deals with matters opposite from those of the existence assertion
c. The completeness assertion is concerned with the possibility of omitting items from the financial
statements that should have been included
d. The existence assertion is concerned with inclusion of amount that should not have been
8.
Which of the following assertions does not relate to balances at the period end?
a. Existence
b. Occurrence
c. Valuation or allocation
d.
9.
Rights and obligation
Which of the following statement is correct?
a. Existence relates to whether the amounts in accounts are understated
b. Completeness relates to whether balance exist
c. Existence relates to whether the balances are valid
d. Occurrence relates to whether the amounts in accounts occurred in the proper year
10. Which of the following management assertions is not associated with transaction-related audit objectives?
a. Occurrence
b. Classification and understandability
c. Accuracy
d. Completeness
11. An assertion that transaction are recorded in the proper accounting period is:
a. Classification
b. Accuracy
c. Occurrence
d.
Cut-off
12. The auditor is determining that the recorded sales are for the amount of goods shipped are correctly billed and
recorded. The auditor is gathering evidence about which transaction related audit objective?
a. Existence
b. Completeness
c. Accuracy
d. Cut-off
13. In testing for cut-off, the objective is to determine:
a. Whether all of the current period’s transactions are recorded
b. Whether transactions are recorded in the correct accounting period
c. The proper cut-off between capitalizing and expensing expenditures
d. The proper cut-off between disclosing items in footnotes or in account balances
14. Which of the following statement is not correct?
a. There are many ways an auditor can accumulate evidence to meet the overall audit objectives
b. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility
c. The cost of accumulating the evidence should be minimized
d. Gathering evidence and minimizing costs are equally important considerations that affect the approach the
auditor selects
15. When the auditor examines the client’s documents and records to substantiate information on the financial
statements, it is commonly referred to as
a. Inquiry
b. Confirmation
c. Vouching
d. Physical examination
16. When the auditor uses tracing as an audit procedures for tests of transactions, the auditor primarily concerned
with which audit objective?
a. Occurrence
b. Completeness
c. Cut-off
d. Classification
17. When the auditor used the audit procedure vouching, the auditor is primarily concerned with which of the
following audit objectives when testing classes of transactions?
a. Occurrence
b. Completeness
c. Authorization
d. Classification
18. Which of the following is an example of vouching?
a. Trace inventory purchases from the acquisitions journal to supporting invoices
b. Trace selected sales invoices to the sales journal
c. Trace details of employee pay checks to the payroll journal
d. All of the above are examples of vouching
19. A document which the auditor receives from the client, but which was prepared by someone outside the client’s
organization, is a(n)
a. Confirmation
b. Internal document
c. External document
d. Inquiry
20. Traditionally, confirmation are used to verify
a. Individual transactions between organizations, such as sales
b. Bank balances and accounts receivable
c.
d.
Fixed asset additions
All three of the above
21. In performing your audit for a privately-held firm your inquiries have yielded that one of the company’s
owner’s primary motivations is to pay the least amount of income tax that is possible. Based on this observation
which of the objective for ending inventory would the auditor would be most concerned about ascertaining?
a. Completeness
b. Accuracy
c. Rights and obligations
d. Existence
22. After the auditor has completed all audit procedures, it is necessary to combine the information obtained to
reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly
subjective process that relies heavily on:
a. Generally accepted accounting principle
c. PFRS
b. The Code of Professional Ethics
d. The auditor’s professional judgement
23. Which of the following audit procedures is used extensively throughout the audit and often is complementary to
performing other audit procedures?
a. Inspection
b. Observation
c. Inquiry
d. Confirmation
24. Which statement is incorrect regarding Inquiry?
a. Responses to inquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence
b. Responses to inquiries might provide information that differs significantly from other information that the
auditor has obtained
c. Responses to inquiries may provide a basis for the auditor to modify of perform additional audit procedures
d. Inquiry alone is sufficient to test the operating effectiveness of controls
25. Observation
a. Consists of looking at the process or procedure being performed by others
b. Consists of seeking information of knowledgeable persons, both financial and non-financial, throughout the
entity or outside the entity
c. Is the process of obtaining a representation of information or an existing condition directly from third party
d. Is the auditor’s independent execution of procedures or controls that were originally performed as part of
the entity’s internal control
26. This consists of checking the mathematical accuracy of documents or records
a. Reperformance
b. Recalculation
c. Confirmation
d.
Inspection
27. Even with the most effectively designed internal control, the auditor must obtain audit evidence, beyond testing
the controls, for every:
a. Transaction
c. Material financial statement account
b. Financial statement account
d. Financial statement account that will be relied upon by third parties
28. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is
a. Substantive tests, documentation of control structure, and test of controls
b. Documentation of control structure, test of controls, and substantive tests
c.
d.
Documentation of control structures, substantive tests, and test of controls
Test of controls, documentation of control structure, and substantive tests
29. Which of the following is correct order of steps in the audit process?
A. Perform tests of control
B. Develop an overall strategy for the expected conduct and scope of the audit
C. Obtain client’s written representation
D. Prepare engagement letter
E. Perform substantive tests
a. D,A,B,E,C
b. D,B,A,E,C
c. D,B,C,A,E
d.
D,B,E,A,C
30. Which of the following would an auditor least likely perform as part of the auditor’s preliminary engagement
activities?
a. Perform procedures regarding the continuance of the client relationship and the specific audit engagement
b. Evaluate compliance with ethical requirements, including independence
c. Establish an understanding of the terms of the engagement
d. Obtain understanding of the legal and regulatory framework applicable to the entity
31. Which of the following is not one of the reasons why auditor should perform preliminary engagement
activities?
a. To ensure that the auditor maintains the necessary independence and ability to perform the engagement
b. To help ensure that there are no issues with the management integrity that may affect the auditor’s
willingness to continue the engagement
c. To ensure that there is no misunderstanding with the client as to the terms of engagement
d. To ensure that sufficient appropriate evidence will be obtained to support the auditor’s opinion on the
financial statements
32. Which of the following is not normally performed in the preplanning or pre-engagement phase?
a. Deciding whether to accept or reject an audit engagement
b. Inquiring from predecessor auditor
c. Preparing and engagement letter
d. Making a preliminary estimate of materiality
33. In making a decision to accept or continue with a client, the auditor should consider:
a.
b.
c.
Its competence
YES
YES
YES
Its independence
YES
NO
YES
Its ability to serve the client properly
YES
YES
YES
The integrity of client’s management
YES
YES
NO
d.
YES
NO
NO
YES
34. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. A preliminary understanding of the prospective client’s industry and business
b. The prospective clients signature to the engagement letter
c. An understanding of the prospective client’s control environment
d. A representation letter from the prospective client
35. Preliminary knowledge about the client’s business and industry must be obtained prior to the acceptance of the
engagement primarily to
a. Determine the degree of knowledge and expertise required by the engagement
b. Determine the integrity of management
c. Determine whether the firm is independent with the client
d. Gather evidence about the fairness of the financial statements
36. A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client would most
likely include
a. Inquiry of management as to whether disagreements between the predecessor auditor and the prospective
client were resolved satisfactory
b. Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable
basis for an opinion
c. Inquiry of third parties, such as the prospective client’s banker and attorneys, about information regarding
the prospective client and its management
d. Consideration of whether the internal control structure is sufficiently effective to permit a reduction in the
required substantive tests
37. Prior to the acceptance of an audit engagement with the client who has terminated the service of the predecessor
auditor, the CPA should
a. Contact the predecessor auditor without advising the prospective client and request a complete report of the
circumstance leading to the termination with the understanding that all information disclosed be kept
confidential
b. Accept the engagement without contacting the predecessor auditor since the CPA can include audit
procedures to verify the reasons given by the client for the termination
c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to violate
the confidential relationship between the auditor and client
d. Advise the client of the intention to contact the predecessor auditor and request permission for the contact
38. The purpose of the requirement in having communication between the predecessor and successor auditors is to:
a. Allow the predecessor to disclose information which would otherwise be confidential
b. Help the successor auditor evaluate whether to accept the engagement
c. Help the client by facilitating the change of auditors
d. Ensure the predecessor collects all unpaid fees prior to a change in auditor
39. Jenna, CPA, has been retained to audit the financial statements of JMV Co. JMV’s predecessor auditor was
Moshe, CPA, who has been notified by JMV that Moshe’s services have been terminated. Under these
circumstances, which party should initiate the communication between Jenna and Moshe?
a. Jenna, the incoming auditor
c. JMV’s collector
b. Moshe, the predecessor auditor
d. The chairman of JMV’s board of directors
40. In an audit, communication between the predecessor and incoming auditor should be
a. Authorized in the engagement letter
c. Either written or oral
b. Acknowledged in a representation letter
d. Written and included in the working papers
41. The predecessor auditor is required to respond to the request of the successor auditor for information, but the
response can be limited to stating that no information will be provided when:
a. The predecessor auditor has poor relations with the successor auditor
b. The client is dissatisfied with the predecessor work
c. There are actual or potential legal problems between the client and the predecessor
d. The predecessor believes that the client lacks integrity
42. Arnel, CPA, is succeeding Von, CPA, on the audit engagement if Jin Corporation. Arnel plans to consult Von
and to review Von’s prior year working papers. Arnel may do so if
a. Von and Jin consents
c. Von consents
b. Jin consents
d. Von and Arnel Consents
43. Upon discovering material misstatements in a client’s financial statements that the client would not revise, the
auditor withdrew from engagement. If asked by the incoming auditor about the termination the engagement, the
predecessor auditor should
a. State that he found material misstatements that the clients would not revise
b. Suggest that the incoming auditor ask the client
c. Suggest that the incoming auditor obtain the client’s permission to discuss the reasons
d. Indicate that a misunderstanding occurred
44. Before accepting an engagement to audit a new client, a CPA is required to obtain
a. An understanding of the prospective client’s industry and business
b. The prospective client’s signature to the engagement
c. A preliminary understanding of the prospective client’s control environment
d. The prospective client’s consent to Make inquiries of the predecessor auditor, if any
45. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor
auditor regarding
a. Disagreements the predecessor had with the client concerning auditing procedures and accounting
principles
b. The predecessors evaluation of matters of continuing accounting significance
c. The degree of cooperation the predecessor received concerning the inquiry of the client’s lawyer
d. The predecessor’s assessments of inherent risk and judgements about materiality
46. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor
auditor regarding the predecessor’s
a. Opinion of any subsequent events occurring since the predecessor’s auditor report was issued
b. Understanding as to the reasons for the change of auditors
c. Awareness of the consistency in the application of PFRS between periods
d. Evaluation of all matters of continuing accounting significance
47. An incoming auditor most likely would make specific inquiries of the predecessor auditor regarding
a. Specialized accounting principles of the client’s industry
b. The competency of the client’s internal audit staff
c. The uncertainty inherent in applying sampling procedures
d. Disagreements with management as to auditing procedures
48. Which of the following should an incoming auditor obtain from the predecessor auditor prior to accepting an
audit engagement
a. Analysis of balance sheet accounts
c. All matters of continuing accounting significance
b. Analysis of income statement accounts
d. Facts that might bear on the integrity of management
49. What information should an incoming auditor obtain during the inquiry of the predecessor auditor prior to
acceptance of the audit?
I.
Facts that bear on the integrity of management
II.
Whether statistical or non-statistical sampling was used to gather evidence
III.
Disagreement with management concerning auditing procedures
IV.
The effect of the client’s internal audit function on the scope of the independent auditor’s examination
a. I and II
b. I and III
c. I and IV
d. III and IV
50. An incoming auditor should request the new client to authorize the predecessor auditor to allow a review of the
Predecessor’s Engagement letter
Predecessor’s Working paper
a.
YES
YES
b.
YES
NO
c.
NO
YES
d.
NO
NO
51. Which of the following factors most likely would cause an auditor not to accept a new audit engagement?
a. An adequate understanding of the entity’s interval control structure
b. The close proximity to the end of the entity’s fiscal year
c. Concluding that the entity’s management probably lacks integrity
d. An inability to perform preliminary analytical procedures before assessing control risk
52. Which of the following factors most likely would influence an auditor’s determination of the audit ability of the
entity’s financial statements
a. The complexity of the accounting system
c. The adequacy of the accounting records
b. The existence of related party transactions
d. The operating effectiveness of control procedures
53. In auditing the financial statements of Star Corp., Land discovered information leading Land to believe that
Star’s prior financial statements, which are audited by Jell, require substantial revisions. Under these
circumstances , Land should
a. Notify Star’ audit committee and stockholders that the prior year’s financial statements cannot be relied on
b. Request Star to reissue the prior year’s financial statements with the appropriate revisions
c. Notify Jell about the information and make inquiries about the inquiry of Star’s management
d. Request Star to arrange a meeting among the three parties to resolve the matter
54. Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the
predecessor auditor’s work papers. The prospective client’s refusal to permit this will bear directly on Hawkin’s
decision concerning the:
a. Adequacy of the preplanned audit program
c. Apparent scope limitation
b. Consistency in application of accounting principles
d. Integrity of management
55. Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor’s working paper
analyses relating to
Contingencies
Balance sheet accounts
a.
YES
YES
b.
YES
NO
c.
NO
YES
d.
NO
NO
56. In making client acceptance decisions the audit firm will consider:
a. Inherent and control risk of client
c. The client’s business risk and the CPA firm’s engagement risk
b. Audit risk to the CPA firm
d. CPA firm’s potential ongoing revenue from the audit client
57. The purpose of an engagement letter is to:
a. Document the CPA firm’s responsibility to external users of the audited financial statement
b. Document the terms of the engagement
c. Notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated
d. Emphasize management’s responsibility for approving the audit program
58. Before performing any audit procedures. The auditor and the client should agree on the
Type of opinion to be expressed
Terms of the engagement
a.
YES
YES
b.
NO
YES
c.
NO
YES
d.
YES
YES
59. Engagement letters
a. May be either oral or written
b. Must be written
c.
d.
Must be written and notarized
Must be written if the client regulated by the SEC
60. According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms
need to be recorded in a(n)
a. Memorandum to be placed in the permanent section of the auditing working papers
b. Engagement letters
c. Client representation letter
d. Comfort letter
CHAPTER 5 – AUDIT PLANNING
1.
This involves developing an overall strategy for the expected conduct and scope of the examination; the nature,
extent, and timing of which vary with the size and complexity, and experience with the knowledge of the entity.
a. Audit planning
b. Audit procedure
c. Audit program
d. Audit working papers
2.
Audit plans should
Precede actions
Be flexible
Be cost beneficial
3.
a.
b.
c.
d.
a.
NO
YES
YES
b.
YES
NO
YES
Adequate planning of the audit work helps ensure that
Appropriate attention is
All misstatements
devoted to important areas
will be detected
YES
YES
NO
YES
YES
NO
YES
NO
c.
YES
YES
YES
Potential problems are
identified
YES
NO
YES
YES
d.
NO
YES
NO
The work is completed
expeditiously
YES
YES
YES
NO
4.
Which of the following is not normally performed in the planning stage of the audit?
a. Develop an overall audit strategy.
c. Schedule engagement staff and audit specialists.
b. Request that bank balances be confirmed.
d. Identify the client’s reason for the audit
5.
Which of the following procedures would a CPA ordinarily perform during audit planning?
a. Obtain understanding of the client’s business and industry
b. Review the client’s bank reconciliation
c. Obtain client’s representation letter
d. Review and evaluate client’s internal control
6.
Early appointment of the independent auditor will enable:
a. A more thorough examination to be performed.
b. A proper study and evaluation of internal control to be performed.
c. Sufficient competent evidential matter to be obtained.
d. A more efficient examination to be planned.
7.
In developing the overall audit plan for a new client, factor not to be considered is
a. Materiality levels.
b. The client’s business, including the structure of the organization and accounting system used.
c. The amount of estimated fee.
d. The audit risks and procedures to be performed to achieve audit objectives.
8.
In planning the audit engagement, auditor should consider each of the following except
a. Matters relating to the entity’s business and the industries in which it operates.
b. The entity’s accounting policies and procedures.
c. Anticipated levels of control risk and materiality.
d. The kind of opinion that is likely to be expressed.
9.
A CPA is conducting the first examination of a client’s financial statements. The CPA hopes to reduce the audit
work by consulting with the predecessor auditor and reviewing the predecessor’s working papers. The
procedure is
a. Acceptable if the client and the predecessor auditor agree to it.
b. Acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor’s work.
c. Required if the CPA is to render an unmodified opinion.
d. Unacceptable because the CPA should bring an independent viewpoint to a new engagement.
10. Which of the following is not one of the three main reasons why the auditor should properly plan engagement?
a. To enable proper on-the-job training of employees.
c. To avoid misunderstandings with the client.
b. To enable the auditor to obtain sufficient competent
d. To help keep audit costs reasonable.
evidence.
11. Which of the following is the most likely first step an auditor would perform at the beginning of an initial audit
engagement?
a. Prepare a rough draft of the financial statements and of the auditor’s report.
b. Study and evaluate the system of internal administrative control.
c. Tour the client’s facilities and review the general records.
d. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the
client management.
12. A tour of the client’s facilities is helpful in obtaining an understanding of the client’s operations because
a. The auditor will be able to assess the physical safeguards over assets.
b. The auditor may be better able to assess certain inherent risks.
c. The auditor obtains a broader perspective about the company as a whole.
d. All of the above.
13. Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the
industry in which the client operates, the CPA should
a. Reduce audit risk by lowering the preliminary levels of materiality.
b. Design special substantive tests to compensate for the lack of industry expertise.
c. Engage financial experts familiar with the nature of the industry.
d. Obtain knowledge of matters that relate to the nature of the entity’s business.
14. An extensive understanding of the client’s business and industry and knowledge about the company’s
operations are essential for doing an adequate audit. For a new client, most of this information is obtained
a. From the predecessor auditor.
c. From the permanent file.
b. From the Securities and Exchange Commission.
d. At the client’s premises.
15. The audit team gathers information about a new client’s business and industry in order to obtain:
a. An understanding of the client’s internal control system for financial reporting.
b. An understanding of how economic events and transactions affect the company’s financial statements.
c. Information about engagement risk.
d. Information regarding whether the company is engaging in financial statement fraud.
16. In performing an audit of financial statements, the auditor should obtain knowledge of the client’s business
sufficient to
a. Make constructive suggestions concerning improvements in internal control.
b. Identify transactions and events that may affect the financial statements.
c. Develop an attitude of professional skepticism.
d. Assess the level of control risk.
17. Each of the following may be relevant to an auditor when obtaining knowledge about the client’s business and
industry except
a. Discussion with people within or outside the entity.
c. Visits of the entity’s premises.
b. Reading publications related to the industry.
d. Performing tests of control.
18. To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would
a. Perform tests of details of transactions and balances.
b. Review prior year working papers and the permanent file for the client.
c. Read specialized industry journals.
d. Re-evaluate the client’s internal control system.
19. Which of the following statements is correct, when obtaining understanding about the client’s business?
a. The level of knowledge required of the auditor is ordinarily more than the level of knowledge possessed by
management.
b. Preliminary knowledge about the entity’s industry must be obtained after accepting the engagement to
determine whether the auditor has the necessary knowledge to perform the audit.
c. Following the acceptance of the engagement, the auditor should obtain detailed knowledge about the
client’s business preferably at the start of the engagement.
d. For continuing engagements, the auditor may no longer obtain knowledge about the client’s business
anymore.
20. Information about the client’s business appropriately assists the auditor in:
Assessing risks and identifying
Planning and performing the
potential problems
audit effectively and efficiently
a.
YES
YES
b.
YES
NO
c.
NO
YES
d.
