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Audit TB Compiled - test bank
Bachelor of Science in Accountancy (University of Mindanao)
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDITING THEORY
AUDIT REPORT
Related PSAs: PSA 700, 710, 720, 560, 570, 600 and 620
1. When an independent auditor expresses an unqualified opinion he asserts that:
(1) He performed the audit in accordance with generally accepted auditing standards.
(2) The company is a profitable and viable entity.
(3) The financial statements examined are in conformity with GAAP.
(4) The financial statements are accurate and free of errors.
a.
b.
c.
d.
All of the above statements are true.
Only statements (1) and (3) are true.
Only statements (2) and (4) are true.
All of the above statements are false.
2. An audit report should be dated as of the
a. date the report is delivered to the entity audited.
b. date the financial statements were approved by the client management.
c. balance sheet date of the latest period reported on.
d. date a letter of audit inquiry is received from the entity’s attorney of record.
3. If a company’s external auditor expresses an unqualified opinion as a result of the audit of the
company’s financial statements, readers of the audit report can assume that
a. The external auditor found no fraud.
b. The company is financial sound and the financial statements are accurate.
c. Internal control is effective.
d. All material disagreements between the company and external auditor about the application
of accounting principles were resolved in the satisfaction of the external auditor.
4. A statement that the auditor’s responsibility is to express an opinion on the financial statements
is contained in the:
a. Opening paragraph
c. Opening and scope paragraph
b. Scope paragraph
d. Opinion paragraph
5. The description of an audit in the scope paragraph of the standard audit report includes all of
the following except:
a. Evaluating the overall financial statement presentation.
b. Assessing control risk.
c. Examining, on a test basis, evidence supporting the amount and disclosures in the financial
statements.
d. Assessing the accounting principles used and significant estimates made by management.
6. The audit report is normally addressed to the:
Board of directors
Stockholders
a.
No
Yes
b.
Yes
Yes
c.
Yes
Yes
d.
Yes
No
Chair of the Audit Committee
No
No
Yes
Yes
7. If comparative financial statements are presented and the present auditor has audited both
years, the auditor should:
a. Reissue the report
c. Redate the report
b. Dual date the report
d. Update the report
8. In which of the following situations would the auditor appropriately issue a standard unqualified
report with no explanatory paragraph concerning consistency?
a. A change in the method of accounting for specific subsidiaries that comprise the group of
companies for which consolidated statements are presented.
b. A change from an accounting principle that is not generally accepted to one that is
generally accepted.
c. A change in the percentage used to calculate the provision for warranty expense.
d. Correction of a mistake in the application of a generally accepted accounting principle.
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9. An auditor’s report contains the following sentences:
We did not audit the financial statements of B Company, a consolidated subsidiary,
whose statements reflect total assets and revenues constituting 20 percent and 22
percent, respectively, of the related consolidated totals. These statements were audited
by other auditors, whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for B Company, is based solely upon the report of the
other auditors.
These sentences
a. disclaim an opinion
b. qualify the opinion
c. divide responsibility
d. should not be part of the audit report
10. The management of a client company believes that the statement of cash flow is not a useful
document and refuses to include one in the annual report to stockholders. As a result, the
auditor’s opinion should be
a. qualified due to inadequate disclosure
c. adverse
b. qualified due to a scope limitation
d. unqualified
11. An auditor’s opinion reads as follows: “In our opinion, except for the above-mentioned
limitation on the scope of our audit…” This is an example of a(n)
a. review opinion
c. qualified opinion
d. unacceptable reporting practice
b. emphasis on a matter
12. Eagle Company’s financial statements contain a departure from generally accepted accounting
principles because, due to unusual circumstances, the statements would otherwise be
misleading. The auditor should express an opinion that is
a. Qualified and describe the departure in a separate paragraph.
b. Unqualified but not mention the departure in the auditor’s report.
c. Qualified or adverse, depending on materiality, and describe the departure in a separate
paragraph.
d. Unqualified and describe the departure in a separate paragraph.
13. An auditor is unable to determine the amounts associated with illegal acts committed by a
client. The auditor would most likely issue
a. Either a qualified opinion or a disclaimer of opinion.
b. An adverse opinion.
c. Either a qualified opinion or an adverse opinion.
d. A disclaimer of opinion.
14. The objective of the consistency standard is to provide assurance that
a. There are no variations in the format and presentation of financial statements.
b. Substantially different transactions and events are not accounted for on an identical basis.
c. The auditor is consulted before material changes are made in the application of accounting
principles.
d. The comparability of financial statements between periods is not materially affected by
changes in accounting principles without disclosure.
15. If management fails to provide adequate justification for a change from one generally accepted
accounting principle to another, the auditor should
a. Add an explanatory paragraph and express a qualified or an adverse opinion for lack of
conformity with generally accepted accounting principles.
b. Disclaim an opinion because of uncertainty.
c. Disclose the matter in a separate explanatory paragraph(s) but not modify the opinion
paragraph.
d. Neither modify the opinion nor disclose the matter because both principles are generally
accepted.
16. When an auditor qualifies an opinion because of inadequate disclosure, the auditor should
describe the nature of the omission in a separate explanatory paragraph and modify the
Scope paragraph
Opinion paragraph
Introductory paragraph
a.
Yes
No
No
b.
Yes
Yes
No
c.
No
Yes
Yes
d.
No
No
Yes
17. An auditor may not express a qualified opinion when
a. A scope limitation prevents the auditor from completing an important audit procedure.
b. The auditor’s report refers to the work of a specialist.
c. An accounting principles at variance with generally accepted accounting principles is used.
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d. The auditor lacks independence with respect to the audited entity.
18. An auditor decides to express a qualified opinion on an entity’s financial statements because a
major inadequacy in its computerized accounting records prevents the auditor from applying
necessary procedures. The opinion paragraph of the auditor’s report should state that the
qualification pertains to
a. A client-imposed scope limitation.
b. A departure from generally accepted auditing standards.
c. The possible effects on the financial statements.
d. Inadequate disclosure of necessary information.
19. Totoy, CPA, was engaged to audit the financial statements of Bibo Co., a new client, for the
year ended December 31, 2004. Totoy obtained sufficient audit evidence for all of Bibo’s
financial statement items except Bibo’s opening inventory. Due to inadequate financial
records, Totoy could not verify Bibo’s January 1, 2004 inventory balances. Totoy’s opinion on
Bibo’s 2004 financial statements most likely will be
Income Statement
Balance Sheet
a.
Disclaimer
Disclaimer
b.
Unqualified
Disclaimer
c.
Disclaimer
Adverse
d.
Unqualified
Adverse
20. When management prepares financial statements on the basis of a going concern and the
auditor believes the company may not continue as a going concern, the auditor should issue
a(n)
a. qualified opinion
b. unqualified opinion with an explanatory paragraph
c. disclaimer of opinion
d. adverse opinion
21. A dual dated report contains the dates of a subsequent event and the date the:
c. Subsequent event was resolved
a. Auditor completed work in the client’s office
b. Financial statements were prepared
d. Audit report was delivered
22. If the principal auditor decides to take responsibility for the work of other auditors, the principal
auditor should:
a. Modify the opening paragraph
c. Modify all three paragraphs
b. Modify the opening and opinion paragraphs
d. Issue a standard report
23. An auditor who concludes that an uncertainty is not adequately disclosed in the financial
statements should issue a:
a. Disclaimer of opinion.
c. Special report.
b. Unqualified report with an explanatory paragraph. d. Qualified report.
24. An auditor may wish to emphasize a matter included in the financial statements by adding an
explanatory paragraph to the audit report. In this case the following paragraphs of the audit
report should be modified:
a. Introductory paragraph
c. Opinion paragraph
d. None
b. Scope paragraph
25. In the case of a client imposed scope limitation, the auditor must consider issuing a:
a. Qualified opinion or disclaimer of opinion
c. Disclaimer of opinion or adverse opinion
d. Disclaimer of opinion
b. Qualified opinion or adverse opinion
26. Which of the following modifications of the standard auditor’s report does not require an
explanatory paragraph.
c. Scope limitation
a. Reference to other auditors
b. Inconsistency
d. Adverse opinion
27. Pamela, CPA, was engaged to audit the financial statements of One Co. after its fiscal year
had ended. The timing of Pamela’s appointment as auditor and the start of field work made
confirmation of accounts receivable by direct communication with the debtors ineffective.
However, Pamela applied other procedures and was satisfied as to the reasonableness of the
account balances. Pamela’s auditor’s report most likely contained a(n)
a. Unqualified opinion.
b. Unqualified opinion with an explanatory paragraph.
c. Qualified opinion because of a scope limitation.
d. Qualified opinion because of a departure from GAAS.
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28. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will always
result when management
a. Engages the auditor after the year-end physical inventory count is completed.
b. Fails to correct a material internal control weakness that had been identified during the prior
year’s audit.
c. Refuses to furnish a management representation letter to the auditor.
d. Prevents the auditor from reviewing the working papers of the predecessor auditor.
29. When an auditor expresses an opinion other than unqualified opinion, a clear description of all
substantive reasons for the modification of the opinion should be included in the report. This
explanation should be presented:
a. As a separate paragraph that precedes the opinion paragraph of the audit report.
b. As a separate paragraph, preferably after the opinion paragraph, of the audit report.
c. In the opinion paragraph
d. As a separate paragraph in the notes to financial statements.
30. Where a limitation on the scope of the auditor’s work requires modification of an unqualified
opinion, the auditor’s report should describe the limitation and:
a. Indicate that the auditor is no longer responsible to his opinion.
b. Indicate the possible adjustments to the financial statements that might have been
determined to be necessary had the limitation not existed.
c. Refer the users to the particular note to financial statements that adequately discusses the
limitation
d. Indicate that the auditor is not satisfied of the results of the alternative procedures that he
had performed.
31. What is the purpose of the following paragraph in a particular audit report:
“…We draw attention to note X in the financial statements which discusses that the
company incurred a net loss of P6.4 million during the year ended December 31, 2004
and as of that date, the Company’s liabilities exceeded its total assets by P2,500,000...”
a.
b.
c.
d.
A standard reporting requirement.
Emphasis of matter about the going concern problems of the entity.
Inadequate disclosure qualification.
An inappropriate reporting.
32. An explanatory paragraph following an opinion paragraph that describes an uncertainty follows:
As discussed in Note X to the financial statements, the company is a defendant in a
lawsuit alleging infringement of certain patent rights and claiming damages. Discovery
proceedings are in progress. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result upon adjudication
has been made in the accompanying financial statements.
What type of opinion should the auditor express in this circumstance?
a. unqualified
b. qualified
c. disclaimer
d. adverse
33. If an amendment to other information in a document containing audited financial statements is
necessary and the entity refuses to make the amendment, the auditor would consider issuing:
c. Unqualified opinion with explanatory paragraph
a. Qualified or adverse opinion
b. Qualified or disclaimer of opinion
d. Unqualified opinion.
34. When management does not amend the financial statements in circumstances where the
auditor believes they need to be amended and the auditor’s report has not been released to the
entity, the auditor should express
a. Qualified or adverse opinion
c. Unqualified opinion with explanatory paragraph
b. Qualified or disclaimer of opinion
d. Unqualified opinion.
35. If subsequent to the issuance of the audited financial statements, the auditor becomes aware of
material misstatements in the financial statements that exist prior to the date of the audit report,
the auditor should
a. Notify the parties who currently relying on the financial statements.
b. Discuss the matter with management, and should take the action appropriate in the
circumstances.
c. Document such information in the audit plan for succeeding audit.
d. Submit revised copies of the financial statements and audit report to the stockholders.
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QUIZZERS
1. Which of the following is not explicitly included in the opening paragraph of an audit report?
a. Identification of the financial statements that have been audited.
b. A statement by the auditor that the audit provides a reasonable basis for the opinion.
c. Statement that the financial statements are the responsibility of the entity’s management.
d. Statement that the responsibility of the auditor is to express an opinion on the financial
statements based on his audit.
2. A measure of uniformity in the form and content of the auditor’s report is desirable because
a. It helps the auditors avoid legal liability.
b. It helps the readers understand the report.
c. It helps the auditor identify the usual circumstances that are expected to occur.
d. It makes the auditors more informed of their responsibilities with respect to audit report.
3. The most common type of audit report contains a(n):
a. Adverse opinion.
c. Disclaimer of opinion.
b. Qualified opinion.
d. Unqualified
4. If an auditor is certain an illegal act has a material effect on financial statements and the clients
agrees to adjust the statements accordingly, the auditor should:
a. Withdraw from the engagement.
b. Disclaim an opinion on the financial statements taken as a whole.
c. Issue a qualified opinion.
d. Issue an unqualified opinion.
5. It exists when other information contradicts information contained in the audited financial
statements.
a. Material misstatement of fact
c. Material inconsistency
b. Material error
d. Material deviation
6. After issuing a report, a auditor has no longer obligation to make continuing inquiries or perform
other procedures concerning the audited financial statements, unless
a. Management of the entity requests the auditor to reissue the auditor’s report.
b. Information about an event that occurred after the end of fieldwork comes to the auditor’s
attention.
c. Information, which existed at the report date and may affect the report, comes to the
auditor’s attention.
d. Final determinations or resolutions are made of contingencies that had been disclosed in
the financial statements.
7. Which of the following events occurring after the issuance of an auditor’s report most likely
would cause the auditor to make further inquiries about the previously issued financial
statements?
a. A technological development that could affect the entity’s future ability to continue as a
going concern.
b. The entity’s sale of a subsidiary that accounts for 30 percent of the entity’s consolidated
sales.
c. The discovery of information regarding a contingency that existed before the financial
statements were issued.
d. The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report
8. An auditor would issue an adverse opinion if
a. The audit was begun by other independent auditors who withdrew from the engagement.
b. The statements taken as a whole do not fairly present the financial condition and results of
operations of the company.
c. A qualified opinion cannot be given because the auditor lacks independence.
d. The restriction on the scope of the audit was significant.
9. An audit report contains the following paragraph:
"Because of the inadequacies in the company's accounting records during the year ended June
30, 2005, it was not practicable to extend our auditing procedures to the extent necessary to
enable us to obtain certain evidential matter as it relates to classification of certain items in the
consolidated statements of operations."
This paragraph most likely describes
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a.
b.
c.
d.
A material departure from GAAP requiring a qualified audit opinion.
An uncertainty that should not lead to a qualified opinion.
A material scope restriction requiring a qualification of the audit opinion.
A matter that the auditor wishes to emphasize and that does not lead to a qualified audit
opinion.
10. The auditor issued a qualified opinion covering the financial statements of Client A for the year
ended December 31, 2004. The reason for the qualification was a departure from GAAP. In
presenting comparative statements for the years ended December 31, 2004 and 2005, the
client revised the 2004 financial statements to correct the previous departure from GAAP. The
auditor's 2005 report on the 12/31/04 and 12/31/05 comparative financial statements will
a. Express unqualified opinions on both the 2004 and 2005 financial statements.
b. Express a qualified opinion on the 2004 financial statements and an unqualified opinion on
the 2005 statements.
c. Retain the qualified opinion covering the 2004 statements, but add an explanatory
paragraph describing the correction of the prior departure from GAAP.
d. Render qualified audit opinions for both 2004 and 2005 financial statements given the 2005
carryover effect of the 2004 error.