YES
YES
Evaluating audit
evidence
YES
YES
YES
NO
21. For initial engagements, PSA 510 does not require the auditor to obtain evidence :
a. That the opening balances do not contain material misstatements that materially affect the current period’s
financial statements.
b. That the prior period’s ending balances have been correctly brought forward to the current period or, when
appropriate, have been restated.
c. That appropriate accounting policies are consistently applied or changes in accounting policies have been
properly accounted for and adequately disclosed.
d. That the prior period financial statements were audited by an independent CPA.
22. The preliminary judgment about materiality and the amount of audit evidence accumulated are _______ related.
a. Directly
b. Indirectly
c. Not
d. Inversely
23. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that
misstatements, whether caused by errors or fraud, that are not ________ are detected.
a. Important to the financial statements.
c. Material to the financial statements.
b. Statistically significant to the financial statements.
d. Identified by the client.
24. According to PSA 320, materially should be considered by the auditor when:
Determining the nature, timing and
Evaluating the effects of
extent of audit procedures
misstatements
a.
YES
YES
b.
YES
NO
c.
NO
NO
d.
NO
YES
25. If an auditor establishes a relatively high level of materiality, then the auditor will:
a. Accumulate more evidence than if a lower level had been set.
b. Accumulate less evidence than if a lower level had been set.
c. Accumulate approximately the same evidence as would be the case were materially lower.
d. Accumulate an undetermined amount of evidence.
26. Which of the following statements is not correct about materiality?
a. The concept of materiality recognizes that some matters are important for fair presentation of financial
statements in conformity with the applicable financial reporting framework, while other matters are not.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily involve both
quantitative and qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a
reasonable person who will rely on the finical statements.
27. In developing the preliminary level of materiality in an audit, the auditor will
a. Look to audit standards for specific materiality guidelines.
b. Increase the level of materiality if fraud is suspected.
c. Rely primarily on professional judgment to determine the materiality level.
d. Use the same materiality level as that used for different clients in the same industry.
28. In making a preliminary judgment about materiality, the auditor initially determines the aggregate (overall)
level of materiality for each statement. For planning purposes, the auditor should use the
a. Levels separately
c. Average of these levels
b. Largest aggregate level
d. Smallest aggregate level
29. In planning the audit, the auditor should assess materiality at two levels
a. The preliminary level and the final level.
c. The account balance level and the detailed item level.
b. The company level and the divisional
d. The financial statement level and the account balance
level.
level.
30. “Performance materiality” is the term used to indicate materiality at the:
a. Balance sheet level.
c. Income statement level.
b. Account balance level.
d. Company-wide level.
31. All else being equal, as the level of materiality decreases, the amount of evidence required will:
a. Remain the same
c. Change in unpredictable fashion
b. Decrease
d. Increase
32. In considering materiality for planning purposes, an auditor believes that misstatements aggregating P 100,000
would have a material effect on an entity’s income statement, but those misstatements would have to aggregate
P 200,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing
procedures that would be expected to detect misstatement that aggregate
a. P 100,000
b. P 200,000
c. P 150,000
d. P 300,000
33. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment
about materiality?
a. The anticipated sample size of the planned substantive tests.
b. The entity’s annualized interim financial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.
34. Which of the following is the primary basis used to decide materiality for a profit oriented entity?
a. Net sales
b. Net assets
c. Net income before tax
d. All of the above
35. The concept of materiality
a. Applies only to publicly held firms.
b. Has greater application to the standards of reporting than the other generally accepted auditing standards.
c. Requires that relatively more effort be directed to those assertions that are more susceptible to
misstatement.
d. Requires the auditor to make judgments as to whether misstatements affect the fairness of the financial
statements.
36. The relationship between materiality and risk is ordinarily
a. Direct
b. Parallel
c.
Inverse
d.
None
37. When comparing level of materiality used for planning purposes and the level of materiality used for evaluating
evidence, one would most likely expect
a. The level of materiality to be always similar.
b. The level of materiality for planning purposes to be smaller.
c. The level of materiality for planning purposes to be higher.
d. The level of materiality for planning purposes to be based on total assets while the level of materiality for
evaluating purposes to be based on net income.
38. When assessing materiality levels for audit purposes, the auditor should consider the
Amount involved
Nature of misstatement
a.
YES
YES
b.
YES
NO
c.
NO
NO
d.
NO
YES
39. Auditors are responsible for determining whether financial statements are materially misstated, so upon
discovering a material misstatement they most bring it to the attention of:
a. The regulators.
c. The client shareholders.
b. The audit firm’s managing partner.
d. The client’s management.
40. Auditing standards __________ that the basis used to determine the preliminary judgment about materiality be
documented in the audit files.
a. Permit
b. Do not allow
c. Require
d. Strongly encourage
41. Qualitative factors can affect an auditor’s assessment of materiality. Which of the following qualitative factors
could influence the assessment of materiality?
I.
Misstatements that are otherwise immaterial may be material if they affect earnings trends.
II.
Minor misstatements resulting from the consequences of contractual obligation.
a. I only
b. II only
c. I and II
d. Neither I nor II
42. Which of the following statements is not correct?
a. Materiality is a relative rather than an absolute concept.
b. The most important base used as the criterion for deciding materiality is total assets.
c. Qualitative factors as well as quantitative factors affect materiality.
d. Given equal peso amounts, frauds are usually considered more important than errors.
43. Jern Corporation has a few large accounts receivable that total one million pesos whereas Moshe Corporation
has many small accounts receivable that total one million pesos. Misstatement in any one account is more
significant for Jern Corporation because of the concept of:
a. Materiality.
b. Audit risk.
c. Reasonable assurance.
d. Comparative analysis.
44. When tolerable misstatement is exceeded by ________ the auditor should request the client to adjust their
account balance.
I.
Known misstatements
II.
Projected misstatements
a. I only
b. II only
c. I and II
d. None of the above
45. Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to
__________.
a. Detection risk
b. Audit report risk
c. Acceptable audit risk
d. Inherent risk
46. A measure of how willing the auditor is to accept that the financial statements may be materially misstated after
the audit is completed and an unqualified opinion has been issued is the
a. Inherent risk
b. Acceptable audit risk
c. Statistical risk
d. Financial risk
47. A measure of the auditor’s assessment of the likelihood that there are material misstatements in an account
before considering the effectiveness of the client’s internal control is
a. Control risk
b. Acceptable audit risk
c. Statistical risk
d. Inherent risk
48. In a financial statement audit, inherent risk is evaluated to help an auditor asses which of the following?
a. The internal audit department’s objectivity in reporting, material misstatement of a financial statement
assertion it detects to the audit committee.
b. The risk the internal control system will not detect a material misstatement of an assertion.
c. The risk that the audit procedures implemented will not detect a material misstatement of a financial
statement assertion.
d. The susceptibility of a financial statement assertion to a material misstatement assuming there are no
related controls.
49. The risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by
internal control is
a. Detection risk.
b. Control risk.
c. Inherent risk.
d. Audit risk.
50. The probability that an auditor’s procedure leading to the conclusion that a material error does not exist in an
account balance when, in fact, such error does exist is referred to as
a. Prevention risk.
b. Inherent risk.
c. Control risk.
d. Detection risk.
51. The risk that the auditor may express an incorrect opinion on the financial statements is called
a. Inherent risk.
b. Detection risk.
c. Control risk.
d. Audit risk.
52. The risk that financial statement s are likely to be misstated materially without regard to the effectiveness of
internal control is the:
a. Inherent risk.
b. Audit risk.
c. Client risk.
d. Control risk.
53. A measure of the auditor’s assessment of the likelihood that there are material misstatements in an account
before considering the effectiveness of the client’s internal control is called:
a. Control risk.
b. Acceptable audit risk.
c. Statistical risk.
d. Inherent risk
54. Audit risk consists of all but the following components
a. Inherent risk
b. Substantive risk
c.
Detection risk
d.
Control risk
55. For a particular assertion, control risk is the risk that:
a. A material misstatement will occur in the accounting process.
b. Controls will not detect a material misstatement that occurs.
c. Audit procedures will fail to detect a weak control system.
d. The prescribed control procedures will not be applied uniformly.
56. Which of the following is the best definition of detection risk?
a. The auditor will compute audit materiality incorrectly.
b. The auditor will fail to detect material misstatements that exist.
c. The auditor will apply more audit procedures than are required in the circumstances.
d. The auditor will fail to modify the audit opinion on financial statements that are materially misstated.
57. The audit risk against which the auditor and those who rely on his/her opinion require reasonable protection is a
combination of three separate risks at the account-balance or class-of-transactions level. The first risk is
inherent risk. The second risk is that material misstatements will not be prevented or detected by internal
control. The third risk is that
a. The auditor will reject a correct account balance as incorrect.
b. Material misstatements that occur will not be detected by the audit.
c. The auditor will apply an inappropriate audit procedure.
d. The auditor will apply an inappropriate measure of audit materiality.
58. The risk that the audit will fail to uncover a material misstatement is eliminated
a. If a client has strong internal control.
b. If a client is not publicly accountable entity.
c. When the auditor has complied with the Philippine Standard on Auditing.
d. Under no circumstances.
59. When planning a financial statement audit, the auditor should assess inherent risk at the
Financial Statement level
Account balance or transaction class level
1.
YES
YES
2.
YES
NO
3.
NO
NO
4.
NO
YES
60. Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function. An
effective auditor will
a. Take any means available to reduce the risk to the lowest possible level.
b. Set the risk level between 5% and 10%.
c. Perform the audit procedures first and quantitatively set the risk level before forming an opinion and
writing the report.
d. Recognize that risk exists and deal with it in an appropriate manner.
CHAPTER 6 – CONSIDERATION OF INTERNAL CONTROL
1.
The primary responsibility for establishing and maintaining an internal control rests with
a. The external auditors
c. Management and those charged with governance
b. The internal auditors
d. The controller or the treasurer
2.
The fundamental purpose of an internal control is to
a. Safeguard the resources of the organization
b. Provide reasonable assurance that the objectives of the organization are achieved
c. Encourage compliance with organization objectives
d. Ensure the accuracy, reliability, and timeliness of information
3.
Which of the following is not one of the three primary objectives of effective internal control?
a. Reliability of financial reporting
c. Compliance with laws and regulations
b. Efficiency and effectiveness of operations
d. Each of the above is a primary objective
4.
Which of the following is not typically one of management’s concerns in designing effective internal controls?
a. To generate profits from operations
b. To generate fairly stated financial statements
c. To comply with applicable laws and regulations
d. To design the most effective internal control possible no matter how much it will cost
5.
Which of the following is not one of the three primary objectives of effective internal control?
a. Reliability of financial reporting
c. Compliance with laws and regulations
b. Efficiency and effectiveness of operations
d. Each of the above is a primary objective
6.
Which of the following internal control objectives would be most relevant to the audit?
a. Operational objective
c. Financial reporting objective
b. Compliance objective
d. Administrative control objective
7.
An act of two or more employees to steal assets or misstate records is frequently referred to as
a. Collusion
b. Material weakness
c. Control deficiency
d. Any of the above
8.
Which statement is correct concerning the relevance of various types of controls to a financial audit?
a. An auditor may ordinarily ignore a consideration of controls when a substantive audit approach is taken.
b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an audit but other
controls may also be relevant.
c. Controls over safeguarding of assets and liabilities are of primary importance, while controls over the
reliability of financial reporting may also be relevant.
d. All controls are ordinarily relevant to an audit.
9.
An auditor would most likely be concerned with internal control policies and procedures that provide
reasonable assurance about the
a. Efficiency of management’s decision-making process
b. Appropriate prices the entity should charge for its products
c. Methods of assigning production tasks to employees
d. Entity’s ability to process and summarize financial data
10. In an audit of financial statements, an auditor’s primary consideration regarding an internal control activity is
whether the control
a. Reflects management’s philosophy and operating style
b. Affects management’s financial statement assertions
c. Provides adequate safeguards over access to assets
d. Enhances management’s decision-making process
11. Two key concepts that underlie management’s design and implementation of internal control are:
a. costs and materiality
c. inherent limitations and reasonable assurance
b. absolute assurance and costs
d. collusion and materiality
12. Internal control can provide only reasonable assurance of achieving entity’s control objectives. One factor
limiting the likelihood of achieving those objectives is that
a. The auditor’s primary responsibility is the detection of fraud
b. The board of directors is active and independent
c. The cost of internal control should not exceed its benefits
d. Management monitors internal control
13. Inherent limitations in an internal control must be considered in evaluating its effectiveness in preventing and
detecting errors and fraud. Inherent limitations do not include
a.
b.
c.
d.
Misunderstanding of instructions, mistakes of judgment, personal carelessness, distraction, or fatigue.
Incompatible functions performed by the same person.
Collusion among employees.
Management override of certain policies or policies.
14. The following statements relate to internal controls, which is false?
a. No one should be responsible for both the custodial and recording responsibilities for an asset.
b. Transactions must be properly authorized before such transactions are processed.
c. Because of the cost-benefit relationship, a client may apply control procedures on a test basis.
d. Control procedures reasonably ensure that collusion among employees cannot occur.
15. Which of the following best describes an inherent limitation that should be recognized by an auditor when
considering the potential effectiveness of an internal control procedure?
a. Procedures whose effectiveness depends on segregation of duties can be circumvented by collusion.
b. The competence and integrity of client personnel provide an environment conducive to control and
provides assurance that effective control will be achieved.
c. Procedures designed to assure the execution and recording of transactions in accordance with proper
authorizations are effective against fraud perpetrated by management.
d. The benefits expected to be derived from effective internal control usually do not exceed the cost of such
control.
16. When considering the effectiveness of a system of internal control, the auditor should recognize that inherent
limitations exist. Which of the following is an example of an inherent limitation in a system of internal control?
a. The effectiveness of procedures depends on the segregation of employee duties.
b. Procedures are designed to assure the execution and recording of transactions in accordance with
management’s authorization.
c. In the performance of most control procedures, there are possibilities of errors arising from mistakes in
judgment.
d. Procedures for handling large numbers of transactions are processed by electronic data processing
equipment
17. An effective system of internal control
a. Cannot be circumvented by management
b. Can reduce the cost of an external audit
c.
d.
Can prevent collusion among employees
Eliminates risks and potential loss to the organization
18. Internal controls are not designed to provide reasonable assurance that:
a. All frauds will be detected.
b. Transactions are executed in accordance with management’s authorization.
c. Access to assets is permitted only in accordance with management’s authorization.
d. Company personnel comply with applicable rules and regulations.
19. The internal control cannot be designed to provide reasonable assurance that
a. Transactions are executed in accordance with management’s authorization.
b. Fraud will be eliminated.
c. Access to assets is permitted only in accordance with management’s authorization.
d. The recorded accountability for assets is compared with the existing assets at reasonable intervals.
20. Which of the following statements about internal control is correct?
a. Properly maintained internal control reasonably ensures that collusion among employees cannot occur.
b. The establishment and maintenance of internal control are important responsibilities of the internal auditor.
c. Exceptionally strong internal control is enough for the auditor to eliminate substantive tests on a significant
account balance.
d. The cost-benefit relationship is a primary criterion that should be considered in designing internal control.
21. Which of the following is correct about internal control?
a. Accounting and internal control systems provide management with conclusive evidence that objectives are
reached.
b. One of the inherent limitations of accounting and internal control systems is the possibility that the
procedures may become inadequate due to changes in conditions, and compliance with procedures may
deteriorate.
c. Most internal controls tend to be directed at non-routine transactions.
d. Management does not consider costs of the accounting and internal control systems.
22. Internal control, no matter how well designed and operated, can only provide an entity with reasonable
assurance about achieving entity’s objectives. The likelihood of achievement is affected by limitations inherent
to internal control. These limitations do not include
a. Collusion among employees
c. Human failures
b. Inappropriate management override of internal control
d. Incompatible functions
23. Internal controls can never be regarded as completely effective. Even if company personnel could design an
ideal system, it effectiveness depends on the
a. Adequacy of the computer system
c. Ability of the internal audit staff to maintain it
b. Proper implementation by management
d. Competency and dependability of the people using it.
24. Internal controls can never be considered as absolutely effective because
a. Their effectiveness is highly dependent on the competence and integrity of company’s employees
b. Controls always have inherent weaknesses that can be exploited
c. Controls are designed to prevent and detect only material misstatements
d. None of the above
25. Which of the following best describes the interrelated components of internal control?
a. Organizational structure, management, philosophy, and planning
b. Control environment, risk assessment, control activities, information and communication systems, and
monitoring
c. Risk assessment, backup facilities, responsibility accounting, and natural laws
d. Internal audit and management’s philosophy and operating style
26. Which of the following is not one of the components of an entity’s internal control?
a. Control risk
c. Information and communication
b. Control activities
d. Control environment
27. The overall attitude and awareness of an entity’s board of directors concerning the importance of the internal
control is usually reflected in its
a. Computer-based controls
c. Control environment
b. System of segregation of duties
d. Safeguards over access to assets
28. When obtaining an understanding of an entity’s control environment, an auditor should concentrate on the
substance of management’s policies and procedures rather than their form because
a. The auditor may believe that the policies and procedures are inappropriate for that particular entity
b. The board of directors may not be aware of management’s attitude toward the control environment
c. Management may establish appropriate policies and procedures but not act on them
d. The policies and procedures may be so ineffective that the auditor may assess control risk at a high level
29. Basic to a proper control environment are the quality and integrity of personnel who must perform the
prescribed procedures. Which is not a factor in providing for competent personnel?
a. Segregation of duties
c. Training programs
b. Hiring practices
d. Performance evaluation
30. In evaluating the design of the entity’s internal control environment, the auditor considers the certain
subcomponents of control environment and how they have been incorporated into the entity’s processes.
Subcomponents of control environment would not include
a. Integrity and ethical values
c. Organizational structure
b. Commitment to competence
d. Information and communications systems
31. It is important for the auditor to consider the competence of the audit client’s employees, because their
competence bears directly and importantly upon the
a. Cost-benefit relationship of internal control
b. Achievement of the objectives of internal control
c. Comparison of recorded accountability with assets
d. Timing of tests to be performed
32. Which of the following components of internal control structure includes the development of employee
promotion and training policies?
a. Control activities
c. Information and communication
b. Control environment
d. Quality control system
33. Which of the following subcomponents of the control environment define the existing lines of responsibility
and authority?
a. Organizational structure
c. Human resource policies and practices
b. Management philosophy and style
d. Management integrity and ethical values
34. Which of the following is not one of the subcomponents of the control environment?
a. Management philosophy and style
c. Adequate separation of duties
b. Organizational structure
d. Commitment to competence
35. Management philosophy and operating style most likely would have a significant influence on an entity’s
control environment when
a. The internal auditor reports directly to management.
b. Management is dominated by one individual.
c. Accurate management job descriptions delineate specific duties.
d. The audit committee actively oversees the financial reporting process.
36. A proper segregation of duties requires
a. An individual authorizing a transaction records it.
b. An individual authorizing a transaction maintains custody of the asset that resulted from the transaction.
c. An individual maintaining custody of an asset is entitled to access the accounting records for the asset.
d. An individual recording a transaction not compare the accounting record of the asset with the asset itself.
37. The single most effective control procedure established to avoid allowing any person to be in a position to
perpetrate and then conceal errors or fraud is
a. The separation of the functional responsibilities such as custodianship, record keeping, operations, and
authorization.
b. Require each employee to take a vacation each year.
c. Establish an internal audit department.
d. Require the bonding of personnel in positions that necessitate handling of cash and other universally
desirable valuables.