11. An auditor may reasonably issue an "except for" qualified opinion for
a.
b.
c.
d.
Inadequate disclosure
Yes
Yes
No
No
Scope limitation
Yes
No
Yes
No
12. Soon after Boyd's audit report was issued, Boyd learned of certain related party transactions
that occurred during the year under audit. These transactions were not disclosed in the notes
to the financial statements. Boyd should
a. Plan to audit the transactions during the next engagement.
b. Recall all copies of the audited financial statements.
c. Ask the client to disclose the transactions in subsequent interim statements.
d. Determine whether the lack of disclosure would affect the auditor's report.
13. An auditor includes an explanatory paragraph in an otherwise unqualified report in order to
emphasize that the entity being reported on is a subsidiary of another business enterprise. The
inclusion of this paragraph
a. Is appropriate and would not negate the unqualified opinion.
b. Is a qualification.
c. Is a violation of generally accepted reporting standards if this information is disclosed in
footnotes to the financial statements.
d. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoing
explanation."
14. Which of the following best describes the auditor's responsibility for "other information" included
in the annual report to stockholders which contains financial statements and the auditor's
report?
a. The auditor has no obligation to read the "other information."
b. The auditor has no obligation to corroborate the "other information," but should read the
"other information" to determine whether it is materially inconsistent with the financial
statements.
c. The auditor should extend the examination to the extent necessary to verify the "other
information."
d. The auditor must modify the auditor's report to state that the "other information is
unaudited" or "not covered by the auditor's report."
15. In which of the following circumstances would an auditor be most likely to express an adverse
opinion?
a. The statements are not in conformity with the ASC Statements regarding the capitalization
of leases.
b. Information comes to the auditor's attention that raises substantial doubt about the entity's
ability to continue in existence.
c. The chief executive officer refuses the auditor access to minutes of board of directors'
meetings.
d. Control tests show that the entity's internal control is so poor that the financial records
cannot be relied upon.
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16. When a principal auditor decides to make reference to another auditor's examination, the
principal auditor's report should always indicate clearly, in the introductory, scope, and opinion
paragraphs, the
a. Magnitude of the portion of the financial statements examined by the other auditor.
b. Division of responsibility.
c. Disclaimer of responsibility concerning the portion of the financial statements examined by
the other auditor.
d. Name of the other auditor.
17. The independent auditor refers to both GAAP and GAAS when writing the standard audit report.
These terms are mentioned as follows:
a
b
c
d
Scope Paragraph
GAAP
GAAS
GAAP
GAAS
Opinion Paragraph
GAAS
GAAP
GAAP
GAAS
18. Which of the following best describes the reference to the expression “taken as a whole” in the
fourth generally accepted auditing standard of reporting?
a. It applies equally to a complete set of financial statements and to an individual financial
statement.
b. It applies only to a complete set of financial statements.
c. It applies equally to each item in each financial statement.
d. It applies equally to each material item in each financial statement.
19. If an accounting change has no material effect on the financial statements in the current year
but the change is reasonably certain to have a material effect in later years, the change should
be
a. Treated as a consistency modification in the auditor’s report for the current year.
b. Disclosed in the notes to the financial statements of the current year.
c. Disclosed in the notes to the financial statements and referred to in the auditor’s report for
the current year.
d. Treated as a subsequent event.
20. An auditor’s standard report expressed an unqualified opinion and includes an explanatory
paragraph that emphasizes a matter included in the notes to the financial statements. The
auditor’s report would be deficient if the explanatory paragraph states that the entity
a. Is a component of a larger business enterprise.
b. Has changed form the completed contract method to the percentage of completion method
to account for long-term construction contracts.
c. Has had a significant subsequent event.
d. Has accounting reclassifications that enhance the comparability between years.
21. In which of the following circumstances would an adverse opinion be appropriate?
a. The auditor is not independent with respect to the enterprise being audited
b. An uncertainty prevents the issuance of an unqualified report
c. The statements are not in conformity with authoritative statements regarding accounting for
pension plans
d. A client-imposed scope limitation prevents the auditor from complying with generally
accepted auditing standards
22. An auditor is confronted with an exception sufficiently material to warrant departing from the
standard wording of an unqualified report. If the exception relates to a departure from the
generally accepted accounting principles, the auditor must decide between a(n)
a. adverse opinion and an unqualified opinion
b. adverse opinion and a qualified opinion
c. adverse opinion and a disclaimer of opinion
d. disclaimer of opinion and a qualified opinion
23. An auditor had expressed a qualified opinion on the financial statements of a prior period
because the client’s financial statements departed from generally accepted accounting
principles. The prior period statements are restated in the current period to conform with
generally accepted accounting principles. The auditor’s updated report on the prior period
statements should
a. express an unqualified opinion about the restated financial statements
b. be accompanied by the auditor’s original report on the prior period
c. bear the same date as the auditor’s original report on the prior period
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d. qualify the opinion concerning the restated financial statements because of a change in
accounting principles
24. A successor auditor should refer to a predecessor auditor’s report in the
a. Opening paragraph
c. Opinion paragraph
b. Scope paragraph
d. Opening and opinion paragraph
25. Because of inadequate records the auditor is uncertain as to whether property and equipment
is stated at cost. The auditor should issue a (n):
c. Adverse opinion
a. Qualified opinion
b. Unqualified opinion
d. Standard opinion
26. The auditor’s report contains a paragraph explaining that the entity changed from the straightline to the declining balance method of depreciation. The auditor expressed an:
a. Adverse opinion
c. Qualified opinion
b. Unqualified opinion
d. Disclaimer of opinion
27. The following circumstances result in a modified, but unqualified report, except:
a. Inconsistent application of accounting principles.
b. Emphasis of a related party transaction that is disclosed in a footnote.
c. Lack of disclosure of a restriction on payment of dividends.
d. Other auditors perform work for which the principal auditor does not assume responsibility.
28. Under which of the following sets of circumstances might an auditor disclaim an opinion?
a. The financial statements contain a departure from GAAP, the effect of which is material.
b. The principal auditor decides to make reference to the report of another auditor who audited
a subsidiary.
c. There has been a material change between periods in the method of the application of
accounting principles.
d. There were significant limitations on the scope of the audit.
29. Which of the following description is not included in the scope paragraph of the auditor’s
report?
a. Examining, on a test basis, evidence to support the financial statement amounts and
disclosures.
b. Determining the accounting principles used in the preparation of the financial statements.
c. Assessing the significant estimates made by management in the preparation of the financial
statement.
d. Evaluating the overall financial statement presentation.
30. Which of the following statements is best described in the scope paragraph of the independent
auditor’s report?
a. The audit was planned and performed to obtain reliable assurance about whether the
financial statements are free of material misstatements.
b. The audit was conducted in accordance with financial reporting framework.
c. The auditor makes the significant estimates in the preparation of the financial statements.
d. A statement by the auditor that the audit provides a reasonable basis for the opinion.
31. When there is an assessed substantial doubt about the ability of the entity to continue as a
going concern and such information is adequately disclosed in the notes to financial
statements, the auditor should express a(n):
a. Standard unqualified opinion.
c. Qualified opinion
d. Adverse opinion
b. Unqualified opinion with explanatory paragraph.
32. If adequate disclosure is not made by the entity regarding substantial doubt about its ability to
continue as a going concern, the auditor should include in his report specific reference to the
substantial doubt as to ability of the company to continue as a going concern and should
express:
a. Unqualified opinion with explanatory paragraph
b. A subject to qualified opinion or adverse opinion.
c. Either an “except for” qualified opinion or an adverse opinion.
d. A disclaimer of opinion.
33. Which of the following factors, by itself, would not cause uncertainty about the ability of a
company to continue as a going concern?
a. A significant net loss.
b. Inability to pay its obligations as they come due.
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c. The occurrence of uninsured catastrophe.
d. Legal proceedings that might jeopardize the entity’s ability to operate.
34. If the auditor concludes that the fraud or error has a material effect on the financial statements
and has not been properly corrected in the financial statements, the auditor should issue a:
a. Unqualified opinion with explanatory paragraph.
c. Qualified or disclaimer of opinion.
b. Qualified or adverse opinion.
d. Adverse or disclaimer of opinion.
35. If the auditor is precluded by the entity from obtaining evidence to evaluate whether fraud or
error that may be material to the financial statements has, or is likely to have, occurred, the
auditor should issue a (n):
a. Unqualified opinion with explanatory paragraph.
b. Qualified or adverse opinion.
c. Qualified or disclaimer of opinion.
d. Adverse or disclaimer of opinion.
36. In which of the following circumstances would an auditor usually choose between expressing a
qualified opinion or disclaiming an opinion?
a. Departure from generally accepted accounting principles
b. Inadequate disclosure of accounting policies
c. Inability to obtain sufficient competent evidential matter
d. Unreasonable justification for a change in accounting principle
PSA 700 – The Auditor’s Report on Financial Statements
37. The element of the auditor’s report that distinguishes it from reports that might be issued by
others is
a. Title
c. Auditor’s signature
b. Addressee
d. Opinion paragraph
38. The financial statements audited by the auditor are identified in the
a. Opening paragraph
c. Opinion paragraph
b. Scope paragraph
d. All of the above.
39. Which of the following statements can be found on the scope paragraph of the standard audit
report?
a. The financial statements are the responsibility of the Company’s management.
b. Our responsibility is to express an opinion on these financial statements based on our audit.
c. We believe that our audit provides a reasonable basis for our opinion.
d. The financial statements ‘present fairly, in all material respects’.
40. Which statement is incorrect regarding the date of the auditor’s report?
a. The auditor should date the report as of the completion date of the audit.
b. The date of the report informs the reader that the auditor has considered the effect on the
financial statements and on the report of events and transactions of which the auditor
became aware and that occurred up to that date.
c. The auditor should not date the report earlier than the date on which the financial
statements are signed or approved by management.
d. The auditor should date the report as of date the report is delivered to the entity audited.
41. The following will usually result in a modified report but will not affect the auditor’s opinion,
except
a. Existence of going concern problem.
b. There is a significant uncertainty (other than a going concern problem), the resolution of
which is dependent upon future events and which may affect the financial statements.
c. Emphasis of a matter.
d. There is a disagreement with management regarding the acceptability of the accounting
policies selected.
42. In extreme cases, such as situations involving multiple uncertainties that are significant to the
financial statements, the auditor may consider it appropriate to express a
a. Qualified or adverse opinion
c. Unqualified opinion with explanatory paragraph
d. Unqualified opinion.
b. Disclaimer of opinion
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PSA 710 – Comparatives
43. Which statement is incorrect regarding comparatives?
a. The auditor is not required to determine whether the comparatives comply in all material
respects with GAAP relevant to the financial statements being audited.
b. There are two broad financial reporting frameworks for comparatives: the corresponding
figures and the comparative financial statements.
c. Under the corresponding figures framework, the corresponding figures for the prior
period(s) are an integral part of the current period financial statements and have to be read
in conjunction with the amounts and other disclosures relating to the current period.
d. Under the comparative financial statements framework, the comparative financial
statements for the prior period(s) are considered separate financial statements.
44. Which statement is incorrect regarding corresponding figures?
a. The corresponding figures are not presented as complete financial statements capable of
standing alone.
b. The level of detail presented in the corresponding amounts and disclosures is dictated
primarily by its relevance to the current period figures.
c. The auditor’s report refers only to the financial statements of the current period.
d. The auditor’s report refers to each period that financial statements are presented.
45. When the comparatives in which the prior audit report is unmodified, the auditor should issue
an audit report in which:
a. The comparatives are specifically identified in the opening paragraph but not referred to in
the opinion paragraph of the auditor’s report.
b. The comparatives are specifically identified in the opening paragraph and are referred to in
the opinion paragraph.
c. The comparatives are not specifically identified in the audit report.
d. The comparatives are described in the emphasis of matter paragraph of the auditor’s report.
46. In case the prior period financial statements were audited by another auditor and the incoming
auditor decides to refer to another auditor, the incoming auditor’s report should indicate:
a. That the financial statements of the prior period were audited by another auditor.
b. The type of report issued by the predecessor auditor and, if the report was modified, the
reasons therefore.
c. The date of that report.
d. All of the above.
47. In relation to comparatives as corresponding figures, which of the following is incorrect?
a. When the prior period financial statements are not audited, the incoming auditor should
state in the auditor’s report that the corresponding figures are unaudited.
b. The incoming auditor must refer to the predecessor auditor’s report on the corresponding
figures in the incoming auditor’s report for the current period.
c. When the financial statements of the prior period were audited by another auditor, the
incoming auditor’s report should state that the prior period was audited by another auditor.
d. In situations were the incoming auditor identified that the corresponding figures are
materially misstated, the auditor should request management to revise the corresponding
figures or if management refuses to do so, appropriately modify the report.
48. When the financial statements of the prior period were not audited, the incoming auditor
should:
a. Insist that an audit of prior year’s financial statements must be made.
b. Not allow the inclusion of the corresponding figures in the financial statements of the
current period.
c. Disclaim his opinion and treat the unaudited corresponding figures as basis of scope
limitation.
d. Obtain sufficient appropriate audit evidence that the corresponding figures meet the
requirements of the relevant financial reporting framework.’
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDITING THEORY
INTERNAL CONTROL
Related PSAs/PAPSs: PSA 400, 402 and 315
The auditor should obtain an understanding of the accounting and internal control systems sufficient
to plan the audit and develop an effective audit approach.
Accounting system means the series of tasks and records of an entity by which transactions are
processed as a means of maintaining financial records. Such systems identify, assemble, analyze,
calculate, classify, record, summarize and report transactions and other events.
Internal Control System means all the policies and procedures (internal controls) adopted by the
management of an entity to assist in achieving management’s objective of ensuring, as far as
practicable,:
• orderly and efficient conduct of its business, including adherence to management policies;
• safeguarding of assets;
• prevention and detection of fraud and error;
• accuracy and completeness of the accounting records; and
• timely preparation of reliable financial information.
The internal control system extends beyond those matters which relate directly to the functions of the
accounting system.
Internal Control Components (PSA 315)
(a)
(b)
(c)
(d)
(e)
The control environment;
The entity’s risk assessment process;
The information system, including the related business processes, relevant to financial reporting,
and communication;
Control activities; and
Monitoring of controls.
Control environment
The control environment includes the attitudes, awareness, and actions of management and those
charged with governance concerning the entity’s internal control and its importance in the entity. The
control environment also includes the governance and management functions and sets the tone of an
organization, influencing the control consciousness of its people. It is the foundation for effective
internal control, providing discipline and structure.
The control environment encompasses the following elements:
•
•
•
•
•
•
•
Communication and enforcement of integrity and ethical values.
Commitment to competence.
Participation by those charged with governance.
Management’s philosophy and operating style.
Organizational structure.
Assignment of authority and responsibility.
Human resource policies and practices.
Entity’s risk assessment process
An entity’s risk assessment process is its process for identifying and responding to business risks and
the results thereof. For financial reporting purposes, the entity’s risk assessment process includes
how management identifies risks relevant to the preparation of financial statements that are presented
fairly, in all material respects in accordance with the entity’s applicable financial reporting framework,
estimates their significance, assesses the likelihood of their occurrence, and decides upon actions to
manage them.
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Risks can arise or change due to circumstances such as the following:
•
Changes in operating environment. Changes in the regulatory or operating environment can
result in changes in competitive pressures and significantly different risks.
•
New personnel. New personnel may have a different focus on or understanding of internal
control.
•
New or revamped information systems. Significant and rapid changes in information systems can
change the risk relating to internal control.
•
Rapid growth. Significant and rapid expansion of operations can strain controls and increase the
risk of a breakdown in controls.
•
New technology. Incorporating new technologies into production processes or information
systems may change the risk associated with internal control.
•
New business models, products, or activities. Entering into business areas or transactions with
which an entity has little experience may introduce new risks associated with internal control.
•
Corporate restructurings. Restructurings may be accompanied by staff reductions and changes in
supervision and segregation of duties that may change the risk associated with internal control.
•
Expanded foreign operations. The expansion or acquisition of foreign operations carries new and
often unique risks that may affect internal control, for example, additional or changed risks from
foreign currency transactions.
•
New accounting pronouncements. Adoption of new accounting principles or changing accounting
principles may affect risks in preparing financial statements.
Information system, including the related business processes, relevant to financial reporting, and
communication
An information system consists of infrastructure (physical and hardware components), software,
people, procedures, and data. Infrastructure and software will be absent, or have less significance, in
systems that are exclusively or primarily manual.
The information system relevant to financial reporting objectives, which includes the financial reporting
system, consists of the procedures and records established to initiate, record, process, and report
entity transactions (as well as events and conditions) and to maintain accountability for the related
assets, liabilities, and equity.
Accordingly, an information system encompasses methods and records that:
•
•
•
•
•
Identify and record all valid transactions.
Describe on a timely basis the transactions in sufficient detail to permit proper classification of
transactions for financial reporting.
Measure the value of transactions in a manner that permits recording their proper monetary
value in the financial statements.
Determine the time period in which transactions occurred to permit recording of transactions in
the proper accounting period.
Present properly the transactions and related disclosures in the financial statements.
Communication involves providing an understanding of individual roles and responsibilities pertaining
to internal control over financial reporting. It includes the extent to which personnel understand how
their activities in the financial reporting information system relate to the work of others and the means
of reporting exceptions to an appropriate higher level within the entity. Open communication channels
help ensure that exceptions are reported and acted on.
Control activities
Control activities are the policies and procedures that help ensure that management directives are
carried out, for example, that necessary actions are taken to address risks that threaten the
achievement of the entity’s objectives.
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Generally, control activities that may be relevant to an audit may be categorized as policies and
procedures that pertain to the following:
•
•
•
•
Performance reviews.
Information processing.
Physical controls.
Segregation of duties.
Monitoring of controls
Management’s monitoring of controls includes considering whether they are operating as intended
and that they are modified as appropriate for changes in conditions. Monitoring of controls may
include activities such as management’s review of whether bank reconciliations are being prepared on
a timely basis, internal auditors’ evaluation of sales personnel’s compliance with the entity’s policies
on terms of sales contracts, and a legal department’s oversight of compliance with the entity’s ethical
or business practice policies.
Inherent Limitations of Internal Controls
1. Management’s usual requirement that the cost of an internal control does not exceed the expected
benefits to be derived.
2. Most internal controls tend to be directed at routine transactions rather than non-routine
transactions.
3. The potential for human error due to carelessness, distraction, mistakes of judgment and the
misunderstanding of instructions.
4. The possibility of circumvention of internal controls through the collusion of a member of
management or an employee with parties outside or inside the entity.
5. The possibility that a person responsible for exercising an internal control could abuse that
responsibility, for example, a member of management overriding an internal control.
6. The possibility that procedures may become inadequate due to changes in conditions, and
compliance with procedures may deteriorate.
Accounting and Internal Control Assessment
1st
Understanding of accounting and internal control system
Plan the assessed level of control risk
2nd
3rd
Performance of tests of controls (if appropriate)
4th
Reassessment of control risk
th
5
Final assessment of control risk
(1st) Understanding of Accounting and Internal Control Systems
In the audit of financial statements, the auditor is only concerned with those policies and procedures
within the accounting and internal control systems that are relevant to the financial statement
assertions. The understanding of relevant aspects of the accounting and internal control systems,
together with the inherent and control risk assessments and other considerations, will enable the
auditor to:
(a) identify the types of potential material misstatements that could occur in the financial
statements;
(b) consider factors that affect the risk of material misstatements; and
(c) design appropriate audit procedures.
The nature, timing and extent of the procedures performed by the auditor to obtain an understanding
of the accounting and internal control systems will vary with, among other things:
• The size and complexity of the entity and of its computer system.
• Materiality considerations.
• The type of internal controls involved.
• The nature of the entity’s documentation of specific internal controls.
• The auditor’s assessment of inherent risk.
• Experience gained from prior audits.
Procedures in Obtaining Understanding
1. Make inquiries of appropriate company personnel
2. Inspect documents and records
3. Observe the company’s activities and operations
4. Walk-through
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Documentation of Understanding
The auditor should document his understanding of internal control. The extent of documentation is a
matter of the CPA’s judgment and the form of documentation depends upon his preference and skills.
1. Narrative descriptions
3. Flowcharts
2. Internal control questionnaires (ICQ)
4. Checklists
(2nd) Preliminary Assessment of Control Risk
The preliminary assessment of control risk is the process of evaluating the effectiveness of an entity’s
accounting and internal control systems in preventing or detecting and correcting material
misstatements. There will always be some control risk because of the inherent limitations of any
accounting and internal control system.
After obtaining an understanding of the accounting and internal control systems, the auditor should
make a preliminary assessment of control risk, at the assertion level, for each material account
balance or class of transactions.
The auditor ordinarily assesses control risk at a high level for some or all assertions when:
(a) the entity’s accounting and internal control systems are not effective; or
(b) evaluating the effectiveness of the entity’s accounting and internal control systems would not
be efficient.
The preliminary assessment of control risk for a financial statement assertion should be high unless
the auditor:
(a) is able to identify internal controls relevant to the assertion which are likely to prevent or
detect and correct a material misstatement; and
(b) plans to perform tests of control to support the assessment.
(3rd) Test of Controls
If appropriate, tests of control are performed to obtain audit evidence about the effectiveness of the:
(a) design of the accounting and internal control systems, that is, whether they are suitably
designed to prevent or detect and correct material misstatements; and
(b) operation of the internal controls throughout the period.
Procedures for Performing Tests of Controls
1. Inspection
2. Inquiry
3. Observation
4. Reperformance
5. Walk-through
Required Documentation
Understanding of ICS
Tests of Controls
Assessment of Control Risk
Reason for assessment
Assessed Control Risk
High (Maximum)
Less than high (Below Maximum)
Required
Required
Required
Required
Required
Not required
Not required
Required
(4th) Reassessment of control risk
Based on the results of the tests of control, the auditor should evaluate whether the internal controls
are designed and operating as contemplated in the preliminary assessment of control risk. The
evaluation of deviations may result in the auditor concluding that the assessed level of control risk
needs to be revised. In such cases, the auditor would modify the nature, timing and extent of planned
substantive procedures.
(5th) Final Assessment of Control Risk
Before the conclusion of the audit, based on the results of the substantive procedures and other audit
evidence obtained by the auditor, the auditor should consider whether the assessment of control risk
is confirmed.
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Communication of Weaknesses
As a result of obtaining an understanding of the accounting and internal control systems and tests of
control, the auditor may become aware of weaknesses in the systems. The auditor should make
management aware, as soon as practical and at an appropriate level of responsibility, of material
weaknesses in the design or operation of the accounting and internal control systems, which have
come to the auditor’s attention. The communication to management of material weaknesses would
ordinarily be in writing. However, if the auditor judges that oral communication is appropriate, such
communication would be documented in the audit working papers. It is important to indicate in the
communication that only weaknesses which have come to the auditor’s attention as a result of the
audit have been reported and that the examination has not been designed to determine the adequacy
of internal control for management purposes.
MULTIPLE CHOICE QUESTIONS
1. According to PSA 400, which of the following is correct regarding internal control system?
a. Internal control system refers to all the policies and procedures adopted by the auditor to
assist in achieving management’s objective.
b. A strong environment, by itself, ensure the effectiveness of the internal control system.
c. In the audit of financial statements, the auditor is only concerned with those policies and
procedures within the accounting and internal control systems that are relevant to the financial
statements.
d. The internal control system is confined to those matters which relate directly to the functions of
the accounting system.
2. 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.
3. Corporate directors, management, external auditors, and internal auditors all play important roles
in creating a proper control environment. Top management is primarily responsible for
a. Establishing a proper environment and specifying overall internal control.
b. Reviewing the reliability and integrity of financial information and the means used to collect
and report such information.
c. Ensuring that external and internal auditors adequately monitor the control environment.
d. Implementing and monitoring controls designed by the board of directors.
4. Which of the following best describe 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. Legal environment of the firm, management philosophy, and organizational structure.
5. In an audit of financial statements, an auditor’s primary consideration regarding a control is
whether it
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 processes.
6. Effective internal control
a. Eliminates risk and potential loss to the organization.
b. Cannot be circumvented by management.
c. Is unaffected by changing circumstances and conditions encountered by the organization.
d. Reduces the need for management to review exception reports on a day-to-day basis.
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7. Which of the following statements about internal control is correct?
a. Properly maintained internal controls reasonably assure that collusion among employees
cannot occur.
b. Establishing and maintaining internal control is the internal auditor’s responsibility.
c. Exceptionally strong control allows the auditor to eliminate substantive tests.
d. The cost-benefit relationship should be considered in designing internal control.
8. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk
that
a. Tests of controls may fail to identify controls relevant to assertions.
b. Material misstatements may exist in the financial statements.
c. Specified controls requiring segregation of duties may be circumvented by collusion.
d. Entity policies may be overridden by senior management.
9. A proper understanding of the client’s internal control is an integral part of the audit planning
process. The results of the understanding
a. Must be reported to the shareholders and the SEC.
b. Bear no relationship to the extent of substantive testing to be performed.
c. Are not reported to client management.
d. May be used as the basis for withdrawing from an audit engagement.
10. An entity should consider the cost of a control in relationship to the risk. Which of the following
controls best reflects this philosophy for a large peso investment in heavy machine tools?
a. Conducting a weekly physical inventory.
b. Placing security guards at every entrance 24 hours a day.
c. Imprinting a controlled identification number on each tool.
d. Having all dispositions approved by the vice president of sales.
11. Audit evidence concerning segregation of duties ordinarily is best obtained by
a. Performing tests of transactions that corroborate management’s financial statement assertions
b. Observing the employees as they apply specific controls.
c. Obtaining a flowchart of activities performed by available personnel.
d. Developing audit objectives that reduce control risk.
12. Which of the following statements about preliminary assessment of control risks is correct?
a. After obtaining an understanding of the accounting and internal control systems, the auditor
should make a preliminary assessment of control risks, at the assertion level, for all accounts
or transaction classes.
b. The preliminary assessment of control risk can be done only after completing tests of controls.
c. The preliminary assessment of control risk for a financial assertion is normally low, unless the
auditor is able to identify weaknesses that may indicate ineffectiveness of accounting and
internal control system.
d. The auditor ordinarily assesses control risk at high level for some or all assertions when it is
not cost efficient to do tests of controls.
13. Which of the following statements concerning control risk is correct?
a. When control risk is at the maximum level, an auditor is required to document the basis for that
assessment.
b. Control risk may be assessed sufficiently low to eliminate substantive testing for significant
transaction classes.
c. When assessing control risk, an auditor should not consider evidence obtained in prior audits
about the operation of controls.
d. Assessing control risk and obtaining an understanding of an entity’s internal control may be
performed concurrently.
14. Based on a consideration of internal control completed at an interim date, the auditor assessed
control risk at a low level and performed interim substantive tests. The records and procedures
would most likely be tested again at year-end if
a. Tests of controls were not performed by the internal auditor during the remaining period.
b. Internal control provides a basis for limiting the extent of substantive testing.
c. The auditor used nonstatistical sampling during the interim period testing of controls.
d. Inquiries and observations lead the auditor to believe that conditions have changed.
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15. Although substantive tests may support the accuracy of underlying records, these tests frequently
provide no affirmative evidence of segregation of duties because
a. Substantive tests rarely guarantee the accuracy of the records if only a person who performs
incompatible functions.
b. The records may be accurate even though they are maintained by a person who performs
incompatible functions.
c. Substantive tests relate to the entire period under audit, but tests of controls ordinarily are
confined to the period during which the auditor is on the client’s premises.
d. Many computerized procedures leave no audit trail of who performed them, so substantive
tests may necessarily be limited to inquiries and observation of office personnel.
16. After obtaining an understanding of internal control and assessing control risk, an auditor decided
not to perform additional tests of controls. The auditor most likely concluded that the
a. Additional evidence to support a further reduction in control risk was not cost-beneficial to
obtain.
b. Assessed level of inherent risk exceeded the assessed level of control risk.
c. Internal control was properly designed and justifiably may be relied on.
d. Evidence obtainable through tests of controls would not support an increased assessment of
control risk.
17. The objective of tests of details of transactions performed as tests of controls 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.
18. An auditor wishes to perform tests of controls on a client’s cash disbursements procedures. If the
controls leave no audit trail of documentary evidence, the auditor most likely will test the
procedures by
a. Confirmation and observation.
c. Analytical procedures and confirmation.
b. Observation and inquiry.
d. Inquiry and analytical procedures
19. Which of the following would not be a method used to conduct tests of controls?
a. Inquiry
b. Walkthrough
c. Confirmation
d. Observation
20. The auditor is examining copies of sales invoices only for the initials of the person responsible for
checking the extensions. This is an example of a
a. Test of controls
c. Dual purpose test
b. Substantive test
d. Test of balances
21. Which of the following types of evidence would an auditor most likely examine to determine
whether controls are operating as designed?
a. Confirmations of receivables verifying account balances.
b. Letters of representations corroborating inventory pricing.
c. Attorneys’ responses to the auditor’s inquiries.
d. Client records documenting the use of computer programs.
22. Which of the following procedures concerning accounts receivable is an auditor most likely to
perform to obtain evidential matter in support of an assessed level of control risk below the
maximum level?
a. Sending confirmation requests to an entity’s principal customers to verify the existence of
accounts receivable.
b. Inspecting an entity’s analysis of accounts receivable for unusual balances.
c. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts
receivable.
d. Observing an entity’s employee prepare the schedule of past due accounts receivable.
23. An auditor is least likely to test controls that provide for
a. Classification of revenue and expense transactions by product line
b. Approval of the purchase and sale of trading securities
c. Segregation of the functions of recording disbursements and reconciling the bank account
d. Comparison of receiving reports and vendors’ invoices with purchase orders
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24. In a small company that doesn't employ an adequate number of employees to permit proper division
of responsibilities, effective internal control can be strengthened by
a. Direct participation by the owner of the business in the record keeping activities of the business.
b. Employment of temporary personnel to aid in the separation of duties.
c. Delegation of full, clear-cut responsibility to each employee for the functions assigned to each.
d. Engaging a CPA to perform monthly "write up" work.