38. Which of the following statements is most correct with respect to separation of duties?
a. Employees should not have temporary and permanent custody of assets.
b. Employees who authorize transactions should not have custody of related assets.
c. It is permissible to allow an employee to open cash receipts and record those receipts.
d. Employees who authorize transactions should have recording responsibility for these transactions.
39. Which of the following would contribute most to the safeguarding of assets?
a. Access to computer facilities and records is limited to authorized personnel.
b. Training programs are conducted to develop competence of newly hired personnel.
c. Control and subsidiary accounts are reconciled on a regularly scheduled basis.
d. Blank stock of all purchase orders and sales invoices are prenumbered.
40. Accounting information system:
Initiates transactions
a.
YES
b.
YES
c.
NO
d.
NO
Processes transactions
YES
YES
YES
NO
Monitors transactions
YES
NO
NO
YES
41. Which of the following statements is correct with respect to separation of duties?
a. Employees should not have temporary and permanent custody of assets.
b. It is desirable to prevent employees who authorize transactions from having custody of related assets.
c. It is permissible to allow an employee to open cash receipts and record those receipts.
d. None of the above is correct.
42. The most important type of protective measure for safeguarding assets and records is
a. Adequate separation of duties among personnel
c. The use of physical precautions
b. Proper authorization of transactions
d. Adequate documentation
43. Which of the following statements best describes the entity’s risk assessment process?
a. Entity’s process of identifying business risks relevant to financial reporting objectives and deciding about
actions to address those risks.
b. Entity’s assessment of audit risks affecting the financial statements.
c. Entity’s process of evaluating the risks of misstatements due to fraud.
d. Entity’s assessment of risks that internal control may fail to detect misstatements affecting the financial
statements.
44. Which of the following deal with ongoing or periodic assessment of the quality of internal control by
management?
a. Quality control activities
c. Oversight activities
b. Monitoring activities
d. Management activities
45. An entity’s ongoing monitoring activities often include
a. Periodic audits by audit committee.
c. The audit of the annual financial statements.
b. Reviewing the purchasing function.
d. Control risk assessment in conjunction with quarterly reviews.
46. The policies and procedures that help ensure that management directives are carried out are referred to as the:
a. Control environment
c. Monitoring of controls
b. Control activities
d. Information system
47. Which of the following is not one of the specific control activities that are relevant to financial statement audits?
a. Performance reviews
b. Physical controls
c. Segregation of duties
d. Monitoring
48. Proper segregation of functional responsibilities in an effective structure of internal control calls for separation
of the functions of
a. Authorization, execution, and payment
c. Custody, execution, and reporting
b. Authorization, recording, and custody
d. Authorization, payment, and recording
49. Which of the following activities would be least likely to strengthen a company’s internal control?
a. Separating accounting from other financial operations
b. Maintaining insurance for fire and theft
c. Fixing responsibility for the performance of employee duties
d. Carefully selecting and training employees
50. Which of the following best describes the purpose of control activities?
a. The actions, policies and procedures that reflect the overall attitudes of management
b. The identification and analysis of risks relevant to the preparation of financial statements
c. The policies and procedures that help ensure that necessary actions are taken in order to achieve the entity’s
objectives
d. Activities that deal with the ongoing assessment of the quality of internal control by management
51. A small entity may use less formal means to ensure that internal control objectives are achieved. For example,
extensive accounting procedures, sophisticated accounting records, or formal control are least likely to be
needed if
a. Management is closely involved in operations
b. The entity is involved in complex transactions
c. The entity is subject to legal or regulatory requirements also found in larger entities.
d. Financial reporting objectives have been established.
52. Which of the following may represent the biggest challenge smaller public companies face in implementing
effective internal control?
a. a lack of expertise
c. limited resources
b. reduced importance
d. limited available guidance
53. A major control available in a small company, which might not be feasible in a large company, is
a. A wider segregation of duties
b. A voucher system
c. Fewer transactions to process
d. The owner-manager’s personal interest and close relationship with personnel.
54. The auditor’s consideration of a company’s internal control is:
a. Required under the Philippine Accountancy Act.
c. Required by the Code of Ethics.
b. Required by PSA.
d. Recommended by the SEC.
55. The auditor’s primary purpose in auditing the client’s system of internal control over financial reporting is:
a. To prevent fraudulent financial statements from being issued to the public.
b. To evaluate the effectiveness of the company’s internal controls over all relevant assertions in the financial
statements.
c. To report to management that the internal controls are effective in preventing misstatements from
appearing on the financial statements.
d. To effectively conduct the audit of financial statements.
56. Auditing standards require the auditor to obtain an understanding of the client’s internal control structure
a. For every audit.
c. Sufficient to find any frauds which may exist.
b. For first time audits.
d. Whenever it would be appropriate.
57. When auditing a private company, the auditor should obtain an understanding of internal control sufficient to:
a. Provide reasonable protection against client fraud and defalcations by client employees.
b. Asses control risk.
c. Provide a basis for suggestions to the client for improving the accounting system.
d. Provide a method for safeguarding assets, checking the accuracy and reliability of accounting data,
promoting operational efficiency, and encouraging adherence to prescribed managerial policies.
58. Evaluating the design of the entity’s internal control would involve
a. Considering whether the control, individually or in combination with other controls, is capable of
effectively preventing, or detecting and correcting, material misstatements.
b. Determining whether control exists and the entity is using it.
c. Determining whether the control is operating effectively.
d. Determining the consistency of application of internal control procedures.
59. Obtaining knowledge about whether the control is implemented can best be obtained by
a. Inquiry of client’s personnel.
b. Reading procedures manual.
c. Tracing transactions through the information system relevant to financial reporting.
d. Performing tests of control.
60. An auditor should consider two key issues when obtaining an understanding of a client’s internal controls.
These issues are:
a. The effectiveness and efficiency of the controls.
c. The design and implementation of the controls.
b. The frequency and effectiveness of the controls.
d. The implementation and efficiency of the controls.
CHAPTER 7 – AUDITING IN A COMPUTERIZED ENVIRONMENT
1.
CIS has several significant effects on an organization. Which of the following would not be important from an
auditing perspective?
a. Organizational changes
c. The potential for material misstatement
b. The visibility of information
d. None of the above, i.e., they are all important.
2.
Which statement is incorrect when auditing in a CIS environment?
a. A CIS environment exist when a computer of any type or size is involved in the processing by the entity of
financial information of significance to the audit, whether that computer is operated by the entity or by a
third party.
b. The auditor should consider how a CIS environment affects the audit.
c. The use of a computer changes the processing, storage and communication of financial information and
may affect the accounting and internal control systems employed by the entity.
d. A CIS environment changes the overall objective and scope of an audit.
3.
An important characteristic of CIS is uniformity of processing. Therefore, a risk exists that:
a. Auditors will not be able to access data quickly.
b. Auditors will not be able to determine if data is processed consistently.
c. Erroneous processing can result in the accumulation of a great number of misstatements in a short period of
time.
d. All of the above.
4.
Which of the following is not a benefit of using IT based controls?
a. Ability to process large volumes of transactions.
b. Ability to replace manual controls with computer-based controls.
c. Reduction in misstatements due to consistent processing of transactions.
d. Over-reliance on computer generated reports.
5.
The characteristics that distinguish computer processing from manual processing include the following:
1. Computer processing uniformly subjects like transactions to the same instructions.
2. Computer systems always ensure that complete transaction trails useful for audit purposes are preserved for
indefinite periods.
3. Computer processing virtually eliminates the occurrence of clerical errors normally associated with manual
processing.
4. Control procedure as to segregation of functions may no longer be necessary in computer environment.
a. All of the above statements are true.
c. Only statements (1) and (3) are true.
b. Only statements (2) and (4) are true.
d. All of the above statements are false.
6.
Which of the following is not a risk specific to CIS environments?
a. Reliance on the functioning capabilities of hardware and software.
b. Increased human involvement.
c. Loss of data due to insufficient backup.
d. Unauthorized access.
7.
Which of the following is not a risk in a computerized information system (CIS)?
a. Need for CIS experienced staff
c. Improved audit trail
b. Separation of CIS duties from accounting functions
d. Hardware and data vulnerability
8.
Which of the following statements is not correct?
a. The overall objective and scope of an audit do not change in a CIS environment.
b. When computers or CIS are introduced, the basic concept of evidence accumulation remains the same.
c. Most CIS rely extensively on the same type of procedures for control that are used in manual processing
system.
d. The specific methods appropriate for implementing the basic auditing concepts do not change, as systems
become more complex.
9.
The use of CIS will least likely affect the
a. The procedure followed by the auditor in obtaining a sufficient understanding of the accounting and
internal control systems.
b. The auditor’s specific audit objectives.
c. The consideration of inherent risk and control risk through which the auditor arrives at the risk assessment.
d. The auditor’s design and performance of test of control and substantive procedure appropriate to meet the
audit objective.
10. Which of the following is unique to CIS?
a. Error listing
b. Flowchart
c.
d.
Questionnaires
Pre-numbered documents
11. Where computer processing is used in significant accounting applications, internal control procedures may be
defined by classifying control procedures in two types: general and
a. Administrative
b. Specific
c. Application
d. Authorization
12. A control which relates to all parts of the CIS is called a(an(
a. System control
b. General control
c.
d.
13. Controls which apply to a specific use of the system are called
a. System controls
c.
b. General controls
d.
Application control
User control
Applications control
Universal control
14. Some CIS control procedures relate to all CIS activities (general controls) and some relate to specific tasks
(application controls). General controls include
a. Controls designed to ascertain that all data submitted to CIS for processing have been properly authorized.
b. Controls that relate to the correction and resubmission of data that were initially incorrect.
c. Controls for documenting and approving programs and changes to programs.
d. Controls designed to assure the accuracy of the processing results.
15. Which of the following statements is correct?
a. Auditors should evaluate application controls before evaluating general controls.
b. Auditors should evaluate application controls and general controls simultaneously.
c. Auditors should evaluate general controls before evaluating application controls.
d. None of these statements is correct.
16. Which of the following is a component of general controls?
a. Processing controls
b. Output controls
c.
d.
Back-up and contingency planning
Input controls
17. Which of the following is least likely to be a general control over computer activities?
a. Procedures for developing new programs and systems.
c. An access control.
b. Requirements for system documentation.
d. A control total.
18. Which of the following is an example of general control?
a. Input validation checks.
b. Control total.
c.
d.
Operations manual.
Generalized audit software.
19. Which of the following is not a general control?
a. The plan of organization and operation of CIS activity.
b. Procedures for documenting, reviewing, and approving systems and programs.
c. Processing controls.
d. Hardware controls.
20. Which of the following activities would most likely be performed in the CIS department?
a. Initiation of changes to master records.
b. Conversion of information to machine-readable form.
c. Correction of transactional errors.
d. Initiation of changes to existing applications.
21. Which of the following IT duties should be separated from the others?
a. Systems development.
c. IT management
b. Operations
d. All of the above should be separated.
22. For control purposes, which of the following should be organizationally segregated from the computer
operations functions?
a. Data conversion.
c. Minor maintenance according to a schedule
b. Systems development.
d. Processing of data.
23. Which of the following computer related employees should not be allowed access to program listings of
application programs?
a. The systems analyst.
c. The operator.
b. The programmer.
d. The librarian.
24. Which of the following statements about general controls is not correct?
a. Backup and disaster recovery plans should identify alternative hardware to process company data.
b. Successful IT development efforts require the involvement of IT and non-IT personnel.
c. The chief information officer should report to senior management and the board.
d. Programmers should have access to computer operations to aid users in resolving problems.
25. Where computers are used, the effectiveness of internal control depends, in part, upon whether the
organizational structure includes any incompatible combinations. Such a combination would exist when there is
no separation of the duties between
a. Documentation librarian and manager of programming.
b. Programming and computer operator.
c. Systems analyst and programmer.
d. Processing control clerk and keypunch supervisor.
26. Which of the following is a general control that would most likely assist an entity whose system analyst left the
entity in the middle of a major project?
a. Grandfather-father-son record retention.
c. Systems documentation.
b. Data encryption.
d. Check digit verification.
27. Internal control is ineffective when computer department personnel
a. Participate in computer software acquisition decision.
c. Originate changes in master files.
b. Design documentation for computerized systems.
d. Provide physical security for program files.
28. An example of an access control is a:
a. Check digit.
b. Password.
c.
Test facility.
d.
Read only memory.
29. Access control in an on-line CIS can best be provided in most circumstances by
a. An adequate librarianship function controlling access to files.
b. A label affixed to the outside of a file medium holder that identifies the contents.
c. Batch processing of all input through a centralized, well-guarded facility.
d. User and terminal identification controls, such as passwords.
30. Controls which are built in by manufacturer to detect equipment failure are called:
a. Input controls.
c. Hardware controls.
b. Data integrity controls.
d. Manufacturer’s controls.
31. In a CIS environment, automated equipment controls or hardware controls are designed to:
a. Correct errors in the computer programs.
b. Monitor and detect errors in source documents,
c. Detect and control errors arising from the use of equipment,
d. Arrange data in a logical sequential manner for processing purposes.
32. To determine that user ID and password controls are functioning, an auditor would most likely:
a. Test the system by attempting to sign on using invalid user identifications and passwords.
b. Write a computer program that stimulates the logic of the client’s access control software.
c. Extract a random sample of processed transactions and ensure that the transactions were appropriately
authorized.
d. Examine statements signed by employees stating that they have not divulged their user identifications and
passwords to any other person.
33. Adequate control over access to data processing is required to
a. Deter improper use or manipulation of data files and programs.
b. Ensure that only console operators have access to program documentation.
c. Minimize the need for backup data files.
d. Ensure that hardware controls are operating effectively and as designed by the computer manufacturer.
34. The management of ABC Co, suspects that someone is tampering with pay rates by entering changes through
the Co.’s remote terminals located in the factory. The method ABC Co. should implement to protect the system
from these unauthorized alterations to the system’s files is
a. Batch totals.
c. Passwords.
b. Checkpoint recovery.
d. Record account.
35. Passwords for microcomputer software programs are designed to prevent:
a. Inaccurate processing of data.
c. Incomplete updating of data files.
b. Unauthorized access to the computer.
d. Unauthorized use of the software.
36. The possibility of losing a large amount of information stored in computer files most likely would be reduced
by the user of
a. Back-up files.
c. Completeness tests.
b. Check digits.
d. Conversion verification.
37. Which of the following controls most likely would assure that an entity can reconstruct its financial records?
a. Hardware controls are built into the computer by the computer manufacturer.
b. Back up diskettes or tapes of files are stored away from originals.
c.
d.
Personnel who are independent of data input perform parallel simulations.
System flowcharts provide accurate descriptions of input and output operations.
38. Unauthorized alteration of on-line records can be prevented by employing:
a. Key verification.
c. Computer matching.
b. Computer sequence checks.
d. Data base access controls.
39. XYZ Company updates its accounts receivables master file weekly and retained the master files and
corresponding update transaction for the most recent 2-week period. The purpose of this practice is to
a. Verify run-to-run control totals for receivables.
b. Match internal labels to avoid writing on the wrong volume.
c. Permit reconstruction of the master file if needed.
d. Validate groups of update transactions for each.
40. Which of the following is not a general control?
a. Separation of duties.
b. Systems development.
c.
d.
Output controls.
Hardware controls.
41. General controls include all of the following except:
a. Systems development.
b. Online security.
c.
d.
Check digit.
Hardware controls.
42. Which of the following is not a general control?
a. Computer performed validation tests of control of input accuracy.
b. Equipment failure causes error messages on monitor.
c. Separation of duties between programmer and operators.
d. Adequate program run instructions for operating computer.
43. Controls which are designed to assure that the information processed by the computer is authorized, complete,
and accurate are called
a. Input controls.
c. Processing controls.
b. Output controls.
d. General controls.
44. Which of the following statements related to application controls is correct?
a. Application controls relate to various aspects of the CIS operation including software acquisition and the
processing of transactions.
b. Application controls relate to various aspects of the CIS operation including physical security and the
processing of transactions in various cycles.
c. Application controls relate to all aspects of the CIS operation.
d. Application controls relate to the processing of individual transactions.
45. Which of the following is not an example of an applications control?
a. Back-up data to remote site for data security.
b. There is a preprocessing authorization of the sales transactions.
c. There are reasonable tests for the unit selling price of a sale.
d. After processing, all sales transactions are reviewed by the sales department.
46. Which of the following is not an example of an application control?
a. An equipment failure causes an error message on the monitor.
b. There is a preprocessing authorization of the sales transactions.
c. There are reasonableness test for the unit-selling price of a sale.
d. After processing, all sales transactions are reviewed by the sales department.
47. Which of the following statements related to application controls is correct?
a. Application controls relate to various aspects of the IT function including software acquisition and the
processing of transactions.
b. Application controls relate to various aspects of the IT function including physical security and the
processing of transactions in various cycles.
c. Application controls relate to all aspects of the IT function.
d. Application controls relate to the processing of individual transactions.
48. Which of the following is not a processing control?
a. Control risk.
b. Reasonable test.
c.
Check digits.
d.
Control data.
49. When CIS programs or files can be accessed from the terminals, users should be required to enter a (an)
a. Parity check.
c. Self-diagnosis test.
b. Personal identification code.
d. Echo check.
50. Which of the following is an example of a check digit?
a. An agreement of the total number of employees to the total number of checks printed by the computer.
b. An algebraically determined number produced by the other digits of the employee’s number.
c. A logic test that ensures all employees numbers are nine digits.
d. A limit check that an employee’s hours do not exceed 50 hours per work week.
51. Controls which are design to assure that the data that will be processed by the computer is authorized, complete
and accurate are called:
a. Input controls.
c. Output controls.
b. Processing controls.
d. General controls.
52. The completeness of computer-generated sales figures can be tested by comparing the number of items listed on
the daily sales report with the number of items billed on the actual invoices. This process uses
a. Check digits.
c. Control totals.
b. Validity tests.
d. Process tracing data.
53. A company’s labor distribution report requires extensive corrections each month because of labor hours charged
to inactive jobs. Which of the following data processing input controls appears to be missing?
a. Completeness test.
c. Limit test.
b. Validity test.
d. Control total.
54. When an on-line, real-time (OLRT) system is in use, control over input data can be strengthened by
a. Providing for the separation of duties between key punching and error listing operations.
b. Attaching plastic file protection rings to reels of magnetic tape before new data can be entered on the file.
c. Preparing batch totals to provide assurance that file updates are made for the entire input.
d. Making a validity check of an identification number before a user can obtain access to the computer files.
55. A company uses the account code 669 for maintenance expense. However, one of the company clerks often
codes maintenance expense as 996. The highest account code in the system is 750. What would be the best
internal control check to build into the company’s computer to detect this error?
a. A check for this type of error would have to be made before the information was transmitted to the IT
department.
b. Batch total.
c. Sequence check.
d. Valid-code test.
56. Which of the following is not an application control?
a. Preprocessing authorization of sales transactions.
b. Reasonableness test for unit selling price of sale.
c. Post-processing review of sales transactions by the sales department.
d. Separation of duties between computer programmer and operators.
57. Which of the following is correct?
a. Check digits should be used for all data codes.
b. Check digits are always placed at the end of a data code.
c. Check digits do not affect processing efficiency.
d. Check digits are designed to detect transcription errors.
58. A clerk inadvertently entered an account number 12368 rather than the account number 12638. In processing
this transaction, the error would be detected with which of the following controls?
a. Batch total.
c. Self-checking digit.
b. Key verifying.
d. An internal consistency check.
59. Totals of amounts in computer-record data fields, which are not usually added but are used only for data
processing control purposes are called
a. Records totals.
c. Processing data totals.
b. Hash totals.
d. Field totals.