25. Which of the following is true of the communication to management of material weaknesses in
accounting and internal control?
a. Communication must be in writing.
b. Oral communication of material weaknesses, when appropriate, would be documented in the
audit working papers.
c. The communication should indicate that the auditor had extensively examined the accounting
and internal control system of the client.
d. The auditors should indicate in the communication that the examination is primarily designed
to determine whether the accounting and internal control is adequate.
QUIZZERS
1. Transaction authorization within an organization may be either specific or general. An example of
specific transaction authorization is the
a. Approval of a construction budget for a new warehouse
b. Setting of automatic reorder points
c. Establishment of a customer’s credit limits
d. Establishment of sales prices
2. Internal control should provide reasonable (but not necessarily absolute) assurance which means
that:
a. The cost of control activities should not exceed the benefits.
b. Internal control is management’s, not auditor’s, responsibility.
c. An attestation engagement about management’s internal control assertions may not
necessarily detect all reportable conditions.
d. There is always a risk that reportable conditions may result in material misstatements.
3. Which of the following statements is an example of an inherent limitation of internal control.
a. Errors may arise from mistakes in judgments.
b. The effectiveness of control procedures depends on segregation of duties.
c. Procedures are designed to assure that transactions are executed as management authorities.
d. Computers process large numbers of transactions.
4. Proper segregation of functional responsibilities calls for separation of the functions of
a. Authorization, execution, and recording.
c. Custody, execution, and reporting.
b. Authorization, execution, and payment.
d. Authorization, payment, and recording.
5. Which of the following is a responsibility that should not be assigned to only one employee?
a. Access to securities in the company’s safe deposit box.
b. Custodianship of the cash working fund.
c. Reconciliation of bank statement.
d. Custodianship of tools and small equipment.
6. Which of the following activities would be least likely to strengthen a company’s internal control?
a. Maintaining insurance for fire and theft.
b. Separating accounting from other financial operations.
c. Fixing responsibility for the performance of employee duties.
d. Carefully selecting and training employees.
7. As generally conceived, the “audit committee” of a publicly held company should be made up of
a. Members of the board of directors who are not officers or employees.
b. Representatives of the major equity interests (bonds, preferred stock, common stock).
c. The audit partner, the chief financial officer, the legal counsel, and at least one outsider.
d. Representatives from the client’s management, investors, suppliers, and customers.
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8. When considering internal control, the auditor’s primary concern is to determine
a. The reliability of the accounting information system.
b. The possibility of fraud occurring.
c. Compliance with policies, plans, and procedures.
d. The type of an opinion he will issue.
9. Of the following, the best statement of the CPA’s primary objective in considering internal control
is that the review is intended to provide
a. A basis for reliance on the system and determining the scope of other auditing procedures.
b. Reasonable protection against client fraud and defalcations by client employees.
c. A basis for constructive suggestions to the client for improving his internal control system.
d. A method for ensuring that there is reasonable assurance that the financial statements are
reliable.
10. When an auditor assesses control risk below the maximum level, the auditor is required to
document the auditor’s
Basis for concluding that control
Understanding of the entity’s internal
control structure elements
Risk is below the maximum level
a.
Yes
Yes
b.
No
No
c.
Yes
No
d.
No
Yes
11. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is
a. Substantive tests, documentation of control structure, and tests of controls
b. Documentation of control structure, tests of controls, and substantive tests
c. Documentation of control structure, substantive tests, and tests of controls
d. Tests of controls, documentation of control structure, and substantive tests
12. In obtaining an understanding of an entity’s internal control structure, an auditor is required to
obtain knowledge about the
Operating effectiveness of
Design of policies
and procedures
Policies and procedures
a.
Yes
Yes
b.
No
Yes
c.
Yes
No
d.
No
No
13. Which of the following audit techniques most likely would provide an auditor with the most
assurance about the effectiveness of the operation on an internal control procedure?
a. Confirmation with outside parties
c. Recomputation of account balance
d. Inquiry of client personnel
b. Observation of client personnel
14. Which of the following is the correct order for performing the auditing procedures A through C
below
A = Tests of Controls
B = Preparation of a flowchart depicting the client’s internal control structure
C = Substantive tests
b. BAC
c. ACB
d. BCA
a. ABC
15. After considering a client’s internal control, an auditor has concluded that the system is well
designed and is functioning as anticipated. Under these circumstances, the auditor would most
likely
a. Cease to perform further substantive tests
b. Not increase the extent of planned substantive tests
c. Increase the extent of anticipated analytical procedures
d. Perform all tests of controls to the extent outlined in the preplanned audit program
16. After considering internal control, an auditor might decide to
a. Increase the extent of tests of controls and substantive tests in areas where internal control is
strong
b. Increase the extent of substantive tests in areas where internal control is weak
c. Reduce the extent of tests of controls in areas where internal control is strong
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d. Reduce the extent of both substantive tests and tests of controls in areas where internal
control is strong
17. To obtain an understanding of the relevant policies and procedures of internal control, the auditor
performs all of the following except:
a. Make inquiries
c. Make observations
b. Design substantive tests
d. Inspect documents and records
18. In an auditor’s consideration of internal control, the completion of a questionnaire is most closely
associated with which of the following?
a. Separation of duties
c. Flowchart accuracy
b. Understanding the system
d. Tests of controls
19. Before relying on the system of internal control, the auditor obtains a reasonable degree of
assurance that the internal control procedures are in use and operating as planned. The auditor
obtains this assurance by performing planned
a. Substantive tests
c. Transaction tests
b. Tests of controls
d. Tests of trends and ratios
20. After obtaining an understanding of a client’s controls, an auditor may decide to omit tests of the
controls. Which of the following in not appropriate reason to omit tests of controls?
a. The controls duplicate other controls.
b. The controls appear adequate.
c. Reportable conditions preclude assessing control risk below the maximum.
d. The effort to test controls exceeds the effort saved by not performing substantive tests.
21. In general, a material weakness in internal control may be defined as a condition in which material
errors or irregularities may occur and not be detected within a timely period by
a. An independent auditor during tests of controls.
b. Management when reviewing interim financial statements and reconciling account balances.
c. Employees in the normal course of performing their assigned functions.
d. Outside consultants who issue a special-purpose report on internal control structure.
22. Internal control procedures are not designed to provide reasonable assurance that
a. Transactions are executed in accordance with management's authorization.
b. Access to assets is permitted only in accordance with management's authorization.
c. Irregularities will be eliminated.
d. The recorded accountability for assets is compared with the existing assets at reasonable
intervals.
23. A secondary purpose of the auditor's consideration of internal control is to provide
a. A basis for assessing control risk.
b. An assurance that the records and documents have been maintained in accordance with
existing company policies and procedures.
c. A basis for constructive suggestions about improvements in internal control structure.
d. A basis for the determination of the resultant extent of the tests to which auditing procedures
are to be restricted.
24. The auditor's review of the client's internal control is documented in order to substantiate
a. Conformity of the accounting records with GAAP.
b. Adherence to requirements of management.
c. Compliance with generally accepted auditing standards.
d. The fairness of the financial statement presentation.
25. A consideration of internal control made during an audit is usually not sufficient to express an
opinion on an entity's controls because
a. Weaknesses in the system may go unnoticed during the audit engagement.
b. A consideration of internal control is not necessarily made during an audit engagement.
c. Only those controls on which an auditor intends to rely are reviewed, tested, and evaluated.
d. Controls can change each year.
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26. The accountant's report expressing an opinion on an entity's internal controls should state that the
a. Objectives of the client's internal controls are being met.
b. Consideration of the internal controls was conducted in accordance with generally accepted
auditing standards.
c. Establishment and maintenance of internal control is the responsibility of management.
d. Inherent limitations of the client's internal controls were examined.
27. The primary objective of procedures performed to obtain an understanding of internal control is to
provide an auditor with
a. Evidential matter to use in reducing detection risk.
b. A basis from which to modify tests of controls.
c. Knowledge necessary to plan the audit.
d. Information necessary to prepare flowcharts.
PSA 400 – Risk Assessments and Internal Control
28. Which of the following is not part of the control environment?
a. Management philosophy and operating style.
b. Organizational structure and methods of assigning authority and responsibility.
c. Information and communication systems.
d. The function of the board of directors and its committees.
29. When obtaining an understanding of the accounting and internal control system the auditor may
trace a few transactions through the accounting system. This technique is:
a. Reperformance test
c. Walk-through test
b. Test of transactions
d. Validity test
30. Which of the following least likely affects the nature, timing, and extent of the procedures
performed by the auditor to obtain an understanding of the accounting and internal control
systems of an audit client?
a. Materiality considerations
b. The auditor’s assessment of inherent risk
c. The level of acceptable detection risk
d. The size and complexity of the entity and of its computer system
31. The evaluation of deviations that were observed upon completing tests of controls
a. May require the need for doing more extensive understanding of control.
b. May require more extensive tests of controls.
c. Always requires documentation of the basis of assessment of control risk.
d. May require modification of the nature, timing, and extent of planned substantive procedures.
32. The following statements are true about observation when used as tests of control procedures,
except.
a. The auditor may supplement his observations with other tests of control capable of providing
audit evidence.
b. Audit evidence obtained by doing observation pertains only to the point in time at which the
procedure was applied.
c. Observation of who applies a control procedure is useful as a test of control procedures when
evaluating control effectiveness of both computerized and manual system
d. Ordinarily, making inquiries provides more reliable audit evidence than doing observation
when testing segregation of functional responsibilities.
33. Tests of controls may include the following, except:
a. Reperformance of internal control procedures
b. Inquiries about, and observation of, internal controls which leave no audit trail.
c. Inspection of documentary support for transactions evidencing authorization
d. Analytical procedures involving comparison of operating expenses with budgeted amount.
34. Tests of controls are performed to obtain audit evidence about the effectiveness of the
a. Operation of the internal controls at the time the tests are being applied.
b. Operations of the internal controls in eliminating fraud and errors.
c. Design of the internal controls in eliminating fraud and errors.
d. Design of the accounting and internal controls systems.
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35. The auditor should consider whether the assessment of control risk is confirmed
a. Upon completion of understanding of internal control.
b. Upon completion of tests of controls
c. Before the final audit program is completed.
d. Upon the conclusion of the audit, based on the results of substantive procedures and other
audit evidence obtained.
PSA 402 – Audit Considerations Relating to Entities Using Service Organizations
36. Which of the following is least likely considered by the auditor in determining the significance of
service organization activities to the client and the relevance to the audit?
a. Terms of contract and relationship between the client and the service organization.
b. The material financial statement assertions that are affected by the use of the service
organization.
c. Client's internal controls that are applied to the transactions processed by the service
organization.
d. The control policies and procedures of the client of requiring that all payments for goods and
services be supported by receiving reports.
37. When the auditor considers that the service organization activities are significant to the client and
relevant to the audit and he concludes that it would be efficient to obtain audit evidence from tests
of control to support an assessment of control risk at a lower level. Such evidence may be
obtained by, except
a. Performing tests of the client's controls over activities of the service organization.
b. Obtaining a service organization auditor's report that expresses an opinion as to the operating
effectiveness of the service organization's accounting and internal control systems for the
processing applications relevant to the audit.
c. Visiting the service organization and performing tests of control.
d. Review the service contract between the client and the service organization.
38. Which statement is incorrect regarding the client auditor’s use of service organization auditor’s
report?
a. When using a service organization auditor’s report, the client auditor should consider the
nature of and content of that report.
b. The client auditor should consider the scope of work performed by the service organization
auditor and should assess the usefulness and appropriateness of reports issued by the service
organization auditor.
c. When a Type B report is to be used as evidence to support a lower control risk assessment, a
client auditor would consider whether the controls tested by the service organization auditor
are relevant to the client's transactions (significant assertions in the client's financial
statements) and whether the service organization auditor's tests of control and the results are
adequate.
d. Since Type A reports may be useful to a client auditor in gaining the required understanding of
the accounting and internal control systems, an auditor may use such reports as a basis for
reducing the assessment of control risk.
39. Which of the following is the least concern of the client auditor in reviewing the report of service
organization auditor on suitability of internal control design of the service organization?
a. The accuracy of description of the service organization's accounting and internal control
systems, ordinarily prepared by the management of the service organization.
b. The systems' controls have been placed in operation.
c. The accounting and internal control systems are suitably designed to achieve their stated
objectives.
d. The type of documentation of the understanding of the service organization’s control system.
40. Which of the following is least likely entitled to the report of the service organization auditor on the
suitability of the design and operating effectiveness of the service organization?
a. Service organization’s management
c. Client’s auditors
b. Service organization’s customers
d. Service organization’s stockholders
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True or False
1. As part of understanding internal, an auditor is not required obtain knowledge about the operating
effectiveness of internal control.
2. A CPA’s consideration of internal control in a financial statement audit is usually more limited than
that made in connection with an engagement to report on management’s written assertion as to
the effectiveness of internal control.
3. Proper segregation of duties reduces the opportunities for persons to be in positions to perpetrate
and conceal errors or fraud.
4. Management’s aggressive attitude toward financial reporting and its emphasis on meeting
projected profit goals most likely would significantly influence an entity’s control environment when
management is dominated by one individual who is also a shareholder.
5. 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 achievement of the objectives of internal
control.
6. When obtaining an understanding of an entity’s internal control, an auditor should concentrate on
the substance of controls rather than their form because management may establish appropriate
controls but not act on them.
7. In obtaining an understanding of an entity’s internal control in a financial statement audit, an
auditor is not obligated to search for significant deficiencies in the operation of internal control.
8. An independent auditor might consider the procedures performed by the internal auditors because
they are employees whose work may affect the nature, timing, and extent of audit procedures.
9. Internal control procedures are not designed to provide reasonable assurance that irregularities
will be eliminated.
10. When considering internal control, an auditor must be aware of the concept of reasonable
assurance, which recognizes that cost of internal control procedures should not exceed the
benefits expected to be derived from the control.
11. The auditor’s review of the client’s internal control is documented in order to substantiate
compliance with generally accepted auditing standards.
12. After obtaining an understanding of an entity’s internal controls, an auditor may assess control risk
at the maximum for some assertions because the auditor believes internal control activities are
unlikely to be effective.
13. The primary purpose of the auditor’s consideration of internal control is to provide a basis for
determining the nature, timing, and extent of audit tests to be applied.
14. After consideration of a client’s internal control, an auditor might decide to increase the extent of
substantive testing in areas where the controls are weak.
15. A consideration of internal control made during an audit is usually not sufficient to express an
opinion on an entity’s controls because only those controls on which an auditor intends to rely are
reviewed, tested, and evaluated.
16. Evidence about segregation of duties is best obtained by direct personal observation of
employees who perform control activities.
17. An auditor’s flowchart of a client’s accounting system is a diagrammatic representation that
depicts the auditor’s understanding of the internal control system.
18. The purpose of tests of controls is to provide reasonable assurance that the control procedures
are functioning as intended.
19. After documenting internal control in an audit engagement, the auditor may perform tests on those
controls that the auditor plans to rely on.
20. The auditor observes client employees in order to corroborate the information obtained during the
initial review of the system.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDITING THEORY
AUDIT SAMPLING
Related PSA: PSA 530
When designing audit procedures, the auditor should determine appropriate means of selecting
items for testing. The means available to the auditor are:
(a) Selecting all items (100% examination);
(b) Selecting specific items, and
(c) Audit sampling.
The decision as to which approach to use will depend on the circumstances, and the application of
any one or combination of the above means may be appropriate in particular circumstances. While
the decision as to which means, or combination of means, to use is made on the basis of audit risk
and audit efficiency, the auditor needs to be satisfied that methods used are effective in providing
sufficient appropriate audit evidence to meet the objectives of the test.
Selecting All Items
The auditor may decide that it will be most appropriate to examine the entire population of items
that make up an account balance or class of transactions (or a stratum within that population).
100% examination is unlikely in the case of tests of control; however, it is more common for
substantive procedures. 100% examination may be appropriate on the following:
a) When the population constitutes a small number of large value items;
b) When both inherent and control risks are high and other means do not provide sufficient
appropriate audit evidence; or
c) When the repetitive nature of a calculation or other process performed by a computer
information system makes a 100% examination cost effective.
Selecting Specific Items
The auditor may decide to select specific items from a population based on such factors as
knowledge of the client’s business, preliminary assessments of inherent and control risks, and the
characteristics of the population being tested. The judgmental selection of specific items is subject
to non-sampling risk. Specific items selected may include:
•
High value or key items. The auditor may decide to select specific items within a population
because they are of high value, or exhibit some other characteristic, for example items that
are suspicious, unusual, particularly risk-prone or that have a history of error.
•
All items over a certain amount. The auditor may decide to examine 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.
•
Items to obtain information. The auditor may examine items to obtain information about
matters such as the client’s business, the nature of transactions, accounting and internal
control systems.
•
Items to test procedures. The auditor may use judgment to select and examine specific
items to determine whether or not a particular procedure is being performed.
While selective examination of specific items from an account balance or class of transactions will
often be an efficient means of gathering audit evidence, it does not constitute audit sampling. The
results of procedures applied to items selected in this way cannot be projected to the entire
population. The auditor considers the need to obtain appropriate evidence regarding the
remainder of the population when that remainder is material.
Audit Sampling
The auditor may decide to apply audit sampling to an account balance or class of transactions.
Audit sampling (sampling) involves the application of 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.
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Terms normally associated with sampling:
Population - means the entire set of data from which a sample is selected and about which the
auditor wishes to draw conclusions. For example, all of the items in an account balance or a class
of transactions constitute a population. A population may be divided into strata, or subpopulations, with each stratum being examined separately. The term population is used to include
the term stratum.
Sampling unit - means the individual items constituting a population, for example checks listed on
deposit slips, credit entries on bank statements, sales invoices or debtors’ balances, or a monetary
unit.
Sampling frame – means the documentary evidence which physically represents the sampling
units in a given population.
Sample – the portion of the population that will be subjected to audit testing. The selected sample
should be representative of the population.
Error - For purposes of PSA 530, means either control deviations, when performing tests of control,
or misstatements, when performing substantive procedures.
Tolerable error - means the maximum error in a population that the auditor is willing to accept.
Stratification - is the process of dividing a population into subpopulations, each of which is a group
of sampling units which have similar characteristics (often monetary value).
Sampling is not involved in:
1)
2)
3)
100% examination;
Selective testing; and
Audit procedures which either (1) have very limited purposes and provide only a small portion
of the evidence needed to meet an audit objective or (2) intentionally exclude a portion of the
population such as:
a)
Performing a walkthrough test;
b)
Testing controls that leave no audit trail (such as observing client personnel as they
perform internal control activities);
c)
Performing analytical procedures;
Advantages of sampling over complete (100%) verification
1)
2)
3)
Timeliness – Sampling requires lesser time; audit would be completed on a more timely
basis.
Efficiency – Sampling can considerably reduce audit costs.
Effectiveness – Sampling can provide valid conclusions that the sample reflects the same
characteristics as the population.
Risk Considerations in Obtaining Evidence
Sampling risk and non-sampling risk can affect the components of audit risk.
Sampling risk arises from 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 audit
procedure.
Nonsampling risk arises from factors that cause the auditor to reach an erroneous conclusion for
any reason not related to the size of the sample, such as:
1) Failure to select appropriate audit procedures
2) Failure to recognize errors in documents examined
3) Misinterpreting the results of audit tests
For both tests of control and substantive tests, sampling risk can be reduced by increasing sample
size, while non-sampling risk can be reduced by proper engagement planning, supervision, and
review.
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Types of Sampling Risks
Tests of Controls
1) Risk of under-reliance – Sample does not support the auditor’s planned degree of reliance
on the control when true compliance rate supports such reliance. Also known as the risk of
assessing control risk too high - the risk the auditor will conclude that control risk is higher
than it actually is.
2) Risk of over-reliance – Sample supports the auditor’s planned degree of reliance on the
control when true compliance rate does not justify such reliance. Also known as the risk of
assessing control risk too low - the risk the auditor will conclude that control risk is lower
than it actually is.
Substantive Testing
1) Risk of incorrect rejection – the risk the auditor will conclude that a material error exists
when in fact it does not.
2) Risk of incorrect acceptance – the risk the auditor will conclude that a material error does
not exist when in fact it does.
Effect of sampling risk on audit
1) Efficiency – The risk of under-reliance and the risk of incorrect rejection (both referred to as
Alpha Risk) affect audit efficiency as it would usually lead to additional work to establish
that initial conclusions were incorrect.
2) Effectiveness – The risk of over-reliance and the risk of incorrect acceptance (both referred
to as Beta Risk) affect audit effectiveness and is more likely to lead to an inappropriate
audit opinion.
General approaches to audit sampling
Statistical sampling – approach to sampling that has the characteristics of:
• random selection of a sample; and
• use of probability theory to evaluate sample results, including measurement of sampling
risk.
Advantages
Helps auditor
1) Design an efficient sample;
2) Measure the sufficiency of evidential
matter obtained;
3) Objectively evaluate sample results.
Disadvantages
May involve additional costs in
1) Training auditors;
2) Designing samples;
3) Selecting items to be tested.
When applying statistical sampling, the sample size can be determined using either probability
theory or professional judgment.
Nonstatistical sampling – A sampling approach that does not have characteristics of statistical
sampling.
Reasons for use – Often less costly and time-consuming to apply than statistical sampling, but can
be as effective in achieving audit objectives.
Similarities – Both statistical and nonstatistical sampling
1)
Can provide sufficient, competent evidential matter;
2)
Involve judgment in planning, executing the sampling plan, and evaluating the sample results;
3)
Require that sample item be selected in such a way that sample can be expected to be
representative of the population.
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Choice of approach – The decision whether to use a statistical or non-statistical sampling approach
is a matter for the auditor’s judgment regarding the most efficient manner to obtain sufficient
appropriate audit evidence in the particular circumstances.
Sample size is not a valid criterion to distinguish between statistical and non-statistical approaches.
Sample size is a function of various factors. When circumstances are similar, the effect on sample
size of certain factors will be similar regardless of whether a statistical or non-statistical approach is
chosen.
Sample Selection Methods
Appropriate for statistical and non statistical sampling
(a)
Use of a computerized random number generator or random number tables.
(b)
Systematic selection, in which the number of sampling units in the population is divided
by the sample size to give a sampling interval, for example 50, and having determined a
starting point within the first 50, each 50th sampling unit thereafter is selected. Although
the starting point may be determined haphazardly, the sample is more likely to be truly
random if it is determined by use of a computerized random number generator or random
number tables. When using systematic selection, the auditor would need to determine
that sampling units within the population are not structured in such a way that the
sampling interval corresponds with a particular pattern in the population.
Not appropriate for statistical sampling
(c)
Haphazard selection, in which the auditor selects the sample without following a
structured technique. Although no structured technique is used, the auditor would
nonetheless avoid any conscious bias or predictability (for example avoiding difficult to
locate items, or always choosing or avoiding the first or last entries on a page) and thus
attempt to ensure that all items in the population have a chance of selection. Haphazard
selection is not appropriate when using statistical sampling.
(d)
Block selection involves selecting a block(s) of contiguous items from within the
population. Block selection cannot ordinarily be used in audit sampling because most
populations are structured such that items in a sequence can be expected to have similar
characteristics to each other, but different characteristics from items elsewhere in the
population. Although in some circumstances it may be an appropriate audit procedure to
examine a block of items, it would rarely be an appropriate sample selection technique
when the auditor intends to draw valid inferences about the entire population based on
the sample.
Characteristic of Interest
The characteristic of interest depends on the type of test that will be performed on the sample
selected.
Test of controls – the characteristic of interest is the deviation or occurrence rate, which is the
number of times a deviation from the prescribed internal control occurs in the sample.
Substantive testing – the characteristic of interest is the monetary amount of misstatement in an
account balance.
Types of Sampling Plans
Attributes sampling – a statistical sampling plan used in test of controls. This is appropriate:
1) When the auditor wishes to estimate the true but unknown population deviation rate;
2) If the expected deviation rate is high based on prior experience.
Variables sampling – a sampling plan used in substantive testing to estimate the total peso amount
(or possibly units) of a population or the peso amount of an error in a population.
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Attribute Sampling Plan
1)
2)
3)
4)
5)
6)
7)
8)
Determine the objective(s) of the tests
Define the attribute (characteristic of a control) and deviation (absence of an attribute)
conditions
Define the population
Determine the method of sample selection
Determine sample size
Perform the sampling plan
Evaluate sample results
Document the sampling plan, the procedures performed, and the conclusions reached
Factors Influencing Sample Size for Tests of Control
The following are factors that the auditor considers when determining the sample size for a test of
control. These factors need to be considered together.
FACTOR
EFFECT ON
SAMPLE SIZE
An increase in the auditor’s intended reliance on accounting and
internal control systems
Increase
An increase in the rate of deviation from the prescribed control
procedure that the auditor is willing to accept (Tolerable deviation rate)
Decrease
An increase in the rate of deviation from the prescribed control
procedure that the auditor expects to find in the population (Expected
deviation rate)
An increase in the auditor’s required confidence level (or conversely, a
decrease in the risk that the auditor will conclude that the control risk is
lower than the actual control risk in the population – risk of assessing
control risk too low)
An increase in the number of sampling units in the population
Increase
Increase
Negligible effect
Other Sampling Techniques for Test of Controls
Sequential (Stop-or-Go) sampling
Audit sampling can be accomplished with either a fixed or sequential sampling plan.
1)
Fixed sampling plan – the auditor tests a single plan, such as attribute estimation.
2)
Sequential sampling plan – the sampling is performed in several steps. Following each
step, the auditor decides whether to stop testing or to go on to the next step.
Sequential sampling plan can be used as an alternative to attribute estimation when an auditor
expects zero or very few deviations within an audit population.
Discovery sampling
Discovery sampling plan may be appropriate when:
1)
the audit objective is to observe at least one deviation at a specified critical rate;
2)
the expected population deviation rate is near zero; and
3)
the auditor desires a specified probability of observing at least one deviation of the actual
population rate exceeds the critical rate (this is comparable to the tolerable rate in
attribute estimation and sequential sampling).
Variables Sampling Plan
1)
2)
3)
4)
5)
6)
7)
8)
Determine the objective(s) of the tests
Define the population
Choose an audit sampling approach/technique
Determine sample size
Determine the method of sample selection
Perform the sampling plan
Evaluate sample results
Document the sampling plan, the procedures performed, and the conclusions reached
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Sampling techniques
Probability-proportional-to-size (PPS) sampling
PPS sampling is a sampling technique that uses attribute sampling theory to evaluate the results
when a large number of transactions are captured within a single account. In PPS sampling, the
auditor randomly selects individual pesos from a population and then audits the balances,
transactions, or documents – called logical units – that include the pesos selected. Each peso in
the population has an equal chance of being selected, but the likelihood of selecting any one
logical unit for testing is directly proportional to its size.
PPS sampling is most appropriate when:
1) no errors are expected (although it is also appropriate when one or few errors are
expected); and
2) testing for overstatement (normally for assets and income).
Classical variables sampling
Classical variables sampling relies on normal distribution theory to evaluate audit samples. These
may be appropriate when the audit objective is to estimate the true but unknown monetary
balance. The three commonly used classical variables sampling techniques are:
1) Ratio estimation – uses the ratio of audited amounts to recorded amounts in the sample to
estimate the total peso amount of the population (also called point estimate) and an allowance
for sampling risk. Where: SAV = sample audited value; SBV = sample recorded book value;
PBV = population book value; and EPAV = estimated population audited value, the formula is:
SAV/SBV x PBV = EPAV +(-) sampling risk
The use of ratio estimation is appropriate when the misstatement in an account is directly
proportional to its book value.
2) Difference estimation – uses the average difference between audited amounts and individual
recorded amounts in the sample to estimate the total audited amount of the population and an
allowance for sampling risk. Where: SAV = sample audited value; SBV = sample recorded
book value; SS = sample size; and P = number of items in population, the formula is:
(SAV – SBV)/SS x P = Projected error
The use of difference estimation is more appropriate when the misstatement in an account is
not affected by the book value of the item being examined.
3) Mean-per-unit estimation – projects sample average (mean) to the total population by
multiplying the sample average by the number of items in the population. Using the same
legend above, the formula is:
SAV/SS x P = EPAV +(-) sampling risk
The use of mean-per-unit estimation is appropriate when the individual population items do not
have recorded values.
Before applying ratio or difference estimation, the following three conditions must exist:
1) Each population item must have a recorded value (e.g., perpetual rather than periodic,
inventory)
2) Total population book value must be known (e.g., a recorded general ledger book value)
and must correspond to the sum of all individual population items.
3) Expected differences between audited and recorded book values must not be too rare.
Comparative advantages and disadvantages of PPS and classical variables sampling
Probability-proportional-to size (PPS) sampling
Advantages
•
•
Automatically results in stratified sample
because items are selected in proportion to
their peso amounts.
Usually results in a smaller sample size than
classical variables sampling when no errors
are expected.
Classical variables sampling
Advantages
•
•
May result in smaller sample size if there
are many individual differences between
recorded and audited amounts in the
population.
Selection of zero or negative balances
within a sample does not require special
sample design considerations.
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Probability-proportional-to size (PPS) sampling
Advantages
• Can be designed more easily and sample
selection can begin before the complete
population is available.
•
Classical variables sampling
Advantages
If necessary, it is easier to expand samples
than PPS.
Disadvantages
•
•
•
Disadvantages
Evaluation of the sample will require special
sample design considerations if sample
includes understatement errors
Evaluation may overstate the allowance for
sampling risk when errors are found.
Generally includes an assumption that the
audited amount of a sampling unit should
not be less than zero or greater than the
recorded amount.
•
•
•
More complex than PPS
To determine sample size, the auditor must
have an estimate of the population
standard deviation.
Normal distribution theory, the basis
underlying classical variables sampling,
may not be appropriate when the sample
size is not large and there are either very
large items or very large differences
between recorded and audited amounts in
the population
Factors Influencing Sample Size for Substantive Procedures
The following are factors that the auditor considers when determining the sample size for a
substantive procedure. These factors need to be considered together.