60. If a control total were to be computed on each of the following data items, which would best be identified as a
hash total for a payroll CIS application?
a. Net pay.
b. Hours worked.
c. Department numbers.
d. Total debits and credits.
CHAPTER 8 – PERFORMING SUBSTANTIVE TESTS
1.
Which of the following statements is the most correct regarding the primary purpose of audit procedures?
a. To detect errors or fraudulent activities as well as illegal activities
b. To comply with the SEC
c. To gather corroborative audit evidence about management’s assertions regarding the client’s financial
statements
d. To determine the amount of errors in the balance sheet accounts in order to adjust the accounts to actual
2.
In the context of an audit of financial statements, substantive tests are audit procedures that
a. May be eliminated under certain conditions
b. Are designed to discover significant subsequent events
c. May be either tests of transactions, direct tests of financial balances or analytical procedures
d. Will increase proportionately with the auditor’s reliance on internal control
3.
The primary emphasis in most tests of details of balances is on the
a. Balance sheet accounts
c. Cash flow statement accounts
b. Income statement accounts
d. All of the above
4.
A procedure designed to test for monetary misstatements directly affecting the validity of the financial
statement balances is a
a. Tests of controls
c. Test of attributes
b. Substantive test
d. Monetary-unit sampling test
5.
Which of the following is ordinarily designed to detect possible material peso errors?
a. Tests of controls
c. Computer controls
b. Analytical review
d. None of the above
6.
More types of evidence are obtained by using what type of test than any other?
a. Substantive test of transactions
c. Analytical procedures
b. Tests of controls
d. Tests of details of balances
7.
The primary difference between the an audit of the balance sheet and an audit of the income statement lies in
the fact that the audit of the income statement deals with the verification of
a. Transactions
b. Authorizations
c. Costs
d. Cutoffs
8.
Which of the following tests commonly occur together?
a. Substantive tests of transactions and tests of controls
b. Substantive tests of transactions and obtaining an understanding of internal controls
c. Analytical procedures and tests of controls
d. All of the above commonly occur together
9.
As audit evidence, physical examination and confirmation, may only be obtained using which of the following
types of tests?
a. Tests of controls
c. Analytical procedures
b. Tests of transactions
d. Tests of details of balances
10. Below are the five types of tests which auditors use to determine whether financial statements are fairly stated.
Which three are substantive tests?
1. Risk assessment procedures
4. Analytical procedures
2. Tests of controls
5. Tests of details of balances
3. Tests of transactions
a. 1,2 and 3
b. 3,4 and 5
c. 2,3 and 5
d. 2,3 and 4
11. For efficiency, tests of controls are done at the same time as
a. Analytical procedures
b. Compliance tests
c.
d.
Substantive tests of transactions
Substantive tests of balances
12. Which of the following is true?
a. Tests of details of balances focus on the ending balances of accounts in the client’s trial balance
b. Tests of details of balances focus on the transactions during the period
c. Tests of details of balances focus on the auditor’s understanding of internal controls
d. Tests of details of balances focus on comparisons of recorded amounts to expectations developed by the
auditor
13. In the context of an audit of financial statements, substantive tests are audit procedures that
a. May be eliminated under certain conditions
b. Are designed to discover significant subsequent events
c.
d.
May be either tests of transactions, direct tests of financial balances or analytical tests
Will increase proportionately with the auditor’s assessment of control risk
14. The primary emphasis in the most tests of details of balances is on the
a. Balance sheet accounts
c. Cash flow statement accounts
b. Revenue accounts
d. Expense accounts
15. Evidence is usually more persuasive for balance sheet accounts when it is obtained
a. As close to the balance sheet date as possible
b. Only from transactions occurring on the balance sheet date
c. From various times throughout the client’s year
d. From the time period when transactions in that account were most numerous during the fiscal period
16. “The use of comparisons and relationships to assess whether account balances or other data appear reasonable
compared to the auditor’s expectations” is a definition of
a. Analytical procedures
c. Tests of balances
b. Tests of transactions
d. Auditing
17. Auditors may use analytical procedures at any time during an audit; however, they are required to be used at
certain times. During which phase(s) of the audit is the auditor primarily concerned with using analytical
procedures from a cost savings perspective?
a. Planning
b. Testing
c. Completion
d. All of the above
18. Often, auditor procedures result in significant differences being discovered by the auditor. The auditor should
investigate further if
Significant differences are not expected but do exist Significant differences are expected but do not exist
a.
YES
YES
b.
NO
NO
c.
YES
NO
d.
NO
YES
19. Analytical procedures are required to be performed during which phase(s) of the audit?
Planning
Test of Control
Completion
a.
YES
NO
YES
b.
YES
YES
NO
c.
NO
NO
YES
d.
YES
YES
YES
20. Auditors may decide to replace tests of details with analytical procedures when possible because the
a. Analytical procedures are more reliable
b. Analytical procedures are considerably less expensive
c. Analytical procedures are more persuasive
d. Tests of details are more difficult to interpret
21. Which of the following statements are not correct?
a. Analytical procedures are used to isolate accounts or transactions that should be investigated more
extensively.
b. For certain immaterial accounts, analytical procedures may be the only evidence needed
c. In some instances, other types of evidence may be reduced when analytical procedures indicate that an
account balance appears reasonable
d. Analytical procedures use supporting documentation to determine which account balances need additional
detailed procedures.
22. Which of the following is most correct with respect to the use of analytical procedures?
a. Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also
uses them in assessing the going concern assumptions.
b. Analytical procedures must be used throughout the audit.
c. Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor’s
attention so that the auditor’s understanding of the business is improved.
d. Analytical procedures are performed by studying plausible relationships between financial and nonfinancial
data.
23. Which of the following statements concerning analytical procedures is correct?
a. Analytical review may be omitted entirely for some financial statement audits
b. Analytical procedures used in planning an audit should not use non-financial information.
c. Analytical procedures are usually effective and efficient for tests of controls
d. Analytical procedures alone may provide the appropriate level of assurance for some assertions.
24. Of the following procedures, which does not produce analytical evidence?
a. Compare revenue, cost of sales, and gross profit with the prior year and investigate significant variations
b. Examine monthly performance reports and investigate significant revenue and expense variances
c. Confirm customer’s accounts receivable and clear all material exceptions
d. Compare sales trends and profit margins with industry averages and investigate significant differences
25. Which of the following comparisons is most useful to an auditor in evaluating the results of an entity’s
operations?
a. Prior year accounts payable to current year accounts payable
b. Prior year payroll expense to budgeted current year payroll expense
c. Current year revenue to budgeted current year revenue
d. Current year warranty expense to current year contingent liabilities
26. Which of the following analytical procedures should be applied to the income statement?
a. Select sales and expense items and trace amounts to related supporting documents
b. Ascertain that the new income amount in the statement of cash flows agrees with the net income amount in
the income statement
c. Obtain from the clients representatives the beginning and ending inventory amounts that were used to
determine costs of sales
d. Compare the actual revenues and expenses with the corresponding figures to the previous year and
investigate significant differences
27. Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive
tests?
a. Relationships involving balance sheet accounts
c. Relationships involving income statement acc’ts
b. Transactions subject to management discretion
d. Data subject to audit testing in the prior year
28. Auditors try to identify predictable relationships when using analytical procedures. Relationships involving
transactions from which of the following accounts most likely would yield the highest level of evidence?
a. Accounts payable
c. Accounts receivable
b. Advertising expense
d. Interest expense
29. Auditors sometimes use comparison of ratios as audit evidence. For example, an unexplained decrease in the
ratio of gross profit to sales may suggest which of the following possibilities?
a. Unrecorded purchases
c. Merchandise purchases being charged to operating expense
b. Unrecorded sales
d. Fictitious sales
30. Which result of an analytical procedure suggests the existence of obsolete merchandise?
a. Decrease in the inventory turnover rate
c. Decrease in the ratio of inventory to accounts payable
b. Decrease in the ratio of gross profit to sales
d. Decrease in the ratio of inventory to account payable
31. If accounts receivable turned over 8 times in 2018 as compared to only 6 times in 2019, it is possible that there
were
a. Unrecorded credit sales in 2019
c. More thorough credit investigations made late in 2018
b. Unrecorded cash receipts in 2018
d. Fictitious sales in 2019
32. Which of the following would not be classified as an analytical procedure?
a. Benchmarking the company’s profitability ratios against others in the industry
b. Variance analysis of actual versus budgeted amounts for production
c. Reperforming the clients depreciation expense using the client’s accounting policies for capital
expenditures made during the year
d. Reconciling fixed asset dispositions with the fixed asset ledger
33. Which of the following statements is not correct with respect to analytical procedures?
a. Auditing standards require the use of analytical procedures
b. Analytical procedures may be performed as substantive test
c. Analytical procedures may be performed as test of control
d. Analytical procedures use comparisons and relationships to assess whether account balances appear
reasonable
34. Most auditors prefer to replace tests of details with analytical procedures whenever possible because
a. The analytical procedures are more reliable
c. The analytical procedures are more persuasive
b. The tests of details are more expensive
d. The tests of details are more difficult to interpret
35. An auditor compares this year’s revenues and expenses with those of the prior year and investigates all changes
exceeding 10%. By this procedure the auditor is most likely to learn that
a. An increase in property tax rates has not been recognized in the client’s accrual
b. This year’s provision for uncollectible account is inadequate because of worsening economic conditions
c.
d.
December payroll taxes were not paid
The client changed its capitalization policy for small tools during the year
36. When performing planning analytical procedures for a client the auditor detected that the gross profit
percentage had declined by 50% from the previous year to the year currently under audit. The auditor should:
a. Investigate the possibility the client may have made an error in their cost of goods sold computation
b. Assist management in developing greater cost efficiencies in their product line
c. Prepare a going concern opinion for the client
d. Advise the client to have extensive disclosure to alleviate investor concerns
37. Confirmations would almost always be used, assuming all the accounts below are material, for
a. Individual transactions between organizations, such as sales transactions
b. Bank balances and account receivable
c. Fixed asset additions
d. Payroll expenses
38. You are auditing the company’s purchasing process for goods and services. You are primarily concerned with
the company not recording all purchase transactions. Which audit procedure below would be the most effective
audit procedure in this case?
a. Vouching from the accounts payable account to the vendor invoices
b. Tracing vendor invoices to recorded amounts in the accounts payable account
c. Confirmation accounts payable recorded amounts
d. Reconciling the accounts payable subsidiary ledger to the accounts payable account
39. The practice of auditing firms to spread work throughout the year by carrying out as many auditing procedures
as practicable before the balance sheet date, in order to minimize the load during the peak period. This is called
a. Test of recorded transactions
c. Observation and test-check of inventories
b. Confirmation of receivable and payables
d. Interim work
40. Which of the following statements is not true?
a. Tests of transactions are often performed several months prior to the balance sheet date
b. It is common to use analytical procedures at any time during the audit
c. When controls are not considered effective, or when control deviations are discovered, substantive tests
will be eliminated
d. Tests of details of balances are normally done last
41. In order to promote audit efficiency the auditor considers cost in selecting audit tests to perform. Which of the
following audit tests would be the most costly?
a. Analytical procedures
c. Tests of controls
b. Risk assessment procedures
d. Tests of details of balances
42. If no material differences are found using analytical procedures and the auditor concludes that misstatements
are not likely to have occurred:
a. Other substantive tests may be reduced
b. It will necessary to increase the tests of balances
c. It will not be necessary to perform tests of balances
d. It will be necessary to increase the tests of transactions
43. Which of the following is considered further audit procedures that may be designed after assessing of the risk of
material misstatement?
Substantive test of details
Risk assessment procedures
a.
YES
YES
b.
YES
NO
c.
NO
YES
d.
NO
NO
44. Which of the following audit tests is usually the least costly to perform?
a. Analytical procedures
c. Tests of details of balances
b. Tests of controls
d. Substantive tests of transactions
45. The objective of tests of details of transactions performed as substantive tests is to
a. Monitor the design and use of entity documents such as prenumbered shipping form
b. Determine whether controls have been placed in operation
c. Detect material misstatements in the account balances of the financial statements
d. Evaluate whether controls operated effectively
46. Analytical procedures are those that
a. Evaluate the accuracy of the account balances
b. Assess the overall reasonableness of transactions and balances
c. Review the effectiveness of internal control procedures
d. Analyze the effect of management procedures on the accounting system
47. Tests of details of balances are specific procedures intended to
a. Test for monetary errors in the balances in the financial statements
b. Prove that the accounts with material balances are classified correctly
c. Prove that the trial balance is in balance
d. Identify the details of the internal control system
48. The primary purpose of performing analytical procedures in the testing phase of an audit is to
a. Help the auditor obtain an understanding of the client’s industry and business
b. Assess the going concern assumption
c. Indicate possible misstatements (attention directing)
d. Reduce tests of details of balances
49. The information obtained by the auditor in arriving at the conclusions on which the audit opinion is based is
called:
a. Audit working papers
b. Audit assertions
c. Audit evidence
d. Audit standards
50. The major reason an independent auditor gathers evidence is to:
a. Form an opinion on the financial statements
c.
b. Detect fraud
d.
Evaluate management
Evaluate internal control
51. Which of the following is the best example of corroborating evidence?
a. General journal
c. Vendor’s invoice
b. Worksheet cost allocations
d. Cash receipts journal
52. Which of the following statements relating to the competence of evidential matter is always true?
a. Evidence from outside an enterprise is always reliable
b. Accounting data developed under satisfactory conditions of internal control are more relevant than data
developed under unsatisfactory internal control conditions
c. Oral representations made by management are not reliable evidence
d. Evidence must be both reliable and relevant to be considered appropriate
53. Which of the following is correct about the appropriateness of evidence?
a. Audit evidence from external sources is more relevant than evidence generated internally
b. Audit evidence is more persuasive when items of evidence from different sources or of different nature are
not consistent
c. Audit evidence generated internally is more reliable when the related accounting and internal control
systems are effective
d. Sufficiency refers to the amount of evidence needed
54. Which of the following statements about audit evidence is correct?
a. Appropriateness is the measure of the quantity of audit evidence
b. Sufficiency is the measure of the quality of audit evidence and its relevance to a particular assertion and its
reliability
c. Audit evidence is more persuasive when items of evidence from different sources or of different nature are
consistent
d. There should be a one-on-one relationship between audit objective and audit procedure
55. Evidence is generally considered appropriate when:
a. It has been obtained by random selection
b. There is enough of it to afford a reasonable basis for an opinion on financial statements
c. It has the qualities of being relevant, objective, and free from known bias
d. It consists of written statements made by managers of the enterprise under audit
56. Evidence is generally considered sufficient when
a. It is appropriate
b. There is enough of it to afford a reasonable basis for an opinion on financial statements
c. It has the qualities of being relevant, objective and free from unknown bias
d. It has been obtained by random selection
57. Appropriateness of evidence is a measure of the:
a. Quantity of evidence
b. Quality of evidence
c.
d.
Sufficiency of evidence
Meaning of evidence
58. Two overriding considerations affect the many ways an auditor can accumulate evidence:
1. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility
2. Cost of accumulating evidence should be minimized
In evaluating these considerations,
a. The first is more important than the second
c. They are equally important
b. The second is more important than the first
d. It is impossible to prioritize them
59. Theoretically, which of the following would not have an effect on the amount of audit evidence gathered by the
auditor?
a. The type of opinion to be issued
b. The auditor’s evaluation of internal control
c. The types of audit evidence available to the auditor
d. Whether or not the client reports to the Securities and Exchange Commission
60. The sufficiency and appropriateness of evidential matter ultimately is based on the
a. Availability of corroborating data
c. Pertinence of the evidence
b. Philippine Standards on auditing
d. Judgment of the auditor
CHAPTER 9 – AUDIT SAMPLING
1.
Which of the following constitutes audit sampling?
a. Selecting and examining specific items to determine whether or not a particular procedure is performed
b. Examining items to obtain information about matters such as the client’s business, the nature of
transactions, accounting and internal control systems
c. Examining items whose values exceed a certain amount so as to verify a large proportion of the total
amount of an account balance or class of transactions
d. Applying audit procedures to less than 100% of items within an account balance or class of transactions
such that all sampling units have a chance of selection
2.
When designing audit procedures, the auditor should determine the appropriate means of selecting items for
testing. The means available to the auditor would include:
100% examination
Audit sampling
Selecting specific items
a.
YES
YES
YES
b.
NO
YES
NO
c.
NO
YES
YES
d.
NO
NO
YES
3.
This involves the application of procedures to less than 100% of the items within the account balance or class of
transactions. This enables the auditor to obtain and evaluate audit evidence about some characteristics of the
selected items in order to form an opinion about the characteristics of all items supporting an account balance or
transaction class.
a. Audit techniques
b. Audit sampling
c. Selective testing
d. Specific identification
4.
The auditors’ principal objective when using a sample of tests of details of balances is whether the:
a. Account balance being audited is fairly stated
b. Transactions being audited are free of misstatements
c. Controls being tested are operating effectively
d. Transactions and account balances being audited are fairly stated
5.
Audit sampling for substantive tests is appropriate when
a. Analytical procedures are used
b. The auditor wants to eliminate sampling risks
c. A population contains a small number of large value items
d. Test of details are performed
6.
Audit sampling for test of control is appropriate when
a. Control leaves evidence of performance
c.
b. Control leaves no evidence of performance
d.
100% of the transactions is tested
Examining specific high value items in the population
7.
In a sampling application, the group of items about which the auditor wants to estimate some characteristic is
called the
a. population
b. sample
c. attribute of interest
d. sampling unit
8.
An error that arises from an isolated event that has not recurred other than on specifically identifiable occasions
and is therefore not representative of errors in the population.
a. Tolerable error
b. Non-sampling error
c. Sampling error
d. Anomalous error
9.
The possibility that the auditor’s conclusion based on a sample may be different from the conclusion reached if
the entire population were subjected to the same procedure is called
a. Audit risk
b. Non-sampling risk
c. Sampling risk
d. Detection risk
10. Which of the following best illustrates the concept of sampling risk?
a. A randomly chosen sample may not be representative of the population as a whole on the characteristics of
interest
b. An auditor may select audit procedures that are not appropriate to achieve the specific objective
c. An auditor may fail to recognize errors in the documents examined for the chosen sample
d. The documents related to the chosen sample may not be available for inspection
11. One of the ways to reduce sampling risk is to
a. Increase the sample size
b. Carefully design the audit procedures to be used
c. Provide proper supervision and instruction of the audit team
d. Use variables sampling rather than attributes sampling
12. Non-sampling errors occur when audit tests do not uncover existing exceptions in the
a.
Population
b.
Planning stage
c.
Sample
d.