FACTOR
EFFECT ON
SAMPLE SIZE
An increase in the auditor’s assessment of inherent risk
Increase
An increase in the auditor’s assessment of control risk (or a
decrease in reliance on internal controls)
Increase
An increase in the use of other substantive procedures directed at
the same financial statement assertion
An increase in the auditor’s required confidence level (or
conversely, a decrease in the risk that the auditor will conclude
that a material error does not exist, when in fact it does exist –
risk of incorrect acceptance)
Decrease
Increase
An increase in the total error that the auditor is willing to accept
(tolerable error)
Decrease
An increase in the amount of error the auditor expects to find in
the population (expected error)
Increase
Stratification of the population when appropriate
Decrease
The number of sampling units in the population
Negligible Effect
MULTIPLE CHOICE QUESTIONS
Basic Sampling Concepts/PSA 530 – Audit Sampling and Other Selective Testing Procedures
1. The entire set of data about which the auditor wishes to draw conclusions is called
c. Sampling frame.
a. Population.
b. Sample.
d. Sampling unit.
2. Which of the following constitutes audit sampling?
a. Selecting and examining specific items to determine whether or not a particular procedure
is being 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.
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3. Audit sampling is not involved in the following, except
a. Performing a walkthrough test.
b. Performing analytical procedures
c. Selecting the sample without following a structured technique.
d. Testing controls that leave no audit trail.
4. The following situations will likely lead the auditor to use 100% testing, except
a. When the population constitutes a small number of large value items.
b. When both inherent and control risks are high and other means do not provide sufficient
appropriate audit evidence
c. When the repetitive nature of a calculation or other process performed by a computer
information system makes a 100% examination cost effective.
d. When testing controls that leave audit trail.
5. 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 is called
a. Sampling error.
c. Anomalous error.
b. Non-sampling error.
d. Projected error.
6. Which of the following is true about sampling and non-sampling risks?
a. Sampling risk can be reduced by increasing sample size.
b. Sampling risk cannot be eliminated.
c. Non-sampling risk can be eliminated by proper engagement planning, supervision, and
review.
d. Non-sampling risk arises from 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 audit procedure.
7. Which statement is incorrect about sampling risk?
a. Sampling risk arises from 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 audit procedure.
b. Risk of assessing control risk too low and risk of incorrect acceptance affects audit
effectiveness as it would usually lead to additional work to establish that initial conclusions
were incorrect.
c. The mathematical complements of sampling risks are termed confidence levels.
d. Risk of assessing control risk too high is the risk that the auditor will conclude, in the case
of a test of control, that control risk is higher than it actually is.
8. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling
helps an auditor to
a. Minimize the failure to detect errors and frauds.
b. Eliminate nonsampling risk.
c. Reduce the level of audit risk and materiality to a relatively low amount.
d. Measure the sufficiency of the evidential matter obtained.
9. Each time an auditor draws a conclusion based on evidence from a sample, an additional risk,
sampling risk, is introduced. An example of sampling risk is
a. Projecting the results of sampling beyond the population tested.
b. Properly applying an improper audit procedure to sample data.
c. Improperly applying a proper audit procedure to sample data.
d. Drawing an erroneous conclusion from sample data.
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
characteristic 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. Which of the following statements is not correct?
a. It is acceptable for auditor to use statistical sampling methods.
b. It is acceptable for auditor to use non-statistical sampling methods.
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c. The primary benefit of statistical sampling methods is the quantification of sampling risk.
d. An advantage of using statistical sampling is that the cost/benefit ratio is always positive.
12. A sample in which every possible combination of items in the population has an equal chance
of constituting the sample is a
a. Representative sample
c. Random sample
b. Statistical sample
d. Judgment sample
13. The process which requires the calculation of an interval and then selects the items based on
the size of the interval is
c. Systematic selection
a. Statistical sampling
b. Random selection
d. Computerized selection
14. When the auditor goes through a population and selects items for the sample without regard to
their size, source, or other distinguishing characteristics, it is called
a. Block selection
c. Systematic selection
b. Random selection
d. Haphazard selection
15. Which of the following statistical selection techniques is least desirable for use by an auditor?
a. Systematic selection
c. Block selection
b. Stratified selection
d. Sequential selection
Sampling for Attributes
1. Tests of controls provide reasonable assurance that controls are applied as prescribed. A
sampling method that is useful when testing controls is:
a. Nonstatistical sampling
c. Discovery sampling
b. Attribute estimation sampling
d. Stratified random sampling
2. Statistical sampling may be applied to test controls when a client’s control procedures
a. Depend primarily on segregation of duties.
b. Are carefully reduced to writing and are included in client accounting manuals.
c. Leave an audit trail as evidence of compliance.
d. Enable the detection of fraud.
3. Since auditors are interested in the occurrence of exceptions in population, they refer to the
occurrence as
c. Deviation rate
a. Exception rate
b. Population rate
d. Confidence level
4. 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 risk of over-reliance
b. Estimated population deviation rate
d. Sample deviation rate
5. Which of the following statements is correct?
a. The expected population deviation rate has little or no effect on sample size.
b. As the population size doubles, the sample size also should double.
c. For a given tolerable rate, a larger sample size should be selected as the expected
population deviation rate decreases.
d. The population size has little or no effect on sample size except for very small populations.
6. When sampling for attributes, which of the following would decrease sample size?
Risk of assessing
Tolerable rate
Expected population
of deviation
deviation rate
Control risk too low
a.
Increase
Decrease
Increase
b.
Decrease
Increase
Decrease
c.
Increase
Increase
Decrease
d.
Increase
Increase
Increase
7. A statistical sampling technique that will minimize sample size whenever a low deviation rate is
expected is
a. Ratio-estimation sampling.
c. Stratified mean-per-unit sampling.
d. Stop-or-go sampling.
b. Difference-estimation sampling.
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8. For which of the following audit tests would an auditor most likely use attribute sampling?
a. Making an independent estimate of the amount of a FIFO inventory.
b. Examining invoices in support of the valuation of fixed asset additions.
c. Selecting accounts receivable for confirmation of account balances.
d. Inspecting employee time cards for proper approval by supervisors.
9. In addition to evaluating the frequency of deviations in tests of controls, an auditor also
considers certain qualitative aspects of the deviations. The auditor most likely will give broader
consideration to the implications of a deviation if it is
a. The only deviation discovered in the sample.
b. Identical to a deviation discovered during the prior year’s audit.
c. Caused by an employee’s misunderstanding of instructions.
d. Initially concealed by a forged document.
10. An auditor plans to test a sample of 20 checks for counter signatures as prescribed by the
client’s control procedures. One of the checks in the chosen sample of 20 cannot be found.
The auditor should consider the reasons for this limitation and
a. Evaluate the results as if the sample size had been 19.
b. Treat the missing check as a deviation for the purpose of evaluating the sample.
c. Treat the missing check in the same manner as the majority of the other 19 checks, i.e.,
countersigned or not.
d. Choose another check to replace the missing check in the sample.
11. The tolerable rate of deviation for tests of controls necessary to justify a control risk
assessment depends primarily on which of the following?
a. The cause of errors.
b. The extent of reliance to be placed on the procedures.
c. The amount of any substantive errors.
d. The limit used in audits of similar clients.
12. If the auditor is concerned that a population may contain exceptions, the determination of a
sample size sufficient to include at least one such exception is a characteristic of
a. Discovery sampling
c. random sampling
b. Variable sampling
d. PPS
13. At times a sample may indicate that the auditor’s assessed level of control risk for a given
control is reasonable when, in fact, the true compliance rate does not justify the assessed level.
This situation illustrates the risk of
a. Assessing control risk too low
c. Incorrect precision
b. Assessing control risk too high
d. Incorrect rejection
14. In attribute estimation, which of the following must be known in order to appraise the results of
the auditor’s sample?
a. Estimated peso value of the population
b. Standard deviation of the values in the population
c. Actual occurrence rate of the attribute in the population
d. Sample size
15. Assuming the tolerable deviation rate is 5 percent, the expected population rate is 3 percent,
and the allowance for sampling risk is 2 percent, what should an auditor conclude if tests of 100
randomly selected documents reveals 4 deviations?
a. Accept the sample results as support for assessing control risk below the maximum
because the tolerable rate less the allowance for sampling risk equals the expected
population deviation rate.
b. Assess control risk at the maximum because the sample deviation rate plus the allowance
for sampling risk exceeds the tolerable rate.
c. Assess control risk at the maximum because the tolerable rate plus the allowance for
sampling risk exceeds the expected population deviation rate.
d. Accept the sample results as support for assessing control risk below the maximum
because the sample deviation rate plus the allowance for sampling risk exceeds the
tolerable rate.
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16. As a result of tests of controls, an auditor assessed control risk too low and decreased
substantive testing. This assessment occurred because the true deviation rate in the
population was
a. Less than the risk of assessing control risk too low, based on the auditor’s sample.
b. Less than the deviation rate in the auditor’s sample.
c. More than the risk of assessing control risk too low, based on the auditor’s sample.
d. More than the deviation rate in the auditor’s sample.
17. The diagram below depicts the auditor’s estimated maximum deviation rate compared with the
tolerable rate, and also depicts the true population deviation rate compared with the tolerable
rate.
True State of Population
Auditor’s Estimate Based on
Deviation Rate Exceeds
Deviation Rate is Less
Sample Results
Tolerable Rate
Than Tolerable Rate
Maximum Deviation Rate
Exceeds Tolerable Rate
I
III
Maximum Deviation Rate is
Less Than Tolerable Rate
II
IV
As a result of testing controls, the auditor assesses control risk too high and thereby increases
testing. This is illustrated by situation
c. III.
d. IV.
a. I.
b. II.
18. As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses
control risk lower than appropriate. The most likely explanation for this situation is that
a. The deviation rates of both the auditor’s sample and the population exceed the tolerable
rate.
b. The deviation rates of both the auditor’s sample and the population are less than the
tolerable rate.
c. The deviation rate in the auditor’s sample is less than the tolerable rate, but the deviation
rate in the population exceeds the tolerable rate.
d. The deviation rate in the auditor’s sample exceeds the tolerable rate, but the deviation rate
in the population is less than the tolerable rate.
19. The likelihood of assessing control risk too low is the risk that the sample selected to test
controls
a. Does not support the tolerable misstatement for some or all of management’s assertions.
b. Does support the auditor’s planned assessed level of control risk when the true operating
effectiveness of the control does not justify such an assessment.
c. Contains misstatements that could be material to the financial statements when aggregated
with misstatements in other account balances.
d. Contains proportionately more deviations from prescribed internal control policies or
procedures than exist in the population.
20. The likelihood of assessing control risk too high is the risk that the sample selected to test
controls
a. Does not support the auditor’s planned assessed level of control risk when the true
operating effectiveness of the control justifies such an assessment.
b. Contains misstatements that could be material to the financial statements when aggregated
with misstatements in other account balances or transaction classes.
c. Contains proportionately fewer monetary errors or deviations from prescribed internal
control policies or procedures than exist in the balance or class as a whole.
d. Does not support the tolerable misstatement for some or all of management’s assertions.
21. The tolerable rate of deviations for a test of controls is generally
a. Lower than the expected rate of errors in the related accounting population.
b. Higher than the expected rate of errors in the related accounting records.
c. Identical to the expected rate of errors in the related accounting records.
d. Unrelated to the expected rate of errors in the related accounting records.
22. If a selected random number matches the number of a voided voucher, the voucher ordinarily
should be replaced by another voucher in the sample if the voucher
a. Constitutes a deviation
c. Cannot be located
b. Has been properly voided
d. Represents an immaterial peso amount
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23. Assessing control risk too high is the risk that the sample
a. Does not support tolerable error for some or all of management’s assertions.
b. Contains proportionately more deviations from prescribed control procedures than actually
exist in the population as a whole.
c. Contains monetary misstatements that could be material to the financial statements when
aggregated with misstatements in other account balances or classes of transactions.
d. Contains proportionately fewer deviations from prescribed control procedures than actually
exist in the population as a whole.
24. When using statistical sampling for tests of controls, an auditor’s evaluation would include a
statistical conclusion about whether:
a. Deviations in the population are within an acceptable range.
b. Monetary precision exceeds a predetermined amount.
c. The population’s total monetary value is not in error by more than a predetermined amount.
d. Population characteristics occur at least once in the population.
25. An auditor, planning an attribute sample from a large number of invoices, intends to estimate
the actual rate of deviations. Which factor below is the most important for the auditor to
consider?
a. Audit objective
c. Population size
b. Desired confidence level
d. Population variance
Variables Sampling
1. “Whenever a sample is taken, there is a risk that the quantitative conclusions about the
population will be incorrect.”
a. This is always true.
b. This is always true unless 100 percent of the population is tested.
c. This is true for statistical sampling, but not for non-statistical sampling.
d. This is true for non-statistical sampling but not for statistical sampling.
2. Which of the following sampling methods is used to estimate a numerical measurement of a
population, such as a dollar value?
c. Variables sampling.
a. Attribute sampling.
b. Stop-or-go sampling.
d. Random-number sampling.
3. In applying variables sampling, an auditor attempts to
a. Estimate a qualitative characteristic of interest.
b. Determine various rates of occurrence for specified attributes.
c. Discover at least one instance of a critical deviation.
d. Predict a monetary population value within a range of precision.
4. Several risks are inherent in the evaluation of audit evidence that has been obtained through
the use of statistical sampling. An example of a beta or Type II error related to sampling risk is
the failure to
a. Properly define the population to be sampled.
b. Draw a random sample from the population.
c. Reject the statistical hypothesis that a book value is not materially misstated when the true
book value is materially misstated.
d. Accept the statistical hypothesis that the book value is not materially misstated when the
true book value is not materially misstated.
5. As lower acceptable levels of both audit risk and materiality are established, the auditor should
plan more work on individual accounts to
c. Increase the tolerable misstatement in the accounts.
a. Find smaller misstatements.
b. Find larger misstatements.
d. Decrease the risk of assessing control risk too low.
6. In performing substantive tests, the auditor is concerned with two risks or errors of sampling:
1. The risk of incorrect rejection (an alpha or Type I error)
2. The risk of incorrect acceptance (a beta or Type II error)
Which of the following is true about alpha and beta errors?
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.
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c. The beta error and the alpha error are of equal importance to the auditor.
d. Neither the alpha error nor the beta error need be considered by the auditor.
7. While performing a substantive test of details during an audit, the auditor determined that the
sample results supported the conclusion that the recorded account balance was materially
misstated. It was, in fact, not materially misstated. This situation illustrates the risk of
c. Incorrect rejection.
a. Assessing control risk too low.
b. Assessing control risk too high.
d. Incorrect acceptance.
8. Conducting a substantive test of an account balance, an auditor hypothesis that no material
misstatement exists. The risk that sample results will support the hypothesis when a material
misstatement actually does exist is the risk of
c. Incorrect acceptance.
a. Incorrect rejection.
b. Alpha error.
d. Type I error.
9. The risk of incorrect acceptance and the risk of assessing control risk too low relate to the
a. Preliminary estimates of materiality levels c. Efficiency of the audit
d. Effectiveness of the audit
b. Allowable risk of tolerable error
10. When would difference estimation or ratio estimation sampling methods be inappropriate?
a. If differences between the book values and audit values of a population are rare.
b. If the average difference between the audit value and book value of a population is small.
c. If differences between the book value and audit value of a population are numerous.
d. If the average difference between the audit value and book value of a population is large.
11. Which of the following most likely would be an advantage in using classical variables sampling
rather than probability-proportional-to-size (PPS) sampling.
a. An estimate of the standard deviation of the population’s recorded amounts is not required.
b. The auditor rarely needs the assistance of a computer program to design an efficient
sample.
c. Inclusion of zero and negative balances generally does not require special design
considerations.
d. Any amount that is individually significant is automatically identified and selected.
12. An auditor is preparing to sample accounts receivable for overstatement. A statistical sampling
method that automatically provides stratification when using systematic selection is
c. Probability proportionate to size sampling
a. Attribute sampling.
b. Ratio-estimation sampling.
d. Mean-per-unit (MPU) sampling.
13. An auditor wishes to sample 200 sales receipts from a population of 5,000 receipts issued
during the last year. The receipts have preprinted serial numbers and are arranged in
chronological (and thus serial number) order. The auditor randomly chooses a receipt from the
first 25 receipts and then selects every 25th receipt thereafter. The sampling procedure
described here is called
a. Systematic random sampling.
c. Judgment interval sampling.
b. Monetary-unit sampling.
d. Variables sampling.
14. Which of the following sample planning factors would influence the sample size for a
substantive test of details for a specific account?
Expected amount of misstatements
Measure of tolerable misstatement
a.
No
No
b.
Yes
Yes
c.
No
Yes
d.
Yes
No
15. Which of the following courses of action would an auditor most likely follow in planning a
sample of cash disbursements if the auditor is aware of several unusually large cash
disbursements?
a. Set the tolerable rate deviation at a lower level than originally planned.
b. Stratify the cash disbursements population so that the unusually large disbursements are
selected.
c. Increase the sample size to reduce the effect of the unusually large disbursements.
d. Continue to draw new samples until all the unusually large disbursements appear in the
sample.
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16. In statistical sampling methods used in substantive testing, when would an auditor most likely
stratify a population into meaningful groups?
a. If the population has highly variable recorded amounts.
b. If probability proportional to size sampling is used.
c. If the auditor’s estimated tolerable misstatement is extremely small.
d. If the standard deviation of recorded amounts is relatively small.
17. 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
Increased in assessed level of
misstatement
control risk
a.
Increase sample size
Increase sample size
b.
Increase sample size
Decrease sample size
c.
Decrease sample size
Increase sample size
d.
Decrease sample size
Decrease sample size
18. Using statistical sampling to assist in verifying the year-end accounts payable balance, an
auditor has accumulated the following data:
Number of
Book
Balance Determined by
Balance
the Auditor
Accounts
Population
4,100
P5,000,000
?
Sample
200
P 250,000
P300,000
Using the ratio estimation technique, the auditor’s estimate of year-end accounts payable
balance is
b. P6,000,000
c. P5,125,000
d. P5,050,000
a. P6,150,000
19. An auditor is applying a difference estimation sampling plan. Recorded book value is
P1,000,000 and the auditor estimates a P75,000 understatement difference. In this case, the
auditor’s estimated population value is
a. P925,000
b. P1,075,000
c. P1,000,000
d. P1,025,000
20. An auditor is applying mean-per-unit estimation. Assuming estimated audited value is
P950,000, the achieved allowance for sampling risk is P75,000, and recorded book value is
P925,000, what is the auditor's conclusion?
a. Recorded book value is not likely misstated by a material amount.
b. Recorded book value is misstated by a material amount.
c. Recorded book value is not likely misstated by a material amount, assuming the client
records an adjusting journal entry equal to the allowance for sampling risk.
d. There is insufficient evidence to reach a conclusion.
21. In a probability-proportional-to-size sample interval of P10,000, an auditor discovered that a
selected account receivable with a recorded amount of P5,000 had an audit amount of P2,000.
The projected error of this sample is
a. P3,000
b. P4,000
c. P6,000
d. P8,000
22. An auditor is evaluating the results of a variables sampling plan. Which of the following is not
relevant to the auditor's judgment about the sample?
a. Management's explanations for why errors in the sample occurred.
b. Projecting the sample error to the population.
c. Considering the effects of sampling risk.
d. Qualitative information that lends insight into errors found.
23. When using classical variables sampling for estimation, an auditor normally evaluates the
sampling results by calculating the possible error in either direction. This statistical concept is
known as
a. Precision.
c. Projected error.
b. Reliability.
d. Standard deviation.
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDITING THEORY
Professional Accounting Practice
Related PSA : Preface to PSA and Related Services
1.
The following statements relate to the accounting profession:
I.
To merit public trust and confidence, the professional person must convince the public that
he will place public service ahead of personal reward.
II. A CPA certificate is evidence of basic competence in the discipline of accounting at the time
the certificate is granted.
III. A code of professional conduct is one of the most important distinguishing characteristics of
a profession.
State whether the foregoing statements are true or false.
c. Only two of the statements are true.
a. All of the statements are true.
b. Only one of the statements is true.
d. All of the statements are false.
2.
Which of the following is not normally a service rendered by public accountants?
a.
Management consultation service
c. Internal auditing
b.
Attest function
d. Taxation
3.
A CPA firm offers management advisory services to clients. Its primary purpose is to
a. Furnish professional advice and assistance which will enable the client to improve
operations.
b. Keep the CPA firm competitive with other firms.
c. Establish the firm as a consultant, thus ensuring its future expansion and growth.
d. Permit the firm’s staff members to acquire expertise in other areas of practice.
4.
The government agency tasked by law of implementing and enforcing the regulatory policies
of the national government with respect to the regulation and licensing of the various
professions and occupations under its jurisdiction is
a. PRC
b. BOA
c. COA
d. SEC
5.
Which of the following mostly describes the function of ASPC?
a. To monitor full compliance by auditors to PSAs.
b. To promulgate auditing standards, practices and procedures that shall be generally
accepted by the accounting profession in the Philippines.
c. To assist the Board of Accountancy in conducting administrative proceedings on erring
CPAs in audit practice.
d. To undertake continuing research on both auditing and financial accounting in order to
make them responsive to the needs of the public.
6.
In the absence of pronouncements issued by the ASPC and the PICPA, published
statements and guidelines issued by other authoritative bodies like AICPA, IAASB and AFA
are the bases of determining generally accepted auditing standards (GAAS). What effect do
these pronouncements provide in determining the GAAS?
b. Persuasive
c. Parallel
d. Alternative
a. Authoritative
7.
Which statement is incorrect regarding the pronouncements of ASPC?
a. The PSAs and Interpretations may also have application, as appropriate, to other related
activities of auditors.
b. PSAs contain basic principles and essential procedures (identified in bold type black
lettering) together with related guidance in the form of explanatory and other material.
c. PSAs need only be applied to material matters.
d. The Interpretations have the same authority as the PAPSs.
8.
The Philippine Standards on Auditing issued by ASPC
a. Apply to independent examination of financial statements of any entity when such an
examination is conducted for the purpose of expressing an opinion thereon.
b. Must not apply to other related activities of auditors
c. Need to be applied on all audit related matters.
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d. Require that in no circumstances would an auditor may judge it necessary to depart from
a PSA, even though such a departure may result to more effective achievement of the
objective of an audit
9.
These statements are issued to provide practical assistance to auditors in implementing the
PSAs
a. Interpretations
b. SASP
c. PAPS
d. SPA
10.
A body that is created through the Philippine Accountancy Act of 2004 and is intended to
replace the ASPC.
a. Auditing and Assurance Standards Council (AASC)
b. Financial Reporting Standards Council (FRSC)
c. Education Technical Council (ETC)
d. Philippine Institute of Certified Public Accountants (PICPA)
11.
Which of the following government agencies is represented both to the Auditing Standards
and Practices Council and the Auditing and Assurance Standards Council?
a. Bangko Sentral ng Pilipinas
c. Securities and Exchange Commission
b. Bureau of Internal Revenue
d. Commission on Higher Education
12.
Are the following government agencies represented both to Auditing Standards and Practices
Council (ASPC) and the new Auditing and Assurance Standards Council (AASC)?
a
b
c
d
Yes
Yes
Yes
Yes
• Board of Accountancy
Yes
Yes
No
No
• Securities and Exchange Commission
Yes
Yes
Yes
Yes
• Commission on Audit
Yes
No
Yes
No
• Bangko Sentral ng Pilipinas
13.
Which statement is correct regarding AASC?
a. The AASC shall be composed of 15 members plus a Chairman.
b. The chairman and members of the AASC shall be appointed by the President of the
Philippines upon the recommendation of PRC.
c. The chairman and members of the AASC shall have a non-renewable term of 3 years.
d. The chairman should have been or presently a senior practitioner in public accountancy.
14.
The following sectors represented by the PICPA to the membership of AASC have one
representative, except
a. Government
c. Commerce and industry
d. Academe
b. Public practice
15.
Statements on financial accounting standards constituting GAAP are issued by the
a. Philippine Institute of CPAs.
c. Audit Standards and Practices Council.
b. Securities and Exchange Commission.
d. Accounting Standards Council.
16.
Indicate whether the following functions would be performed by:
P – Partner
S – Senior
M – Manager
AS – Audit Assistant
(1) Supervises two or more concurrent audit engagements
(2)
Performs detailed audit procedures
(3)
Overall responsibility for audit
(4)
Signs audit report
(1)
(2)
(3)
(4)
a.
P
AS
S
M
b.
M
S
M
P
c.
M
AS
P
P
d.
P
AS
S
M
17.
The amount of audit fees depend largely on the
a. Size and capitalization of the company under audit.
b. Amount of profit for the year.
c. Availability of cash.
d. Volume of audit work and degree of competence and responsibilities involved.
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18.
In determining audit fees, an auditor may take into account each of the following except
a. Volume and intricacy of work involved.
c. Number and cost of manhours needed.
b. Degree of responsibility assumed.
d. Size and amount of capital of client.
19.
Under this method of billing a client, the external auditors charges on the basis of time spent
by principals/partners, supervisors, seniors and juniors at predetermined rates agreed upon
with the client
a.
Maximum fee basis
c. Flat sum basis
d. Per diem basis
b.
Retainer basis
RA No. 9298 – Philippine Accountancy Act of 2004 and its IRR
1.
Which of the following is not one of the specified objectives of the Accountancy Act of 2004?
a. Examination for registration of CPAs.
b. Supervision, control, and regulation of accounting practice.
c. Standardization and regulation of accounting education.
d. Promulgation of accounting and auditing standards.
2.
In all of the following situations except one, a person is deemed to be engaged in
professional accounting practice. Which of them is the exception?
a. Performing audits or verification of financial transactions and records for more than one
client.
b. Employed as the department chairman that supervises the BSA program of an
educational institution.
c. Employment as controller of a private business enterprise and such employment requires
that the holder thereof should be a CPA.
d. Appointment in the government where first grade civil service eligibility is a prerequisite.
3.
A person is not deemed to be engaged in professional accounting practice if
a. Her merely holds himself out as skilled in the science and practice of accounting and
qualified to render services as a CPA.
b. He merely offers to render services as a CPA to the public, but does not actually render
such services.
c. He offers or renders bookkeeping services to more than one client.
d. He installs and revises accounting systems for more than one client.
4.
Practice in Public Accountancy shall constitute in a person
a. Involved in decision making requiring professional knowledge in the science of
accounting, or when such employment or position requires that the holder thereof must be
a certified public accountant.
b. In an educational institution which involve teaching of accounting, auditing, management
advisory services, finance, business law, taxation, and other technically related subjects.
c. Who holds, or is appointed to, a position in an accounting professional group in
government or in a government owned and/or controlled corporation, including those
performing proprietary functions, where decision making requires professional knowledge
in the science of accounting,
d. Holding out himself/herself as one skilled in the knowledge, science and practice of
accounting, and as a qualified person to render professional services as a certified public
accountant; or offering or rendering, or both, to more than one client on a fee basis or
otherwise.
5.
Any position in any business or company in the private sector which requires supervising the
recording of financial transactions, preparation of financial statements, coordinating with the
external auditors for the audit of such financial statements and other related functions shall
be occupied only by a duly registered CPA. Provided (choose the incorrect one)
a. That the business or company where the above position exists has a paid-up capital of at
least P5,000,000 and/or an annual revenue of at least P10,000,000.
b. The above provision shall apply only to persons to be employed after the effectivity of the
Implementing Rules and Regulations of RA 9298.
c. The above provision shall not result to deprivation of the employment of incumbents to
the position.
d. None of the above.
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6.
The integrated national professional organization of Certified Public Accountants accredited
by the BOA and the PRC per PRC accreditation No. 15 dated October 2, 1975.
a. Auditing and Assurance Standards Council (AASC)
b. Financial Reporting Standards Council (FRSC)
c. Education Technical Council (ETC)
d. Philippine Institute of Certified Public Accountants (PICPA)
7.
As defined in the IRR of RA 9298, it is an organization engaged in the practice of public
accountancy, consisting of sole proprietor, either alone or with one or more staff members.
a. Firm
b. Individual CPA
c. Partnership
d. Sector
8.
The following statements relate to the Board of Accountancy. Which statement is correct?
a. The Board consists of a Chairman and six members.
b. The chairman and members are appointed by the President of the Philippines upon
recommendation of PICPA.
c. The Professional Regulation Commission may remove from the Board any member
whose certificate to practice has been removed or suspended.
d. Majority of the board members shall as much as possible be in public practice.
9.
The APO shall submit its nominations with complete documentation to the Commission not
later than _____ prior to the expiry of the term of an incumbent chairman or member.
a. 30 days
b. 60 days
c. 90 days
d. 120 days
10.
A member of the BOA shall, at the time of his/her appointment, possess the following
qualifications, except
a. Must be a natural-born citizen and resident of the Philippines.
b. Must be a duly registered CPA with more than ten (10) years of work experience in any
scope of practice of accountancy.
c. Must be of good moral character and must not have been convicted of crimes involving
moral turpitude.
d. Must not be a director or officer of the APO at the time of his/her appointment.
11.
Which statement is incorrect regarding the term of office of the chairman and the members of
the Board of Accountancy (BOA)?
a. The Chairman and members of the Board shall hold office for a term of three years.
b. No person who has served two (2) successive complete terms shall be eligible for
reappointment until the lapse of one (1) year.
c. A person may serve the BOA for not more than twelve years.
d. A member of the BOA may continuously serve office for more than nine years.
12.
The Board shall exercise the following specific powers, functions and responsibilities:
a
b
c
• To supervise the registration, licensure and
Yes
Yes
Yes
practice of accountancy
• To issue, suspend, revoke, or reinstate the
Certificate of Registration for the practice of
Yes
No
Yes
the accountancy profession
• To monitor the conditions affecting the practice
Yes
No
Yes
of accountancy
• To conduct an oversight into the quality of
Yes
No
Yes
audits of financial statements
• To issue a cease or desist order to any
person, association, partnership or corporation
Yes
Yes
No
engaged in violation of any provision of the Act
d
Yes
Yes
Yes
No
Yes
13.
Which of the following is not one of the penalties that can be imposed by the Board of
Accountancy?
a. Fine or imprisonment
c. Reprimand
b. Revocation of CPA certificate
d. Suspension of CPA certificate
14.