Financial statement
13. One of the causes of non-sampling error is
a. Failure to draw a random sample
b. Failure to draw a representative sample
c. The use of inappropriate or ineffective audit procedures
d. The use of attributes sampling rather than variables sampling
14. One of the ways to control non-sampling risk is through
a. Proper supervision and instruction of the client’s employees
b. Proper supervision and instruction of the audit team
c. The use of attributes sampling rather than variables sampling
d. Control which ensure that the sample drawn is random and representative
15. Which of the following is the risk that audit tests will not uncover existing exceptions in a sample?
a. Sampling risk
b. Non-sampling risk
c. Audit risk
d. Detection risk
16. Which of the following statements is most correct
a. A sample of all items of a population will eliminate sampling risk, but increase non-sampling risk
b. The use of an appropriate sample selection technique ensures a representative sample
c. The auditor’s failure to recognize an exception is a significant cause of sampling risk
d. The use of inappropriate audit procedures is a significant cause of non-sampling risk
17. PSA 530 identifies two general approaches to audit sampling. They are
a. Random & nonrandom
c. Precision & reliability
b. Statistical & nonstatistical
d. Risk and nonrisk
18. Which of the following statements best expresses the impact that the performance of audit procedures has on
statistical and nonstatistical sampling?
a. Audit procedures on the sample item will vary as a result of using either statistical or nonstatistical
sampling
b. The audit procedures will be the same for either statistical or nonstatistical sampling but they must be
performed differently for each
c. Statistical sampling requires quantitative audit procedures, whereas nonstatistical sampling require
judgmental audit procedures
d. Audit procedures on the sample items will not vary as a result of using either statistical or nonstatistical
sampling
19. Which of the following is not true for nonstatistical sampling?
a. Applies mathematical rules that allow auditors to quantify sampling risk
b. May use statistical selection techniques
c. Reaches conclusion about the population on a judgmental sample
d. Does not allow measurement of sample reliability
20. An advantage of using statistical sampling is that such techniques
a. Mathematically measure risk
b. Eliminate the need for judgmental decision
c. Define the value of reliability necessary to provide audit assurance
d. Have been established in the courts to be superior to nonstatistical sampling
21. Which of the following is most correct about the quantification of sampling risk?
a. Sampling risk cannot be quantified
b. Sampling risk can be quantified only when nonstatistical selection techniques are used to select the sample
c. Sampling risk can be quantified only when statistical selection techniques are used to select the sample
d. None of the above
22. Statistical samples do not allow
a. More efficient samples
b. Measurement of sample reliability
c.
d.
Replacement of the auditor’s professional judgment
Measurement of sample risk
23. Statistical sampling cannot
a. Determine reliability of samples
b. Select a sample to draw inference about a population
c. Assure a sample will be representative of a population
d. Measure the risk that a sample is not representative of a population
24. A principal advantage of statistical methods of attributes sampling over nonstatistical methods is that they
provide a scientific basis for establishing the:
a.
b.
Risk of assessing control risk is too low
Tolerable exception rate
c.
d.
Expected population exception rate
Sample size
25. Which of the following sampling plans would be designed to estimate a numerical measurement of a population
such as peso value?
a. Numerical sampling
c. Discovery sampling
b. Sampling for attributes
d. Sampling for variables
26. Which of the following sampling methods would be most appropriate in performing tests of controls over
authorization of cash disbursements
a. Attributes
b. Variables
c. Ratio
d. Stratified
27. There are many kinds of statistical estimates that an auditor may find useful, but basically every accounting
estimate is either of a quantity or an error rate. The statistical terms that roughly correspond to “quantities” and
“error rate,” respectively are:
a. Attributes and variables
c. Constants and attributes
b. Variables and attributes
d. Constants and variables
28. Attribute sampling would be an appropriate method to use on which one of the following in an audit program?
a. Review sales transactions for large and unreasonable amounts
b. Observe whether the duties of the accounts receivable clerk are separate from handling cash
c. Examine a sample of duplicate sales invoices for credit approval by the credit manager
d. Review the aged schedule of the accounts receivable to determine if receivables from officers are included
29. Sampling used for tests of details of balances provides results in terms of:
a. Deviation rates
b. Percentages
c. Pesos
d.
Expectation rates
30. If an auditor, planning to use statistical sampling, is concerned with the number of client’s sales invoices that
contain mathematical errors, the auditor would most likely utilize which sampling technique
a. Random sampling with replacement
c. Sampling for variables
b. Sampling for attributes
d. Stratified random sampling
31. In assessing sampling risk, alpha risks relate to the
a. Efficiency of the audit
b. Selection of the sample
c.
d.
Effectiveness of the audit
Audit quality controls
32. In performing substantive tests, the auditor is concerned with two risks or errors of sampling; alpha error and
beta error
a. The alpha error is of greater concern to the auditor than the beta error
b. The beta error is of greater concern to the auditor than the alpha error
c. The beta error and the alpha error are of equal importance to the auditor
d. Neither the alpha error nor beta error need be considered by the auditor
33. To determine if a sample is truly representative of the population, the auditor would be required to:
a. Conduct multiple samples of the same population
c. Audit the entire population
b. Never use sampling because of the expense involved
d. Use systematic sample selection
34. While performing substantive test of details during an audit, the auditor determined that the sample results
supported the conclusion that the recorded account balance was materially stated. Which of the following is the
least likely auditor reaction to this discovery?
a. Perform expanded audit tests in relevant areas
b. Increase detection risk in the relevant areas
c. Increase the sample size for test of control
d. Take no action until test of other audit areas are completed
35. The deviation rate the auditor will permit in the population and still be willing to reduce the assessed level of
control risk is called the
a. Tolerable deviation rate
c. Acceptable sampling risk
b. Estimated population deviation rate
d. Sample deviation rate
36. The maximum amount of error in a population that the auditor is willing to accept is referred to as the
a. Acceptable risk
b. Tolerable error
c. Expected error
d. Tolerable materiality
37. The deviation rate that the auditor expects to find in the population, before testing begins, is called the
a. Tolerable deviation rate
c. Computed upper deviation rate
b. Sample deviation rate
d. Expected deviation rate
38. Which of the following must be set prior to testing a sample?
a. Sample deviation rate
c.
b. Achieved upper precision limit
d.
Computed deviation rate
Tolerable deviation rate
39. The tolerable rate of deviations for tests of controls is generally:
a. Lower than the expected deviation rate
c.
b. Higher than the expected deviation rate
d.
Identical to the expected deviation rate
Unrelated to the expected deviation rate
40. Which of the following factors is generally not considered in determining sample size for a test of controls?
a. Population size
c. Risk of assessing control risk too low
b. Tolerable size
d. Expected population deviation rate
41. The relationship of the sample size and the allowable sampling risk is
a. Direct
b. Inverse
c. Variable
d.
Indeterminate
42. If an auditor desires a greater level of assurance in auditing a balance, the acceptable risk of incorrect
acceptance:
a. is reduced
c. is not changed
b. is increased
d. may be reduced or increased depending upon other circumstances
43. The tolerable rate of deviate for tests of controls necessary to justify a control risk assessment depends primarily
on which of the following?
a. The cause of errors
c. The amount of any substantive errors
b. The extent of reliance to be placed on procedures
d. The limit used in audits of similar clients
44. A number of factors influence the sample size for substantive test of details of an account balance. All of the
factors being equal, which of the following would lead to a larger sample size?
a. Assessing control risk at a low level
c. Smaller expected frequency of misstatements
b. Greater reliance on analytical procedures
d. Smaller measure of tolerable misstatements
45. Which of the following does not have to be considered in determining the initial sample size of a test of details?
a. Tolerable misstatement
c. Estimate of misstatements in the population
b. Acceptable risk of incorrect rejection
d. Acceptable audit risk
46. How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a
substantive test of details?
Increase in tolerable
Increase in assessed level of
misstatement
control risk
a.
Increase
Increase
b.
Increase
Decrease
c.
Decrease
Increase
d.
Decrease
Decrease
47. Which of the following combinations result in a decrease in sample size for attributes?
Acceptable
Tolerable
Expected population
sampling risk
deviation rate
deviation rate
a.
Increase
Decrease
Increase
b.
Decrease
Increase
Decrease
c.
Increase
Increase
Decrease
d.
Increase
Increase
Increase
48. Which of the following would have the least impact in determining sample size for test of controls?
a. Expected population deviation rate
c. Tolerable exception rate
b. Risk of assessing control risk too low
d. Population size
49. In determining the sample size for test of controls, an auditor should consider the expected rate of deviations,
the allowable sampling risk, and the
a. Tolerable deviation rate
c. Nature and cause of deviations
b. Risk of incorrect acceptance
d. Population size
50. As the amount of misstatements expected in the population approaches tolerable misstatement, the planned
sample size will:
a. decrease
c. vary based on characteristics of the population
b. increase
d. be unaffected
51. Which of the following statements is correct concerning statistical sampling in tests of controls?
a. The population size has little or no effect on determining sample size except for very small populations
b.
The expected population deviation rate has little or no effect on determining sample size except for very
small populations
c. As the population size doubles, the sample size should also double
d. For a given tolerable rate, the sample size should be selected as the expected population deviation rate
decreases
52. If the acceptable audit risk is increased, acceptable risk of incorrect acceptance should be:
a. increased
b. reduced
c. unaffected
d. modified
53. To determine an optimum sample size when sampling methods are used in a substantive test, all of the
following factors must be considered except the:
a. Variance in the population
b. Risk levels the auditor is willing to accept
c. Deviation occurrence rate the auditor expects to find in the population
d. Tolerable misstatement
54. Which of the following results in a larger sample size?
a. Decrease the desired confidence level and decrease the tolerable deviation rate
b. Increase the desired confidence level and decrease the tolerable deviation rate
c. Decrease the desired confidence level and increase the tolerable deviation rate
d. Increase the desired confidence level and increase the tolerable deviation rate
55. Principal method of sample selection include all of the following except
a. Haphazard
b. Random number
c. Systematic
d.
Statistical
56. A sample in which every possible combination of items in the population has a chance of constituting the
sample is a:
a. Representative sample
b. Random sample
c. Statistical sample
d. Judgment sample
57. Correspondence is established between the random number table and the population by:
a. Identifying each item in the population with a unique number
b. Deciding the number of digits to use in the random number table and their association with the population
numbering system
c. Defining which digits the auditor uses in a column and the method of reading the table
d. Selecting a random starting point on the table
58. When auditors wish to evaluate a sample statistically, an acceptable selection method is:
a. Systematic sample selection
c. Haphazard selection
b. Judgmental selection
d. Block sample selection
59. Which of the following statements regarding block sampling is least likely to be true?
a. Block sampling is the selection of several items in sequence
b. It is acceptable to use block sampling for tests of transactions only if reasonable number of blocks is used
c. Only one block should be selected to increase the probability if a representative sample
d. Once the first item in the block is selected, the remainder of the block is chosen automatically
60. The process which requires the calculation of an interval and then selects the items based on the size of the
interval is
a. Statistical sampling
c. Random selection
b. Systematic selection
d. Computerized selection
.
CHAPTER 10 – COMPLETING THE AUDIT AND POST-AUDIT RESPONSIBILITIES
1.
Which of the following is not among the characteristics of the procedures performed in completing the audit?
e. They are optional since they have only an indirect impact on the opinion to be expressed.
f. They involve many subjective judgments by the auditor.
g. They are performed after the balance sheet date.
h. They are usually performed by audit managers or other senior members of the audit team who have
extensive audit experience with the client
2.
An auditor has the responsibility to actively search for subsequent events that occur subsequent to the:
a. Balance sheet date
c. Balance sheet date, but prior to the audit report
b. Date of the auditor’s report
d. Date of the management representation letter
3.
“Subsequent events” for reporting purposes are events which occur subsequent to the
e. Financial statement date
f. Date of the auditor’s report
g. Financial statement date but prior to the date of the auditor’s report
h. Date of the auditor’s report and concern contingencies which are not reflected in the financial statements
4.
When completing the audit, the auditor performs procedures designed to identify subsequent events that may
require adjustments of, or disclosure in, the financial statements. Accordingly
Those that provide evidence about conditions
Those that are indicative of conditions that
that existed at period end
arose subsequent to period end
Will require adjustment
Will require adjustment
Will require adjustment
Will require disclosure
Will require disclosure
Will require disclosure
Will require disclosure
Will require adjustment
a.
b.
c.
d.
5.
The auditor has completed his assessment of subsequent events. The proper accounting for subsequent events
that have direct effect on the financial statements is to:
a. adjust the financial statements for the year under audit
b. disclose in the notes to financial statements the amount of the adjustment
c. duly note in the audit work papers that next year’s financial statements need to be adjusted
d. make no adjustment of the financial statement for the year under audit
6.
Which of the following procedures should the auditor generally perform regarding subsequent events?
e. Compare the latest available interim financial statements with the financial statements being audited
f. Send second requests to the client’s customers who failed to respond to the initial accounts receivable
confirmation requests
g. Communicate material weaknesses in the internal control to the client’s audit committee
h. Review the cut-off bank statements for several months after the year-end
7.
Which of the following procedures would an auditor most likely perform to obtain evidence about the
occurrence of subsequent events?
e. Recomputing a sample of large-peso transactions occurring after year-end for arithmetic accuracy
f. Investigating changes in stockholders’ equity occurring after year-end
g. Inquiring of the entity’s legal counsel concerning litigations, claims, assessments arising after year-end
h. Confirming bank accounts established after year-end
8.
Which of the following procedures would an auditor most likely perform to obtain evidence about an entity’s
subsequent events?
e. Reconcile bank activity for the month after the balance sheet date with cash activity reflected in the
accounting records
f. Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date
g. Review the treasurer’s monthly reports on temporary investments owned, purchased, and sold
h. Reading minutes of the directors and stockholders’ meetings
9.
Phil, CPA is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events
that may require adjustment or disclosure essential to a fair presentation of the financial statements in
conformity with financial reporting standards. Which one of the following procedures would be least
appropriate for this purpose?
e. Confirm as to the completion of the field work accounts receivable which have increased significantly from
the year-end date.
f. Read the minutes of the board of directors
g. Inquire of management concerning events which may have occurred
h. Obtain a lawyer’s letter as of the compliance of field work
.
10. The procedures to identify events that may require adjustments of, or disclosure in, the financial statements
would be performed as near as practicable to the date of the auditor’s report. These procedures would ordinarily
include the following except
e. Reviewing procedures management has established to ensure that subsequent events are identified
f. Reading minutes of the meetings of shareholders, the board of directors, audit, and executive committee
held after the period end and inquiring about matters discussed at meetings for which minutes are not yet
available
g. Testing the effectiveness of those internal control policies and procedures that may have significantly
changed in the subsequent period
h. Inquiring or extending previous oral or written inquiries, of the entity’s lawyers concerning litigations and
claims
11. A client has a calendar year-end. Listed below are four events that occurred after December 31. Which one of
these subsequent events might result in adjustment of the December 31 financial statements?
e. Sale of a major subsidiary
f. Adoption accelerated depreciation methods
g. Write-off of a substantial portion of inventory as obsolete
h. Collection of the accounts receivable existing at December 31
12. Which of the following material events occurring subsequent to the balance sheet date would require an
adjustment to the financial statements before they are issued
e. Sale of long-term debt or capital stock
f. Loss of a plant as a result of a flood
g. Major purchase of a business which is expected to double sales volume
h. Settlement of a litigation, in excess of the recorded liability
13. Which of the following events in the subsequent period will require disclosure in the notes to financial
statements?
e. Realization of recorded year-end receivables at a different amount than recorded
f. Settlement of a recorded year-end estimated product warranty liabilities at a different amount than recorded
g. Purchase of a machine
h. Purchase of a business
14. A major customer of an audit client suffers a fire prior to completion of year-end field work. The audit client
believes that this event could have a significant direct effect on the financial statements. The auditor should
e. Advise management to disclose the event in the notes to financial statements
f. Disclose the event in the auditor’s report
g. Withhold submission of the auditor’s report until the extent of the direct effect on the financial statements
is known
h. Advise management to adjust the financial statements
15. Which of the following subsequent events will be least likely to result in an adjustment to the financial
statements?
e. Culmination of events affecting the realization of accounts receivable owned as of the balance sheet date
f. Culmination of events affecting the realization of inventories owned as of the balance sheet date
g. Material changes in the settlement of liabilities which were estimated as of the balance sheet date
h. Material changes in the quoted market prices of listed investment securities since the balance sheet date
16. Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to
distinguish between conditions that existed at the balance sheet date and those that come into being after the end
of the year. The subsequent information should not be incorporated directly into the statements if the conditions
causing the change in valuation:
e. Took place before year-end
g. Occurred both before and after year-end
f. Did not take place until after year-end
h. Are reimbursable through insurance policies
17. An auditor completed field work on February 10, 2019 for a December 31, 2018 year-end client. A significant
subsequent event occurred on February 22, 2019. In this case, which of the following report dates would not be
appropriate?
e. February 10, 2019
g. February 22, 2019
f. February 10, 2019, except Note 1, February 22, 2019
h. December 31, 2018
18. The practice of dual dating is associated with:
e. Subsequent events between the balance sheet date and the report date
f. Subsequent events between the balance sheet date and the issuance of the report
g. Subsequent events between the report date and the issuance of the report
h. The discovery of omitted procedures
.
19. If the auditor dates the auditor’s report on financial statements for the year ended December 31, 2018, as of
February 10, 2019, except for Note 5, as to which the date is March 3, 2019, the auditor is taking responsibility
for
e. All subsequent event occurring through March 3, 2019
f. All subsequent event occurring through February 10, 2019, only
g. All subsequent event occurring through February 10, 2019, and the specific subsequent event referred to in
Note 5 through March 3, 2019
h. Only the specific subsequent event referred to in Note 5 through March 3, 2019
20. The practice of dual dating applies to
e. All types of subsequent events
f. Subsequent events that require disclosure
g. Subsequent events that occur before the date of the auditor’s report
h. Subsequent events that occur after the financial statements are issued
21. An auditor’s decision concerning whether or not to dual date a report is primarily based on the auditor’s
decision to:
e. Extend appropriate audit procedures
f. Assume responsibility for events after the date of the auditor’s report
g. Assume responsibility for event from fiscal year end to the date of the audit report
h. Roll of the dice and hope for a successful outcome
22. An auditor issued an audit report that was dual dated for a subsequent event that occurred after the completion
of field work but before issuance of auditor’s report. The auditor’s responsibility for events occurring
subsequent to the completion of field work was
e. Limited to the specific event referenced
f. Limited to include only events occurring before the date of the last subsequent event referenced
g. Extended to subsequent events occurring through the date of issuance of the report
h. Extended to include all events occurring since the completion of field work
23. Which of the following procedures would an auditor most likely perform to obtain evidence about an entity’s
subsequent events?
e. Reconcile bank activity for the month after the balance sheet date with the cash activity reflected in the
accounting records
f. Obtain a letter from the entity’s attorney describing any pending litigation, unasserted claims, or loss
contingencies
g. Review the treasurer’s monthly reports on temporary investments owned, purchased, and sold
h. Examine on a test basis the purchase invoices and receiving reports for several days after the inventory date
24. The primary source of information about litigation, claims and assessments is obtained by the auditors from the:
e. Client’s lawyers
g. Client’s previous auditor
f. Client’s management
h. All of the above
25. When obtaining evidence regarding a litigation against a client, the CPA would be least interested in
determining
e. An estimate of when the matter will be resolved
f. The period in which the underlying cause of litigation occurred
g. The probability of an unfavorable outcome
h. An estimate of the potential loss
26. The auditor’s primary means of obtaining corroboration of management’s information concerning litigation is a
e. Letter of audit inquiry to the client’s lawyer
f. Letter of corroboration from the auditor’s lawyer upon review of the legal documentation
g. Confirmation of claims and assessments from the other parties to the litigation
h. Confirmation of claims and assessments from an officer of the court presiding over the litigation
27. An auditor should obtain evidential matter relevant to all the following factors concerning third-party litigation
against a client except the
a. Period in which the underlying cause for legal action occurred
b. Probability of an unfavorable outcome
c. Jurisdiction in which the matter will be resolved
d. Existence of a situation indicating an uncertainty as to the possible loss
28. If a potential loss on a contingent liability is remote, the liability usually is:
e. Disclosed in the notes, but not accrued
f. Neither accrued nor disclosed in the notes
g. Accrued and indicated in the body of the financial statements
h. Disclosed in the auditor’s report but not disclosed on the financial statements
.
29. An auditor will ordinarily examine invoices from lawyers primarily in order to
e. Substantiate accruals
f. Assess the legal ramifications of litigation in progress
g. Estimate the peso amount of contingent liabilities
h. Identify possible unasserted litigation, claims, and assessments
30. If a lawyer refuses to furnish corroborating information regarding litigation, claims and assessments, the auditor
should
e. Honor the confidentiality of the client-lawyer relationship
f. Consider the refusal to be a scope limitation
g. Seek to obtain the corroborating information from management
h. Disclose this fact in a footnote to the financial statements
31. The primary reason an auditor requests letters of inquiry be sent to client’s attorney is to provide the auditor
with
e. A description and evaluation of litigations, claims, and assessments that existed at the date of the balance
sheet
f. An expert opinion as to whether a loss is probable, possible, or remote
g. The opportunity to examine the documentation concerning litigation, claims, and assessments
h. Corroboration of information furnished by management concerning litigation, claims, and assessments
32. The refusal of a client’s attorney to provide a representation on the legality of a particular act committed by the
client is generally
e. Sufficient reason to issue a “subject to” qualified opinion
f. Considered to be a scope limitation
g. Insufficient reason to modify the auditor’s report because of the attorney’s obligation of confidentiality
h. Proper grounds to withdraw from the engagement without further consideration
33. At the completion of the audit, management is asked to make a written statement that it is not aware of any
undisclosed contingent liabilities. This statement would appear in the:
e. Management letter
g. Letters testamentary
f. Letter of inquiry
h. Written management representation
34. Which of the following statements about written representations is not correct?
e. It is optional
g. It confirms oral representation made by management
f. It is addressed to the auditor
h. It’s date normally coincides with the date of the audit report
35. Which of the following is not a reason why the auditor requests that the client provide a written representation?
e. Professional auditing standards require the auditor to obtain a written representation
f. It stresses upon management its responsibility for the preparation and fair presentation of the financial
statements
g. It provides written documentation of the oral responses already received to inquiries of management
h. It provides written documentation, which is a higher quality of evidence than management’s oral responses
to inquiries
36. A written representation is used by the auditor to
e. Reduce the scope of the auditor’s physical inventory work but not the other inventory audit work that is
normally performed
f. Confirm in writing the valuation basis used by the client to value inventory at the lower of cost or market
g. Lessen the auditor’s responsibility for the fair presentation of the balance sheet inventories
h. Remind the management that primary responsibility for the overall fairness of the financial statements rests
with them and not with the auditor
37. When considering the use of management’s written representations as audit evidence about the completeness
assertion, an auditor should understand that such representations
e. Complement, but do not replace, substantive tests designed to support the assertion
f. Constitute sufficient evidence to support the assertion when considered in combination with a sufficiently
low assessed level of control risk
g. Are not part of the evidence considered to support the assertion
h. Replace a low assessed level of control risk as evidence to support the assertion
38. Which of the following would the auditor expect to find in the client’s management representation letter?
e. Management’s recommendations for internal control effectiveness improvements
f. Management’s plans for improving product quality
g. Management’s compliance with contractual arrangements that impact the financial statements
h. Management’s goals for improving earnings per share
.
39. A purpose of a management representation letter is to reduce
e. Audit risk to an aggregate level of misstatement that could be considered material
f. An auditor’s responsibility to detect material misstatements only to the extent that the letter is relied on
g. The possibility of misunderstanding concerning management’s responsibility for the financial statements
h. The scope of an auditor’s procedures concerning related party transactions and subsequent events
40. A representation letter issued by a client
e. Is essential for the preparation of the audit program
f. Is a substitute for testing
g. Does not reduce auditor’s responsibility
h. Reduces the auditor’s responsibility only to the extent that it is relied upon
41. An auditor must obtain written representation that normally should be signed by
e. The president and the chairperson of the board
f. The treasurer and the internal auditor
g. The chief executive officer and the chief financial officer
h. The corporate counsel and the audit committee chairperson
42. An auditor must obtain written client representations that might be signed by all but which of the following?
e. Treasurer
g. Vice president of operations
f. Chief financial officer
h. Chief executive officer
43. The date of the management representation letter should coincide with the date of the
e. Balance sheet
g. Auditor’s report
f. Latest interim financial statements
h. Latest related party transaction
44. A client representation letter is:
e. Prepared on the CPA’s letterhead
f. Addressed to the client
g. Signed by high-level officials (e.g., president and chief financial officer)
h. Dated as of the client’s year-end
45. Which of the following would the auditor find most useful in relation to its previous audit procedures from the
client representation letter?
e. To impress upon the audit firm its responsibility for the audit
f. To impress upon management its responsibility for the financial statement assertions
g. To remind management of potential misstatements or omissions in the financial statements
h. To document the responses from management to inquiries about various aspects of the audit
46. Management’s refusal to furnish a written representation letter on a matter which the auditor considers essential
constitutes
a. Prima facie evidence that the financial statements are not presented fairly
b. An illegal act
c. An uncertainty sufficient to preclude an unmodified opinion’
d. A scope limitation sufficient to preclude an unmodified opinion
47. If management refuses to furnish certain written representations that the auditor believes is essential, which of
the following is appropriate?
a. The auditor can rely on oral evidence relating to the matter as a basis for an unmodified opinion
b. The client’s refusal does not constitute a scope limitation that may lead to a modification of the opinion
c. The client’s refusal may have an effect on the auditor’s ability to rely on other representations of
management
d. The auditor should express an adverse opinion because of management’s refusal
48. Which of the following audit procedures is ordinarily performed last?
e. Reading minutes of the board of directors’ meetings
g. Obtaining a client representation letter
f. Confirming accounts payable
h. Testing the purchasing function
49. When an audit is made in accordance with Philippine Standards on Auditing, the auditor should always
e. Document the understanding of the client’s internal control and the basis for all conclusions about the
assessed level of control risk for financial statement assertions
f. Employ analytical procedures as substantive tests to obtain evidence about specific assertions related to
account balances
g. Obtain written representations from management
h. Observe the taking of physical inventory on the balance sheet date
50. PSA 570 requires the auditor to evaluate whether there is a substantial doubt about the client’s ability to
continue as a going concern for at least:
.
e.
f.
g.
h.
One quarter beyond the balance sheet
One quarter beyond the date of the auditor’s report
One year beyond the balance sheet date
One year beyond the date of the auditor’s report
51. Which of the following audit procedures would most likely assist an auditor in identifying conditions and events
that may indicate there could be substantial doubt about the entity’s ability to continue as a going concern?
e. Review compliance with the terms of debt engagement
f. Confirmation of accounts receivable from principal customers
g. Reconciliation of interest expense with debt outstanding
h. Confirmation of bank balances
52. Which of the following conditions or events most likely would cause an auditor to have significant doubt about
the entity’s ability to continue as a going concern?
e. Cash flow from operating activities are negative
f. Research and development projects are postponed
g. Significant related party transactions are pervasive
h. Stock dividends replace annual cash dividends
53. If, on the basis of additional procedures carried out and the information obtained, including the effect of
mitigating circumstances, the auditor’s judgment is that the entity will not be able to continue as a going
concern, the financial statements should be prepared using an appropriate basis; otherwise the auditor will issue
a(n)
e. Disclaimer of opinion
g. Adverse opinion
f. Qualified opinion
h. Unmodified opinion with emphasis of matter paragraph
54. Which of the following may not cast significant doubt about the going concern assumption of an entity?
e. The entity heavily used long-term capital in financing its investment in permanent assets
f. The entity fails to meet capital and other statutory requirements
g. There is a pending legal or regulatory proceeding against the entity that may, if successful, result in claims
that are unlikely to be satisfied
h. There was a change in legislation or government policy expected to adversely affect the entity
55. Which of the following statements is not correct concerning the auditor’s responsibility about management’s
use of the going concern assumption?
e. The auditor should evaluate management’s assessment of the entity’s ability to continue as a going concern
f. The auditor should inquire of management as to its knowledge of events or conditions beyond the period of
assessment used by management that may cast significant doubt on the entity’s ability to continue as a
going concern
g. The auditor does not have the responsibility to design procedures other than inquiry of management to tests
for indication of events or conditions which cast significant doubt on the entity’s ability to continue as a
going concern beyond the period assessed by management
h. The absence of any reference to going concern uncertainty in the auditor’s report can be viewed as a
guarantee as to the entity’s ability to continue as a going concern
56. When conditions and events have been identified which may cast significant doubt as to the entity’s ability to
continue as a going concern, the auditor should consider performing the following procedures except
e. Review management’s plans for future actions based on going concern assessment
f. Gather sufficient appropriate evidence to confirm or dispel whether or not a material uncertainty exists by
carrying out procedures such as considering the effect of management plans and other mitigating factors
g. Seek written representations from management regarding its plans for future actions
h. Issue a report that contains a disclaimer of opinion
57. When a question arises about an entity’s continued existence, the auditor should consider factors tending to
mitigate the significance of negative information regarding the entity’s means for maintaining adequate cash
flow. An example of such factor is the
e. Possibility of purchasing certain assets rather than leasing them
f. Capability of extending the due dates of existing debt
g. Appropriateness of changing depreciation methods from double declining balance to straight line
h. Marketability of property and equipment that management plans to keep
58. The adverse effects of events causing an auditor to believe there is a substantial doubt about entity’s ability to
continue as a going concern would most likely be mitigated by evidence relating to the
e. Ability to expand operations into new product lines in the future
f. Feasibility of plans to purchase leased equipment at less than market value
g. Marketability of assets that management plans to sell
h. Committed arrangements to convert preferred stock to long-term debt
.
59. Which of the following audit procedures most likely would assist an auditor in identifying conditions and events
that may indicate substantial doubt about an entity’s ability to continue as a going concern?
e. Inspecting title documents to identify whether any assets are pledged as collateral
f. Confirming with third parties the details of arrangements to maintain financial support
g. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation
h. Comparing the entity’s depreciation and asset capitalization policies to other entities in the industry
60. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about
an entity’s ability to continue as a going concern?
a. Significant related party transactions are pervasive
b. Usual trade credit from suppliers are denied
c. Arrearages in preferred stock dividends are paid
d. Restrictions on the disposal of principal assets are present
.
CHAPTER 11 – THE AUDITOR’S REPORT ON FINANCIAL STATEMENTS
1.
A major purpose of the auditor’s report on financial statements is to
a. Assures investors of the complete accuracy of the financial statements
b. Enhance the degree of confidence of intended users in the financial statements
c. Deter creditors from extending loans in high risk situations
d. Describe the specific auditing procedures undertaken to gather evidence of the opinion
2.
Which of the following parties is responsible for the fairness of representations made in financial statements?
a. Client’s management
b. Independent auditor
c. Audit committee
d. PICPA
3.
PSA 700 provides guidance on the:
a. Audit report that includes a modified opinion
b. Audit report that includes an unmodified opinion
c. Audit report that includes an unmodified opinion, though the auditor’s report is modified due to an
emphasis of matter
d. Audit report, irrespective of the type of opinion issued by the auditor
4.
The auditing profession recognizes the need for uniformity in reporting as a means of
a. Defending against capricious lawsuits
c. Upgrading the communications skills of auditors
b. Standardizing the policies of various CPA firms
d. Avoiding confusion
5.
What is the overriding benefit of having uniformity in the report?
a. Uniformity promotes credibility in the global market place by making more readily identifiable those audits
that have been conducted in accordance with globally recognize standards.
b. Uniformity in the form promotes expression of unmodified opinion
c. Uniformity lessens the auditor’s legal and civil liabilities
d. The audit report eliminates some disclosures required in the financial statements
6.
Which of the following elements of the auditor’s report affirms the auditor’s independence?
a. Introductory paragraph
b. Auditor’s Responsibility
c. Title
d.
Signature
7.
The auditor’s judgment as to whether the financial statements are presented fairly, in all material aspects, is
made in the context of
a. Philippine Standards on Auditing
c. The professional ethical requirements
b. Applicable financial reporting framework
d. Generally accepted auditing standards
8.
Auditing standards require that the audit report must be titled. This is done in order to
a. indicate that the auditor is a CPA.
b. distinguish the independent auditor’s report from the reports that might be issued by others.
c. identify the financial statements audited.
d. emphasize management’s responsibility for the fair presentation of the financial statements.
9.
The auditor does not normally address the report to
a. Those for whom the report is prepared
b. The president of the client company
c.
d.
Those charged with governance of client company
The stockholders of client company
10. The element of the auditor’s report that identifies the financial statement audited is the
a. title
b. opinion section
c. basis for opinion section
d. auditor’s responsibility section
11. The auditor’s opinion covers the complete set of financial statements. A complete set of financial statements
does not include
a. Statement of Comprehensive Income
b. Statement of Changes in Financial Position
c. Statement of Cash Flows
d. Summary of significant accounting policies and other explanatory information
12. Which of the following shall be included in the opinion section of the auditor’s report?
Name of the entity for whom the
Period covered by the
The title of each statement
report is prepared
financial statements
e.
YES
YES
YES
f.
YES
NO
YES
g.
NO
YES
YES
h.
YES
YES
NO
13. PSA 700 requires the audit report to be signed. The auditor’s signature should be
a. In the name of the audit firm.
c. Either a or b.
b. In the personal name of the auditor.
d. Neither a nor b.
.
14. The appropriate date for the audit report is the one on which the
a. Client’s fiscal year ended.
c. Auditor and client entered into a contract.
b. Auditor has concluded procedures in the field.
d. Auditor types and delivers the report to client.
15. The date of the audit report is important because
a. The date of the auditor’s report informs the user of the auditor’s report that the auditor has considered the
effect of events and transactions of which the auditor became aware and that occurred up to that date.
b. The auditor bills time to the client up to and including the audit report date, and the statement to the client
should reflect this date.
c. PSAs require all audits to be performed on a timely basis.
d. This date coincides with the date of the financial statements
16. The date of the auditor’s report
a. Coincides with the date the financial statements are issued.
b. Should be the same as the financial statement date.
c. Can be earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on
which to base his opinion.
d. Should not be earlier than the date of the approval of financial statements
17. 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.
18. Which of the following is not one of the elements of the auditor’s report?
a.
b.
Auditor’s address
Date of Auditor’s report
c.
d.
Emphasis of a matter
Auditor’s signature
19. The auditor’s address is indicated in the auditor’s report by:
a. Naming the location in the country where the auditor practices his profession.
b. Including the complete mailing address of the auditor.
c. Identifying the country where the auditor had secured his professional license.
d. Addressing the report to the stakeholders or the audit client.
20. How are management’s responsibility and the auditor’s responsibility represented in the auditor’s report?
Management’s Responsibility
Auditor’s Responsibility
a.
Explicitly
Explicitly
b.
Implicitly
Implicitly
c.
Implicitly
Explicitly
d.
Explicitly
Implicitly
21. The opinion expressed by the auditor when the auditor concludes that the financial statements are prepared, in
all material respects, in accordance with the applicable financial reporting framework is
a. Qualified opinion
b. Unmodified opinion
c. Undeniable opinion
d. Denial of opinion
22. The description of the auditor’s responsibility for the audit of the financial statements shall be included
I.
Within the body of the auditor’s report
II.
Within an appendix to the auditor’s report
III.
By a specific reference within the auditor’s report to the location of such a description on an website of
an appropriate authority
a. I only
b. II only
c. Either I or II
d. I, II, or III
23. The most common type of audit report contains a(n)
a. Adverse opinion
b. Qualified opinion
c.
Disclaimer of opinion
d.
Unmodified opinion
24. These refer to financial statements prepared in accordance with a general purpose framework.
a. General-purpose financial statements
c. Common-size financial statements
b. Annual report
d. Fair presentation frameworks
25. Financial statements prepared in accordance with a financial reporting framework designed to meet the financial
information needs of specific users are referred to as
a. Special purpose financial statements
c. General purpose financial statements
b. Special purpose framework
d. Specific purpose financial statements
.
26. Fair presentation framework is a financial reporting framework that requires compliance with the requirements
of the framework and:
I. Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may
be necessary for management to provide disclosures beyond those specifically required by the framework.
II. Acknowledges explicitly that it may be necessary for management to depart from a requirement of the
framework to achieve fair presentation of the financial statements.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
27. Which of the following sections in the auditor’s report shall be placed immediately after the opinion section?
a. Management’s Responsibilities for the Financial Statements
b. Auditor’s Responsibilities for the Audit of the Financial Statements
c. Basis for Opinion
d. Other Reporting Responsibilities
28. To emphasize the fact that auditor is independent, it would be desirable to address the report to
a. The company’s management
c. The board of directors of the client company
b. The stockholders of the client company
d. The Securities and Exchange Commission
29. The first section of the auditor’s report shall have the heading
a. Responsibilities for the Financial Statements
b. Opinion
c. Auditor’s Responsibilities for the Audit of the Financial Statements
d. Basis for Opinion
30. The Basis for Opinion section of the auditor’s report shall
a. State that the financial statements have been audited
b. State that the objective of the auditor is to issue an auditor’s report that includes the auditor’s opinion
c. Describe management’s responsibility for preparing the financial statements in accordance with the
applicable financial reporting framework.
d. State that the audit was conducted in accordance with Philippine Standards on Auditing (PSA).
31. Which of the following management’s responsibilities shall be described in the auditor’s report?
a. Responsibility for preparing the statements in accordance with the applicable financial reporting framework
b. Responsibility for obtaining reasonable assurance about whether the financial statements as a whole are
free from material misstatement
c. Responsibility to exercise professional judgment and maintain professional skepticism throughout the audit
d. Responsibility to identify and assess the risks of material misstatement of the financial statements
32. The following statements relate to the date of the auditor’s report. Which is false?
a. The auditor should date the report as of the completion date of the audit.
b. The date of the auditor’s report should not be earlier than the date on which the financial statements are
signed or approved by management.
c. The date of the auditor’s report should not be later than the date on which the financial statements are
signed or approved by management.
d. The date of the auditor’s report should always be later than the statement of financial position date.
33. Whenever an auditor issues an unmodified opinion, the implication is that the auditor
a. Does not know if the statements are presented fairly in accordance with PFRS.
b. Does not believe if the statements are presented fairly in accordance with PFRS.
c. Is satisfied that the statements are presented fairly in accordance with PFRS except for specific aspects.
d. Is satisfied that the statements are presented fairly in accordance with PFRS.
34. The three main types of audit reports other than the unmodified report are the
a. adverse opinion, disclaimer of opinion, and qualified opinion
b. adverse opinion, reports on unaudited financial statements, and disclaimer of opinion
c. disclaimer of opinion, the qualified opinion, and reports on unaudited financial statements.
d. special audit reports, reports on unaudited financial statements, and adverse opinions.
35. The adverse opinion report will be issued by the independent auditor when he/ she
a. Suspects that client has not followed the identified financial reporting framework.
b. Suspects that client’s financial statements are not in conformity with PSAs.
c. Has knowledge that the financial statements are not in conformity with the applicable financial reporting
framework.
d. Has knowledge that PSAs were not followed.
36. The least severe type of report for disclosing departures from PFRS is the
a. Qualified opinion
b. Disclaimer of opinion
.
c. Adverse opinion
d. Report on unaudited financial statements
37. A disclaimer is issued whenever the auditor
a. Has been unable to satisfy himself/herself that the overall financial statements are presented fairly.
b. Believes that the overall financial statements are not presented fairly.
c. Believes that some material part(s) of financial statements are not presented fairly.
d. Has determined that the financial statements are presented fairly.
38. Both disclaimers and adverse opinions are used
a. When the condition is material and pervasive
b. Irregardless of the auditor’s independence
c. Whenever the condition is material or not.
d. Irregardless of client’s choice of unacceptable accounting method.
39. Which of the following circumstances would most likely cause the auditor to modify his opinion?
Material misstatements
Scope limitations
a.
YES
NO
b.
YES
YES
c.
NO
NO
d.
NO
YES
40. Under which of the following circumstances is a disclaimer of opinion inappropriate?
a. The auditor is engaged after fiscal year end is unable to observe physical inventories or apply alternative
procedures to verify their balances
b. The auditor is unable to determine the amounts associated with fraud committed by the client’s
management.
c. The financial statements fail to contain adequate disclosure concerning related party transactions
d. The client refuses to permit its attorney to furnish information requested in a letter of audit inquiry
41. In which of the following situations would the auditor ordinarily choose between expressing qualified opinion
or adverse opinion?
a. The auditor did not observe the entity’s physical inventory and is unable to become satisfied as to its
balance by other auditing procedures
b. The financial statements fail to disclose information that is required by PFRS
c. The auditor is asked to report only on the entity’s balance sheet and not on the other financial statements
d. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity’s
ability to continue as a going concern
42. When the client’s financial statements are misstated by a material and pervasive amount, the auditor should
issue a report that contains
a. An adverse opinion
b. A disclaimer of opinion
c. Either a qualified opinion or an adverse opinion, depending on which conditions exist
d. Either a qualified opinion or an unmodified opinion with modified wording, depending on which conditions
exist
43. Whenever there is a scope limitation, the appropriate response is to issue
a. A disclaimer of opinion
b. An adverse opinion
c. A qualified opinion
d. An unmodified report, a qualification of scope and opinion, or a disclaimer, depending on the materiality
and pervasiveness of effect
44. Conditions requiring a departure from an unmodified audit report include all, but which of the following?
a. Management refused to allow the auditor to confirm significant accounts receivable for which there were
no alternative procedures performed
b. Management has determined that inventories should be reported in statement of financial position at their
fair values rather than lower of costs or net realizable value
c. The audit partner’s dependent child received a gift of 10 shares of a client’s stocks for her birthday from a
grandparent
d. Management has decided to not allow the auditor to confirm significant accounts receivable, but the auditor
examined subsequent cash receipts related to the accounts in question
45. An auditor’s report includes the following statement: “the financial statements do not present fairly the financial
position, result of operations, cash flows in conformity with PFRS.” The auditor’s report was most likely issued
in connection with financial statements that are
a. Inconsistent
c. Misleading
b. Based on prospective financial information
d. Affected by a material uncertainty
.
46. An auditor may express a qualified opinion when
Disclosures were omitted
a.
NO
b.
NO
c.
YES
d.
YES
Scope of audit has been restricted
YES
NO
NO
YES
47. The auditor most likely express a modified opinion when
The auditor wants to draw
The financial statements are
readers attention to an
not free from material
important matter
misstatements
a.
YES
YES
b.
YES
NO
c.
NO
YES
d.
YES
YES
The auditor is unable to
obtain sufficient
appropriate evidence
YES
YES
YES
NO
48. If the auditor believes that a required material disclosure is omitted from the financial statements, the auditor
should decide between issuing a(n)
a. Qualified opinion or an adverse opinion
c. Adverse opinion or a disclaimer opinion
b. Disclaimer of opinion or a qualified opinion
d. Unmodified opinion or a qualified opinion
49. An auditor confronted with an exception sufficiently material to warrant a modification of the audit report. If
the exception relates to a departure from the PFRS, the auditor must decide between expressing a(n)
a. Adverse opinion and an unmodified opinion
c. Adverse opinion and a disclaimer of opinion
b. Adverse opinion and a qualified opinion
d. Disclaimer of opinion and a qualified opinion
50. In which of the following situations would a decision of selecting between qualified or adverse opinion be
inappropriate?
a. A limitation on the scope of the audit
b. The financial statements are materially misstated
c. A disagreement between the auditor and the client arose because of the capitalization of research and
development costs
d. A required disclosure that is significant is omitted from the financial statements
51. The auditor should consider the nature of the item and the significance of effect when formulating an opinion on
financial statements. Accordingly, the auditor shall express a qualified opinion when the potential effect of an
item under consideration is
Material but not Pervasive
Material and Pervasive
a.
YES
NO
b.
YES
YES
c.
NO
NO
d.
NO
YES
52. When financial statements contain material misstatements, the auditor’s report may contain
Qualified Opinion
Adverse Opinion
Disclaimer of Opinion
e.
YES
NO
YES
f.
YES
YES
NO
g.
NO
NO
YES
h.
YES
YES
YES
53. When the auditor is unable to obtain sufficient appropriate audit evidence, the auditor’s report may contain
Qualified Opinion
Adverse Opinion
Disclaimer of Opinion
e.
YES
NO
YES
f.
YES
YES
NO
g.
NO
NO
YES
h.
YES
YES
YES
54. The qualified opinion report will be issued by the independent auditor when, in the auditor’s judgment, the
effects or possible effects of the item under consideration are
a. Material and pervasive
c. Pervasive but not material
b. Material but not pervasive
d. Not material and not pervasive
55. In a qualified, adverse, or disclaimer report, the auditor
a. Has not performed a satisfactory audit
b. Is not satisfied that the financial statements are presented fairly
c.
d.
Either A or B
None of these
.
56. As a result of management’s refusal to permit the auditor to physically examine inventory, the auditor has not
accumulated sufficient evidence to conclude whether financial statements are stated in accordance with PFRS.
The auditor must depart from the unmodified audit report because
a. The financial statements have not been prepared in accordance with PFRS.
b. The scope of the audit has been restricted by circumstances beyond either the client’s control.
c. The auditor’s independence was impaired.
d. The scope of the audit has been restricted.
57. The qualified opinion, adverse opinion, and disclaimer of opinion, are known as:
a. Modified opinions
c. Unqualified explanation
b. Standardized statements
d. Unmodified opinions
58. An adverse opinion is issued when the auditor believes
a. Some parts of the financial statements are materially misstated or misleading.
b. The financial statements will be found to be misleading or misstated, if an adequate investigation is
performed.
c. The overall financial statements are as materially misstated or misleading as a whole that they do not
present fairly the financial position or results of operations and cash flows in conformity with PFRS.
d. The audit firm is not independent.
59. An auditor was unable to obtain audited financial statements or other evidence supporting an entity’s
investment in a large subsidiary. Between which of the following opinions should the entity’s auditor choose?
a. Adverse and unmodified opinion
b. Disclaimer and unmodified opinion with emphasis of matter paragraph
c. Qualified and adverse opinion
d. Qualified and disclaimer of opinion
60. 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(n)
a. Qualified opinion
c. Disclaimer of opinion
b. Report with Emphasis of a Matter paragraph
d. Adverse opinion
.
CHAPTER 12 – ASSURANCE ENGAGEMENTS AND RELATED SERVICES
1.
Pronouncement of Auditing and Assurance Standard Council (AASC) do not cover
a. Review engagement
c. Consultancy
b. Compilation engagement
d. Agreed-upon procedures engagement
2.
Which of the following best describes “related services”?
a. Audit and Review financial statements
c. Compilation and agreed-upon engagements
b. Assurance and audit engagements
d. Review, compilation and agreed-upon engagements
3.
The auditor’s satisfaction as to reliability of an assertion being made by one party is called:
a. Assurance
b. Audit risk
c. Precision
d. Materiality
4.
The concept of limited assurance is provided for in which of the following engagements?
a. Audit
b. Review
c. Compilation
d. Agreed-upon procedures
5.
A CPA firm can issue a review report:
a. Only if the partners are independent
b. Only if all the partners and the staff in the office performing the engagement are independent
c. Of the partners have no material or direct immaterial interest in client
d. Even if the CPA firm is not independent
6.
Which of the following statements best describes a review service?
a. A review engagement focuses on providing advice in a three-party contract.
b. A review engagement focuses on providing assurance on the internal controls of a public company.
c. A review engagement focuses on providing limited assurance on financial statements of a private company.
d. A review engagement focuses on providing reasonable assurance on the assertions contained in the
financial statements of a public company.
7.
The objective of a review of financial statements is to
a. Express an opinion on the overall financial statements
b. Carry out audit procedures agreed on with the client and other users of the report.
c. Assist the client in the preparation of the financial statements
d. State whether anything has come to the auditor’s attention that indicates that the financial statements are
not presented fairly.
8.
When performing a review of financial statements, the CPA is required to
a. Apply analytical procedures and make inquiries from third parties by sending confirmation letters.
b. Assess the effectiveness of the client’s accounting and internal control systems.
c. Obtain corroborative evidence to support management’s responses to inquiries.
d. Obtain understanding of the client’s business and industry.
9.
Which of the following procedures is not included in a review engagement of a non-public entity?
a. inquiries of management
c. procedures designed to identify unusual fluctuations
b. inquiries regarding subsequent events
d. a study and evaluation of internal control
10. When providing limited assurance that nothing came to the CPA’s attention that would indicate that the
financial statements are not in accordance with financial reporting standards, the CPA should:
a. Obtain corroborative evidence to support management’s responses to inquiries.
b. Test the accounting records that identify inconsistencies with the prior year’s financial statements.
c. Understand the accounting principles of the industry in which the business entity operates.
d. Develop an audit program.
11. Assurance provided by a review is substantially less than an audit. Which of the following statements is true
regarding these services?
a. A review requires more substantive evidence than an audit.
b. An audit requires less evidence related to internal control than a review.
c. A review requires less evidence than an audit.
d. None of the above statements is true.
12. When performing an engagement to review a nonpublic entity’s financial statements, an accountant most likely
would:
a. Limit the distribution of the accountant’s report.
b. Ask about actions taken at board of director’s report.
c. Obtain an understanding of the effectiveness of entity’s internal control.
d. Confirm a sample of significant accounts receivable balances.
.
13. Performing inquiry and analytical review procedures is the preliminary basis for a CPA to issue
a. Compilation reports.
c. Management advisory services report.
b. Review report.
d. Audit report.
14. Which of the following procedures is not included in a review engagement on a non-public entity?
a. Inquiries of management.
b. Inquiries regarding events subsequent to the balance sheet date.
c. Any procedures designed to identify relationships among data that appear to be unusual.
d. Communicating any material weaknesses discovered during the study and evaluation of internal control.
15. A review does not provide assurance that the CPA will become aware of all significant matters that would be
disclosed in an audit. However, if the CPA becomes aware that information coming to his attention is incorrect,
incomplete, or otherwise unsatisfactory, he should
a. Withdraw immediately from the engagement.
b. Perform the additional procedures he deems necessary to achieve limited assurance.
c. Perform a complete audit and issue a standard audit report with appropriate qualifications.
d. Downgrade the engagement to a compilation and issue the appropriate report.
16. If the CPA has reason to believe that the information subject to review may be materially misstated, the CPA
should
a. Express a qualified negative assurance.
c. Withdraw from the engagement.
b. Express and adverse opinion.
d. Carry out additional or more extensive procedures.
17. The review of a company’s financial statements by a CPA firm
a. Requires detailed analysis of the major accounts.
b. Is substantially less in scope of procedures than an audit.
c. Has similar scope as an audit and adds similar credibility to the statements.
d. Culminates in issuance of a report expressing the CPA’s opinion as to the fairness of the statements.
18. A practitioner’s unmodified report on a review of the financial statements of a nonpublic entity should state that
a. The practitioner does not express an opinion or any form of assurance on the financial statements.
b. Nothing has come to the practitioner’s attention that causes the practitioner to believe that the financial
statements are not presented fairly, in all material respects in accordance with PFRS.
c. The practitioner obtained reasonable assurance that financial statements are free of material misstatements.
d. The practitioner examined evidence, on a test basis, supporting the amounts and disclosures in the financial
statements.
19. If there had been a material scope limitation on a review engagement, the CPA may
a. Express either qualified opinion or disclaim an opinion on the financial statement.
b. Not provide any assurance on the financial statements.
c. Issue the unmodified review report.
d. Issue an audit report that contains an unmodified opinion about the financial statements.
20. If the financial statements reviewed contain material misstatements, the practitioner’s review report should:
a. Express a qualification of the negative assurance.
c. Not provide any assurance.
b. Give an adverse statement.
d. Either a or b.
21. The statement that “nothing came to our attention which would indicate that these statements are not fairly
presented” expresses which of the following?
a. Disclaimer of opinion
c. Negative confirmation
b. Negative assurance
d. Piecemeal opinion
22. A practitioner has accepted an engagement in which the audit procedures of inquiry and analytical procedures
will be employed. These procedures will form the basis for issuance of:
a. A compilation report.
b. Audit report on supplemental information issued by the client.
c. A management advisory report requested by the audit committee.
d. A review report on comparative financial statements for a non-public company.
23. In a review service where the client has failed to follow PFRS, the auditor is:
a. Not required to determine the effect of a departure if management has not done so, but that fact must be
disclosed in the report.
b. Required to determine the effect of a departure if management has not done so, and that fact must be
disclosed in the report.
c. Not required to determine the effect of a departure if management has not done so, and that fact need not be
disclosed in the report.
.
d.
Required to determine the effect of a departure if management has not done so, and that fact need not be
disclosed in the report.
24. A report on factual findings is the end product of the auditor when performing
a. Examination
b. Audit
c. Review
d. Agreed-upon procedures
25. An agreed-upon procedures engagement is one in which:
a. The auditor and management agree that procedures will be applied to all accounts and circumstances.
b. The auditor and management agree that procedures will not be applied to all accounts and circumstances.
c. The auditor and management or a third party agree that the engagement will be limited to certain specific
procedures.
d. The auditor and management or a 3rd party agree that the auditor will apply his or her judgment to
determine procedures to be performed.
26. 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.
27. Engagement to apply agreed-upon procedures on certain accounts within a financial statement may be accepted
provided
a. The CPA has expressed opinion on the financial statements taken as a whole.
b. The CPA takes full responsibility for the adequacy of the procedures to be performed.
c. The CPA provides only limited assurance about the reliability of the financial statements.
d. The distribution of the report is limited only to specified parties involved.
28. An engagement to apply agreed-upon procedure engagement may be accepted, provided
a. The CPA has audited the financial statements of the client.
b. The CPA is independent with respect to the client.
c. The client takes full responsibility for the adequacy of procedures to be performed.
d. The adequacy of the procedures to be performed will be determined by the CPA.
29. Which of the following ethical principles does not apply to an agreed-upon procedure engagements?
a. Independence
c. Professional behavior
b. Confidentiality
d. Professional competence and due care.
30. 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.
31. A summary of findings rather than assurance is most likely to be issued on which engagement?
a. Review
b. Compilation
c. Examination
d. Agreed-upon procedures
32. Which statement is incorrect regarding agreed-upon procedures?
a. Users of the report assess for themselves the procedures and findings reported by the auditor and draw their
own conclusions from the auditor’s work.
b. The report is restricted to those parties that have agreed to the procedures to be performed since others,
unaware of the reasons for the procedures, may misinterpret the results.
c. The auditor should conduct an agreed-upon procedures engagement in accordance with PSRS and the terms
of the engagement.
d. Where the auditor is not independent, a statement to that effect need not be made in the report of factual
findings.
33. Distribution of which of the following types of reports is limited?
a. audit
b. review
c. agreed-upon procedures
d.
examination
34. A CPA is not required to comply with the “Code of Professional Ethics for Certified Public Accountants”
promulgated by the Board of Accountancy when performing
a. Review.
b. Agreed-upon procedures.
c. Compilation.
d. None of the above
35. What level of assurance does an accountant give on compilation report?
a. None
b. Moderate
c. Low
d.
High.
.
36. The term “accountant” has been used by AASC to refer to CPA in public practice who engaged to
a. Audit financial statements
c. Apply agreed-upon procedures
b. Review financial statements
d. Compile financial statements
37. Which of the following procedures would an accountant most likely perform in a compilation engagement?
a. Collect, classify and summarize financial information
c. Assess risk components
b. Apply analytical procedures
d. Test the accounting records
38. Ethical principles governing compilation of financial statements include
a.
b.
c.
Independence
YES
YES
YES
Competence
YES
YES
NO
Technical standard
YES
NO
NO
d.
NO
YES
YES
39. 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 procedures but more extensive than agreed-upon procedures
40. Which of the following is incorrect about a compilation engagement?
a. The CPA uses his auditing expertise to collect, classify and summarize financial information
b. The engagement ordinarily entails reducing detailed data to a manageable and understandable form
c. The CPA should exercise due care when engaged to compile financial statements
d. The procedures performed do not enable the accountant to express any form of assurance
41. Which of the following procedures is normally performed in connection with a compilation engagement?
a. Inquire of management about subsequent events
b. Making inquiries of management concerning actions taken at a board meeting
c. Applying analytical review procedures
d. Assemble financial statements
42. What level of assurance does the CPA provide under the following engagements?
Audit
Review
Agreed-upon procedures
e.
High
Moderate
None
f.
Reasonable
Limited
Low
g.
Moderate
Moderate
None
h.
High
Negative
None
Compilation
None
None
None
Low
43. The use of negative assurance in audit reports on financial statements is
a. A violation of the professional standards
b. Encouraged by PICPA
c. A help in clarifying the degree of responsibility being assumed by the auditor
d. Properly located in the opinion paragraph of the unmodified report
44. When an independent CPA is associated with the financial statements of publicly-held company but has not
audited or reviewed the financial statements, the appropriate form of report that must be issued must include
a(n)
a. Negative assurance
b. Compilation opinion
c. Disclaimer of opinion
d. Adverse opinion
45. Which of the following statements is not true about the reports provided by a CPA?
a. In the audit engagement, the auditor provides high level of assurance that the financial information is free
of material misstatement
b. In a review engagement, the CPA’s moderate assurance is expressed in the form of negative assurance
c. For agreed-upon procedures, the CPA provided a report on factual finding and no assurance is expressed
d. In a compilation engagement, no assurance is expressed and the users of financial information do not derive
any benefit from the CPA’s involvement
46. An auditor is associated with the financial statements when he:
Attaches report to the financial
Consents to the use of his name in a
information
professional connection
e.
YES
NO
f.
YES
YES
g.
NO
YES
h.
NO
NO
47. A CPA who is not independent may issue a
a. Review report
b. Special report
c.
Qualified opinion report
d.
Compilation report
.
48. A CPA should perform analytical procedures during engagement to
I.
Audit
II.
Review
III.
a. Yes, Yes, Yes
b. Yes, Yes, No
c. No, Yes, No
Compile
d. Yes, No, No
49. In a compilation engagement, if the accountant becomes aware of material misstatements, the account should
try to agree appropriate amendments with the entity. If such amendments are not made and the financial
information is considered to be misleading, the accountant should
a. Do nothing
c. Issue a qualified or adverse opinion
b. Withdraw from the engagement
d. Issue a negative assurance
50. Your accounting firm has accepted a compilation engagement from a client in which your firm is not
independent. in that case you:
a. May not accept the engagement
b. May accept the engagement and disclose the lack of independence
c. May accept the engagement and not disclose the lack of independence
d. May accept the engagement and disclose the lack of independence and the reason for the lack of
independence
51. The concept of reasonable assurance is provided for in which one of the following engagements?
a. review
b. compilation
c. audit
d. agreed-upon procedures
52. Which of the following results in a conclusion that represents positive assurance?
a. review
b. compilation
c. examination
d.
agreed-upon procedures
53. The distribution of which of the following types of reports is unrestricted?
a. examinations and reviews
c. examinations and agreed-upon procedures
b. reviews and agreed-upon procedures
d. examinations, reviews, and agreed-upon procedures
54. Which of the following statements about assurance engagements is not correct?
a. Assurance engagements are intended to enhance the credibility of information about a subject matter by
evaluating whether that subject matter conforms in all material respects with suitable criteria.
b. The subject matter of an assurance engagement may take many forms such as data, systems and processes
or behavior.
c. Not all engagements performed by professional accountants are assurance engagements.
d. The Philippine Standards on Assurance Engagements issued by AASC describe the objectives and elements
of assurance engagements to provide high, moderate or low level of assurance.
55. Which of the following is an example of an assurance engagement?
a. management advisory services
b. reporting on financial statements prepared using other comprehensive basis of accounting
c. compilation of financial information
d. preparation of tax returns
56. Which of the following services provides a moderate level of assurance about the client’s financial statements?
a. Forecasts and projections
c. Review
b. Compliance with contractual agreement
d. Compilation
57. Which of the following is not one of the elements of an assurance engagement?
a. Sufficient appropriate evidence
b. A subject matter
c. Suitable criteria
d. An opinion about whether the subject matter conforms, in all material aspects, with identified criteria.
58. According to PSA 3000, assurance engagement should exhibit five elements including
a. financial information
c. financial reporting framework
b. a two-party relationship
d. a written assurance report
59. Subject matter of an assurance engagement may take many forms including
Data
Systems
Behavior
i.
YES
YES
YES
j.
YES
NO
YES
k.
YES
YES
NO
l.
NO
YES
YES
60. Which of the following is not one of the requirements before accepting an assurance engagement?
a. The practitioner should be competent and independent.
.
b.
c.
d.
The practitioner should accept the engagement only if the subject matter is the responsibility of another
party.
The practitioner should accept the engagement only if the subject matter is identifiable and in the form that
can be subjected to evidence gathering procedures
The responsible party and the intended user of assurance report should be from different organizations.
CHAPTER 13 – THE CODE OF PROFESSIONAL ETHICS & THE ACCOUNTANCY ACT OF 2004
1.
Society has attached a special meaning to the term “professional”. A professional is
a. Someone who has passed a qualifying exam to enter the job market
b. A person who is expected to conduct himself or herself at a higher level than the requirements of society’s
laws or regulations
c. Any person who receives pay for the services performed
d. Someone who has both an education in the trade and on-the-job experience received under experienced
supervisor
2.
The code of professional ethics for CPAs promulgated by the Board of Accountancy applies to
a. All CPAs in public practice
b. All CPAs in government
c. All CPAs in public practice and employed in private business
d. All CPAs in public practice and employed in private business and industry, in the government and in
education
3.
Which of the following statements best describes why the profession of certified public accountants has deemed
it essential to promulgate a code of ethics and to establish a mechanism for enforcing observance of the code?
a. A distinguishing mark of a profession is its acceptance of responsibility to the public
b. A prerequisites to success is the establishment of an ethical code that stresses primarily the professionals
responsibility to clients and colleagues
c. A requirement of most laws calls for the profession to establish a code of ethics
d. An essential means of self-protection for the profession is the establishment of flexible ethical standards by
the profession
4.
The underlying reason for the code of ethical conduct for any profession is
a. The need for public confidence in the quality of service of the profession
b. That it provides a safeguard to keep unscrupulous people out
c. That it is required by federal legislation
d. That it allows licensing agencies to have a yardstick to measure deficient performance
5.
Which of the following statements is true when the CPA has been engaged to perform an audit of financial
statements?
a. The CPA firm is engaged and paid by the client; therefore the firm has primary responsibility to be an
advocate for the client
b. The CPA firm is engaged and paid by the client but the primary beneficiaries of the audit are those who
rely on the financial statements
c. Should a situation arise when there is no convincing authoritative standard available, and there is a choice
of action which could impact a client’s financial statements, the CPA is free to endorse the choice which is
in the investors’ interests
d. The CPA firm’s paramount concern should be the interest of the client
6.
Which of the following is not one of the characteristics of a profession?
a. Mastery of a particular intellectual skill acquired by training and education
b. Adherence by its members to a common code of conduct
c. Acceptance of a duty to society as a whole.
d. A responsibility to protect exclusively the interest of a client or employer.
7.
In order to achieve the objectives of the accountancy profession, professional accountants have to observe a
number of prerequisites or fundamental principles. The fundamental principles include the following, except
a. Objectivity
c. Technical Standards
b. Professional Competence and Due Care
d. Confidence
8.
The principle of professional competence and due care imposes certain obligations on professional accountants.
Which of the following is not one of those obligations required by this principle?
a. To act diligently in accordance with applicable technical and professional standards.
b. To be fair, intellectually honest and free of conflict of interest.
c. To become aware and understand relevant technical, professional and business developments.
d. To obtain professional knowledge and experience to enable them to fulfill their responsibilities.
9.
Competence as a certified public accountant includes all of the following except
.
a.
b.
c.
d.
Having the technical qualifications to perform an engagement.
Possessing the ability to supervise and evaluate the quality of staff work.
Warranting the infallibility of the work performed.
Consulting others if additional technical information is needed.
10. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity
should
a. Engage financial experts familiar with nature of the business entity
b. Obtain knowledge of matters that relate to the nature of the entity’s business
c. Refer a substantial portion of the audit to another CPA who will act as the principal author.
d. First inform management that an unmodified opinion cannot be issued.
11. Professional competence should include
Attainment of Professional competence
a.
YES
b.
NO
c.
NO
d.
YES
Maintenance of professional competence
YES
YES
NO
NO
12. The phase of professional competence that requires a professional accountant to adopt a program designed to
ensure quality control in the performance of professional services consistent with technical and professional
standards is:
a. Attainment of professional competence
c. Application of professional competence
b. Maintenance of professional competence
d. Review of professional competence
13. Which of the following is the least required in attaining professional competence?
a. High standard of general education.
b. Specific education, training and examination in professionally relevant subjects.
c. Period of meaningful work experience.
d. Continuing awareness of development in the accountancy profession.
14. The essence of the due care principle is that the auditor should not be guilty of:
a. Bias
b. Errors in judgment
c. Fraud
15. The principle of confidentiality applies to:
a. Professional accountants in public practice.
b. Professional accountants in commerce and industry.
c.
d.
d.
Negligence
Professional accountants in government.
All professional accountants.
16. The principle of confidentiality imposes an obligation on professional accountants to refrain from:
a. Disclosing confidential information to another party even if the client authorizes the disclosure.
b. Using confidential information acquired as a result of professional and business relationships to their
personal advantage or the advantage of third parties.
c. Disclosing information to defend themselves in case of litigation.
d. Responding to an inquiry or investigation conducted by the Professional Regulatory Board of Accountancy.
17. A CPA shall not disclose confidential information obtained during an audit engagement in which one of the
following situations?
a. When the security of the state requires.
c. In defense of himself when sued by his client.
b. With the consent of the client.
d. To a successor auditor without the client’s permission.
18. Which of the ff. is incorrect regarding confidentiality?
a. Professional accountants have an obligation to respect the confidentiality of information about a client’s or
employer’s affairs acquired in the course of professional services.
b. The duty of confidentiality ceases after the end of the relationship between the professional accountant and
the client or employee.
c. Confidentiality should always be observed by a professional accountant unless specific authority has been
given to disclose information or there is a legal or professional duty to disclose.
d. Confidentiality requires that a professional accountant acquiring information in the course of performing
professional services neither user nor appear to use that information for personal advantage or for the
advantage of a third party.
19. The confidential relationship will be violated if, without client’s permission, the CPA provides working papers
about client’s permission; the CPA provides working papers about client to
a. A court of law which subpoenas them
b. Another CPA as part of PICPA’s quality assurance review program
c. Another CPA firm has just purchased the CPA’s entire practice
d. An investigative or disciplinary body of the Board of Accountancy which is conducting a review of the
CPA’s practice
.
20. Which one of the following statements is false?
a. Confidentiality is broken when an auditor is presented with subpoena concerning an audit client.
b. Information that a CPA obtains from a client is generally not privileged.
c. When the BOA conducts a review of the quality controls of another CPA firm, permission of the client is
not needed to examine audit documentation.
d. A CPA firm which observes substandard audit documentation of another fir during quality control review
should immediately inform the firm being reviewed in order to rectify the deficiency.
21. Which of the following is considered a violation of rules on confidentiality?
a. The CPA discloses information to protect his own interest in the course of legal proceedings.
b. The CPA discloses information to a successor auditor after obtaining the client’s permission.
c. The CPA discloses information to another CPA in compliance with a quality control review conducted by
the Board of Accountancy.
d. The CPA divulges information disclosed to him by a prospective client.
22. When a professional accountant learns of a material error or omission in a tax return of a prior year, or of the
failure to file a required tax return, the professional accountant has a responsibility to do the following, except
a. Promptly advise the client or employer of the error or omission and recommend that disclosure be made to
the revenue authorities.
b. Immediately inform the revenue authorities.
c. Take reasonable steps to ensure that the error is not repeated in subsequent tax returns if the professional
accountant concludes that a professional relationship with the client or employer can be continued.
d. Inform the client or the employer that it is not possible to act for them in connection with that return or
other related information submitted to the authorities if the client or employer does not correct the error.
23. In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any
confidential information obtained during the course of a professional engagement?
a. The CPA is issued a summon enforceable by a court order which orders the CPA to present confidential
information.
b. A major stockholder of a client company seeks accounting information from the CPA after the management
declined to disclose the requested information.
c. Confidential client information is made available with the client’s permission.
d. An inquiry by the PRC and the CPA needs the disclosure to defend himself.
24. The principle of professional behavior requires a professional accountant to
a. Be straightforward and honest in performing professional services.
b. Be fair and should not allow prejudice or bias, conflict of interest or influence of others to override
objectivity.
c. Perform professional services with due care, competence and diligence.
d. Acct in a manner consistent with the good reputation of the profession and refrain from any conduct which
might bring discredit to the profession.
25. Identify the incorrect statement. “A professional accountant rendering tax service is entitled to put forward the
best position in favor of a client or an employer, provided . . .”
a. It does not impair the accountant’s integrity and objectivity.
b. It is rendered with professional competence.
c. It is consistent with the law.
d. The professional accountant assumes responsibility for the content of the tax return.
26. A professional accountant’s name can be associated with information that:
a. Contains a misleading statement.
b. Intentionally omits or obscures information.
c. Uses estimates.
d. Contains information without any real knowledge of whether they are true or false.
27. When a professional accountant performs services in a country other than the home country and differences on
specific matters exist between ethical requirements of two countries, the professional accountant should apply
a. The ethical requirements of his or her home country.
b. The ethical requirements of the country in which services are being performed.
c. The stricter of the two ethical requirements.
d. The less strict ethical requirements.
28. If the ethical requirements in the country in which a CPA firm practices are either more or less restrictive than
the Philippine Code of Ethics, the CPA firm must follow
a. The Philippine Code of Ethics
c. Whichever rules are less restrictive.
b. The ethical requirements of the country where the CPA
d. Whichever rules are more
practices
restrictive.
.
29. Which fundamental principle is seriously threatened by an engagement that is compensated based on the net
proceeds on loans received by the client from a commercial bank?
a. Integrity
b. Objectivity
c. Confidentiality
d. Professional behavior
30. The Code of Professional Ethics states that a CPA should maintain integrity and objectivity. The term
“objectivity: in the code to a CPA’s ability
a. To choose independently between alternate accounting principles and auditing standards.
b. To distinguish independently between accounting practices that are acceptable and those that are not.
c. To be unyielding in all matters dealing with auditing procedures.
d. To maintain an impartial attitude on all matters that come under the CPA’s review.
31. One of the major differences between auditors and other professionals is that most professionals
a. Do not have to pass rigorous examination to be admitted in the profession.
b. Are not expected to act in the best interest of the public.
c. Need not be concerned about independence.
d. Do not need the confidence of the public.
32. Independence in auditing means
a. Not having any financial or economic relationship with the client.
b. Being an advocate of the assurance client.
c. Taking an unbiased viewpoint.
d. Not having a loan to or from an assurance client.
33. Which of the following most accurately states how objectivity has been defined by the Code of Ethics?
a. Being honest and straight forward in all professional and business relationships.
b. A state of mind that permits the provision of an opinion without being affected by influences that
compromise professional judgment.
c. A combination of impartiality, intellectual honesty and a freedom from conflict of interest.
d. Avoiding facts and circumstances that could reduce the public confidence in the professional accountant’s
report
34. A CPA, while performing an audit, strives to achieve independence in appearance in order to
a. Reduce risk and liability
c. Maintain public confidence in the profession.
b. Become independent in mind.
d. Comply with the generally accepted standards of fieldwork
35. Holding a financial interest in an audit client may create a self-interest threat. The existence and significance of
any threat created depends on:
a. The role of the person holding the financial interest
b. Whether the financial interest is direct or indirect
c. The materiality of the financial interest
d. The type of opinion that the auditor expects to issue
36. The concept of materiality would be least important to an auditor in determining
a. Transactions that should be reviewed
b. The need for disclosing a particular transaction or event
c. The extent of audit work planned for particular account
d. The effect of an auditor’s direct financial interest in a client
37. The primary factor that distinguishes a direct form an indirect financial interest is the
a. Materiality of the amount involve
c. Risk associated with such investment
b. Control over investment decisions
d. Relationship between the investor and investee
38. Ultimately, the decision as to whether the CPA is independent or not, will be made by the
a. Client
b. Audit Committee
c. Public
d.
Auditor
39. The Philippine Code of Ethics for professional accountants requires independence
Of Mind
In Appearance
a.
YES
YES
b.
YES
NO
c.
NO
NO
d.
NO
YES
40. Independence is required whenever a professional accountant performs:
a. Professional services
c. Non-assurance services
b. Assurance services
d. Tax consultancy services
.
41. Not all engagements performed by professional accountants are assurance engagements. Other engagements
frequently performed by professional accountants that are not assurance engagements include the following,
except
a. Agreed-upon procedures
c. Management consulting
b. Compilation of financial or other information
d. Examination of prospective financial information
42. According to the principles of the Code of Professional Ethics
a. All members should be independent in fact and in appearance at all times
b. All members in public practice should be independent in fact and in appearance at all times
c. All members in public practice should be independent in fact and in appearance when providing auditing
and other assurance services
d. All members in public practice should be independent in fact and in appearance when providing auditing,
tax, and advisory services
43. It refers to the avoidance of facts and circumstances that are so significant that a reasonable and informed third
party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a
firm’s or a member of the assurance team’s integrity, objectivity or professional skepticism had been
compromised.
a. Independence in fact
c. Independence of mind
b. Independence in appearance
d. Inherent independence
44. When CPAs are able to maintain their actual independence, it is referred to a independence in:
a. Conduct
b. Appearance
c. Fact
d. Total
45. According to the Code of Professional Ethics, professional accountants:
a. should be independent in fact and in appearance at all times
b. in public practice should be independent in fact and in appearance at all times
c. in public practice should be independent in fact and in appearance when providing auditing and other
assurance services
d. in public practice should be independent in fact and in appearance when providing auditing, tax, and other
advisory services
46. If requested to perform a review engagement for a non-public entity in which an accountant has an immaterial
direct financial interest, the accountant is
e. Independent and, therefore, may issue a review report
f. Not independent and, therefore, may not issue a review report
g. Not independent and, therefore may issue a review report
h. Not independent and, therefore, may not be associated with the financial statements
47. The network firms are required to be independent of the client
e. For assurance engagements provided to an audit client
f. For assurance engagements provided to clients that are not audit clients, when report is not expressly
restricted for use by identified users
g. For assurance engagements provided to clients that are not audit clients, when the assurance report is
expressly restricted for use by identified users
h. For non-assurance engagements
48. Which of the following should be independent of the financial statement audit client?
a.
b.
c.
The members of the assurance team
YE
YES
YES
S
The firm
YE
YES
NO
S
Network firms
YE
NO
NO
S
d.
YES
NO
YES
49. For assurance engagements provided to clients that are not audit clients, when the assurance report is expressly
restricted for use by identified users, the following should be independent of the client:
a.
b.
c.
d.
The members of the assurance team
YE
YES
YES
YES
S
The firm
YE
YES
NO
NO
S
Network firms
YE
NO
NO
YES
S
50. Which of the following statements is not correct about independence requirements?
.
e.
f.
g.
h.
For assurance engagements provided to audit client, the members of the assurance team, the firm, and
network firms are required to be independent of the client.
For assurance engagements provided to non-audit clients, the members of the assurance team and the firm
are required to be independent of the client.
For assurance engagements provided to non-audit clients, where the distribution of the audit report is
limited only to specified users, the members of the assurance team should be independent of the client.
For assurance engagements provided to non-audit clients, where the distribution of the audit report is
limited only to specified users, the firm should be independent of the client.
51. Which of the following professional services does not require independence?
a. Direct reporting engagements
c. Tax consultancy services
b. Examination of financial forecast
d. Assertion-based engagements
52. For which of the following professional services must CPAs be independent?
a. Management advisory services
c. Preparation of tax returns
b. Audits of financial statements
d. All three of the above
53. A CPA firm should decline an offer to perform consulting service engagement if:
a. The proposed engagement is not accounting-related.
b. Recommendations made by the CPA firm are to be subject to review by the client.
c. Acceptance would require the CPA firm to make management decisions for an audit client.
d. Any of the above is true.
54. The member of an assurance team and the firm should be independent of the assurance client during the period
of the assurance engagement. For this purpose, the period of the engagement:
a. Starts when the assurance team begins to perform assurance services and ends when the assurance report is
issued.
b. Starts when the assurance team begins to perform assurance services and ends when the fieldwork is
completed.
c. Starts when the engagement letter is prepared and ends when the fieldwork is completed.
d. Starts when the engagement letter is prepared and ends when the assurance report is issued.
55. This occurs as a result of the financial or other interests of a professional accountant or of an immediate or close
family member.
a. self-interest threat
b. self-review threat
c. advocacy threat
d. familiarity threat
56. This occurs when, because of a close relationship, a professional accountant becomes too sympathetic to the
interests of others.
a. self-interest threat
b. self-review threat
c. advocacy threat
d. familiarity threat
57. According to the Philippine Code of Ethics, compliance with fundamental principles is potentially affected by
self-interest, self-review, advocacy, familiarity and intimidation threats. Which of the following best describes
“advocacy threat”?
a. This occurs when a firm or a member of the assurance team could benefit from financial interest in an
assurance client.
b. This occurs only when any product or judgment of a previous engagement needs to be re-evaluated in
reaching conclusions on the assurance engagement.
c. This occurs when a member of assurance team was previously a director or officer of the assurance client.
d. This occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote, an
assurance client’s position or opinion to the point that objectivity may, or may be perceived to be,
compromised.
58. This occurs when any product or judgment of a previous assurance or non-assurance engagement needs to be
re-evaluated in reaching conclusions on the assurance engagement or when a member of assurance team was
previously a director or officer of the assurance client, or was an employee in a position to exert direct and
significant influence over the subject matter of the assurance engagement.
a. self-interest threat
b. self-review threat
c. advocacy threat
d. familiarity threat
59. This threat occurs when a member of the assurance team may be deterred from acting objectively and
exercising professional skepticism by threats, actual or perceived, from the directors, officers or employees of
an assurance client.
a. intimidation threat
b. familiarity threat
c. advocacy threat
d. self-interest threat
60. Which of the following would least likely create self-interest threat?
a. Contingent fees relating to assurance engagements
b. A direct financial interest or material indirect financial interest in an assurance client
c. A loan or guarantee to or from an assurance client or any of its directors or officers
d. Having a close personal relationship between a member of the assurance team and the assurance client, its
directors, officers or employees.
.