The creation of FRSC and AASC is intended to assist the BOA in carrying out its function to
a. To monitor the conditions affecting the practice of accountancy and adopt such
measures, rules and regulations and best practices as may be deemed proper for the
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enhancement and maintenance of high professional, ethical, accounting and auditing
standards.
b. To supervise the registration, licensure and practice of accountancy in the Philippines.
c. To prescribe and adopt the rules and regulations necessary for carrying out the provisions
of RA 9298.
d. To prepare, adopt, issue or amend the syllabi of the subjects for examinations.
15.
A body that is created to assist the BOA in the attainment of the objective of continuously
upgrading the accountancy education in the Philippines to make the Filipino CPAs globally
competitive.
a. Philippine Institute of Certified Public Accountants (PICPA)
b. Education Technical Council (ETC)
c. Financial Reporting Standards Council (FRSC)
d. Associations of CPAs in Education (ACPAE)
16.
Which of the following is are grounds for suspension or removal of members of BOA?
I. Neglect of duty or incompetence.
II. Violation or tolerance of any violation of the CPA’s Code of Ethics.
III. Final judgment of crimes involving moral turpitude.
IV. Rigging of the certified public accountant’s licensure examination results.
a. I, II, III and IV
b. I, II and III
c. III and IV
d. I, III and IV
17.
The following statements relate to CPA examination ratings. Which of the following is
incorrect?
a. To pass the examination, candidates should obtain a general weighted average of 75%
and above, with no rating in any subject less than 65%.
b. Candidates who obtain a rating of 75% and above in at least four subjects shall receive a
conditional credit for the subjects passed.
c. Candidates who failed in four complete examinations shall no longer be allowed to take
the examinations the fifth time.
d. Conditioned candidates shall take an examination in the remaining subjects within two
years from the preceding examination.
18.
The Board, subject to the approval of the Commission, may revise or exclude any of the
subjects and their syllabi, and add new ones as the need arises. Provided that the change
shall not be more often than every
b. 3 years
c. 4 years
d. 5 years
a. 2 years
19.
The BOA shall submit to the PRC the ratings obtained by each candidate within how many
calendar days after the examination?
b. 10 days
c. 15 days
d. 30 days
a. 5 days
20.
A Professional Identification Card bearing the registration number, date of issuance, expiry
date, duly signed by the chairperson of the Commission, shall be issued to every registrant
renewable every
a. Two years
b. Three years
c. Four years
d. Five years
21.
The certified public accountant shall be required to indicate which of the following numbers
on the documents he/she signs, uses or issues in connection with the practice of his/her
profession?
A
b
c
d
Yes
Yes
Yes
No
• His/her Certificate of Registration
Yes
Yes
Yes
Yes
• Professional Identification Card
Yes
Yes
No
Yes
• Professional Tax Receipt
Yes
No
No
No
• Telephone
22.
The BOA shall not refuse the registration of any person who successfully passed the CPA
examinations if
a. Convicted by a court of competent jurisdiction of a criminal offense involving moral
turpitude
b. Convicted for a political offense.
c. Guilty of immoral and dishonorable conduct
d. None of the above.
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23.
Which of the following is not one of the grounds for proceedings against a CPA?
a. Gross negligence or incompetence in the practice of his profession.
b. Engaging in public practice while being employed in a private enterprise.
c. Insanity.
d. Immoral or dishonorable conduct.
24.
A person whose CPA certificate has been revoked
a. Can no longer be reinstated as a CPA
b. Is automatically reinstated as a CPA after two years if the has acted in an exemplary
manner
c. May be reinstated as a CPA by the Board of Accountancy after two years if he has acted
in an exemplary manner
d. May be reinstated by the PRC after two years if he has acted in an exemplary manner
25.
Who is not permitted by law to practice accountancy?
a. A corporation whose stockholders are all CPAs
b. A partnership of CPAs
c. An individual CPA practitioner
d. A partnership of CPAs with some non-CPA staff
26.
A certificate of accreditation shall be issued to certified public accountants in public practice
only upon showing, in accordance with rules and regulations promulgated by the Board and
approved by the Commission, that such registrant has acquired how many years of
meaningful experience in any of the areas of public practice?
c. Three
d. Four
a. One
b. Two
27.
A meaningful experience shall be considered as satisfactory compliance with the
requirements of Section 28 of RA 9298 if it is earned in (Choose the incorrect one)
a. Commerce and industry and shall include significant involvement in general accounting,
budgeting, tax administration, internal auditing, liaison with external auditors, representing
his/her employer before government agencies on tax and matters related to accounting or
any other related functions.
b. Academe/education and shall include teaching for at least three (3) trimesters or two (2)
semesters subjects in either financial accounting, business law and tax, auditing
problems, auditing theory, financial management and management services.
c. Government and shall include significant involvement in general accounting, budgeting,
tax administration, internal auditing, liaison with the Commission on Audit or any other
related functions.
d. Public practice and shall include at least two years as audit assistant and at least one
year as auditor in charge of audit engagement covering full audit functions of significant
clients.
28.
The Accountancy Law provides that all working papers made during an audit shall be the
property of the auditor. These working papers shall include the following, except:
a. Schedules and memoranda made by the CPA and his staff.
b. Working papers prepared and submitted by the client.
c. Excerpts or copies of documents furnished the auditor.
d. Reports submitted by the CPA to the client.
29.
Individual CPAs, Firms or Partnerships of CPAs, including partners and staff members
thereof shall register with the BOA and the PRC. If the application for registration of AB and
Co., CPAs was approved on August 30, 2005, it shall file for renewal on or before
a. September 30, 2007
c. December 31, 2007
b. September 30, 2008
d. August 30, 2008
30.
Which statement is correct regarding CPE requirements for renewal of professional license?
a. The total CPE credit units required for CPAs shall be sixty (60) units for three (3) years,
provided that a minimum of twenty (20) credit units shall be earned in each year.
b. A registered professional shall be permanently exempted from CPE requirements upon
reaching the age of 60 years old.
c. A registered professional who is working abroad shall be temporarily exempted from
compliance with CPE requirement during his/her stay abroad, provided that he/she is has
been out of the country for at least one year immediately prior to the date of renewal.
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d. Those who failed to renew professional licenses for a period of five (5) continuous years
from initial registration, or from last renewal shall be declared delinquent.
31.
Any person who shall violate any of the provisions of RA 9298 or any of its implementing
rules and regulations as promulgated by the Board subject to the approval of the
Commission, shall, upon conviction, be punished by
a. A fine of not less than fifty thousand pesos (P 50,000.00) or by imprisonment for a period
not exceeding two (2) years or both.
b. A fine of not less than one hundred thousand pesos (P 100,000.00) or by imprisonment
for a period not exceeding two (2) years or both.
c. A fine of not less than fifty thousand pesos (P 50,000.00) or by imprisonment for a period
not exceeding three (3) years or both.
d. A fine of not less than one hundred thousand pesos (P 100,000.00) or by imprisonment
for a period not exceeding three (3) years or both.
32.
The primary duty to enforce the provisions of RA 9298 and its IRR rests with
a. The PRC
c. The PRC and BOA
b. The BOA
d. The AASC
33.
The PICPA shall renew its Certificate of Accreditation once every how many years after the
date of the Resolution granting the petition for re-accreditation and the issuance of the said
certificate upon submission of the requirements?
b. 3 years
c. 4 years
d. 6 years
a. 2 years
34.
Below are the names of three CPA firms and pertinent facts relative to each firm. Unless
otherwise indicated, the individuals named are CPAs and partners, and there are no other
partners. Which firm name and related facts indicates a violation of the IRR of RA 9298?
a. Joyce, Ara and Angela, CPAs (Joyce died about 10 years ago, Ara and Angela are
continuing the firm)
b. Lupin and Fujico, CPAs ( the name of Goymon a third active partner is omitted in the firm
name)
c. Hugo and Pugo, CPAs (Hugo died 25 months ago, Pugo is continuing the firm as a sole
proprietor)
d. Bubu and Bibi, CPAs (Bibi died 3 years ago, Bobot was admitted into the partnership 2
months after Bibi’s death.)
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AUDITING THEORY TEST BANK
ASSURANCE SERVICES
1. Which of the following statements best describes assurance services?
A. Independent professional services that are intended to enhance the
credibility of information to meet the needs of an intended user.
B. Services designed to express an opinion on the fairness of historical financial
statements based on the results of an audit.
C. The preparation of financial statements or the collection, classification, and
summarization of other financial information.
D. Services designed for the improvement of operations, resulting in better outcomes.
2. Which of the following is not an assurance service?
A. Examination of prospective financial information
B. Audit of historical financial statements
C. Review of financial statements
D. Compilation of financial information
3. Suitable criteria are required for reasonably consistent evaluation or measurement of the
subject matter of an assurance engagement. Which of the following statements
concerning the characteristics of suitable criteria is correct?
A. Reliable criteria contribute to conclusions that are clear, comprehensive, and not
subject to significantly different interpretations.
B. Relevant criteria allow reasonably consistent evaluation or measurement of the subject
matter including, where relevant, presentation and disclosure, when used in similar
circumstances by similarly qualified practitioners.
C. Neutral criteria contribute to conclusions that are free from bias.
D. Criteria are sufficiently complete when they contribute to conclusions that are clear,
comprehensive, and not subject to different interpretations.
4. In an assurance engagement, the outcome of the evaluation or measurement of a subject
matter against criteria is called
A. Subject matter information
B. Subject matter
C. Assurance
D. Conclusion
5. What type of assurance engagement is involved when the practitioner expresses a
positive form of conclusion?
A. Limited assurance engagement
B. Positive assurance engagement
C. Reasonable assurance engagement
D. Absolute assurance engagement
6. What type of assurance engagement is involved when the practitioner expresses a
negative form of conclusion?
A. Reasonable assurance engagement
B. Negative assurance engagement
C. Assertion-based assurance engagement
D. Limited assurance engagement
7. Which of the following statements is true concerning evidence in an assurance
engagement?
A. Sufficiency is the measure of the quantity of evidence.
B. Appropriateness is the measure of the quality of evidence, that is, its reliability and
persuasiveness.
C. The reliability of evidence is influenced not by its nature but by its source.
D. Obtaining more evidence may compensate for its poor quality.
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8. Assurance engagement risk is the risk
A. That the practitioner expresses an inappropriate conclusion when the
subject matter information is materially misstated.
B. Of expressing an inappropriate conclusion when the subject matter information is not
materially misstated.
C. Through loss from litigation, adverse publicity, or other events arising in connection
with a subject matter reported on.
D. Of expressing an inappropriate conclusion when the subject matter information is
either materially misstated or not materially misstated.
9. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial as
a result of the following factors, except
A. The use of selective testing.
B. The fact that much of the evidence available to the practitioner is persuasive rather
than conclusive.
C. The practitioner may not have the required assurance knowledge and skills
to gather and evaluate evidence.
D. The use of judgment in gathering and evaluating evidence and forming conclusions
based on that evidence.
10. The Philippine Framework for Assurance Engagements
A. Contains basic principles, essential procedures, and related guidance for the
performance of assurance engagements.
B. Defines and describes the elements and objectives of an assurance
engagement, and identifies engagements to which PSAs, PSREs, and PSAEs
apply.
C. Provides a frame of reference for CPAs in public practice when performing audits,
reviews, and compilations of historical financial information.
D. Establishes standards and provides procedural requirements for the performance of
assurance engagements.
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AUDITING AND RELATED SERVICES
11. PSRE 2400 (Engagements to Review Financial Statements), as amended by the AASC in
February 2008, applies to
A. Reviews of any historical financial information of an audit client.
B. Reviews of any historical financial information by a practitioner other than
the entity’ s auditor.
C. Reviews of historical financial or other information by a practitioner other than the
entity’s auditor.
D. Reviews of historical financial or other information of an audit client.
12. When performing a compilation engagement, the accountant is required to
A. Assess internal controls.
B. Make inquiries of management to assess the reliability and completeness of the
information provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and operations of the
entity.
13. Inquiries and analytical procedures ordinarily form the basis for which type of
engagement?
A. Agreed-upon procedures.
B. Audit.
C. Examination.
D. Review.
14. A practitioner should accept an assurance engagement only if
A. The subject matter is in the form of financial information.
B. The criteria to be used are not available to the intended users.
C. The practitioner’ s conclusion is to be contained in a written report.
D. The subject matter is the responsibility of either the intended users or the practitioner.
15. The auditor is required to maintain professional skepticism throughout the audit. Which of
the following statements concerning professional skepticism is false?
A. A belief that management and those charged with governance are honest
and have integrity relieves the auditor of the need to maintain professional
skepticism.
B. Maintaining professional skepticism throughout the audit reduces the risk of using
inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.
C. Professional skepticism is necessary to the critical assessment of audit evidence.
D. Professional skepticism is an attitude that includes questioning contradictory audit
evidence obtained.
16. Which of the following best describes the reason why independent auditors report on
financial statements?
A. A management fraud may exist and it is more likely to be detected by independent
auditors.
B. Different interests 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 auditors’ work.
D. Poorly designed internal control may be in existence.
17. Which of the following professionals has primary responsibility for the performance of an
audit?
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.
18. What is the proper organizational role of internal auditing?
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A.
B.
C.
D.
19.
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To serve as an independent, objective assurance and consulting activity that
adds value to operations.
To assist the external auditor in order to reduce external audit fees.
To perform studies to assist in the attainment of more efficient operations.
To serve as the investigative arm of the audit committee of the board of directors.
Operational audits generally have been conducted by internal and COA auditors, but may
be performed by certified public accountants. A primary purpose of an operational audit is
to provide
A. A measure of management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting matters to a
company’s top-level management.
C. Aid to the independent auditor, who is conducting the examination of the financial
statements.
D. A means of assurance that internal accounting controls are functioning as planned.
20. Which of the following terms best describes the audit of a taxpayer ’s return by a BIR
auditor?
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.
21. Which of the following statements concerning consulting services is false?
A. The performance of consulting services for audit clients does not, in and of itself,
impair the auditor’s independence.
B. Consulting services differ fundamentally from the CPA ’s function of attesting to the
assertions of other parties.
C. Consulting services ordinarily involve external reporting.
D. Most CPAs, including those who provide audit and tax services, also provide consulting
services to their clients.
22. Which of the following is the most appropriate action to be taken by a CPA who has been
asked to perform a consulting services engagement concerning the analysis of a potential
merger if he/she has little experience with the industry involved?
A. Accept the engagement but he/she should conduct research or consult with
others to obtain sufficient competence.
B. Decline the engagement because he/she lacks sufficient knowledge.
C. Accept the engagement and issue a report that contains his/her opinion on the
achievability of the results of the merger.
D. Accept the engagement and perform it in accordance with Philippine Standards on
Auditing (PSAs).
23. An
A.
B.
C.
D.
objective of a performance audit is to determine whether an entity ’s
Operational information is in accordance with government auditing standards.
Specific operating units are functioning economically and efficiently.
Financial statements present fairly the results of operations.
Internal control is adequately operating as designed.
24.
The internal auditing department’s responsibility for deterring fraud is to
A. Establish an effective internal control system.
B. Maintain internal control.
C. Examine and evaluate the system of internal control.
D. Exercise operating authority over fraud prevention activities.
25.
Internal auditors review the adequacy of the company ’s internal control system primarily
to
A. Help determine the nature, timing, and extent of tests necessary to achieve audit
objectives.
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B. Determine whether the internal control system provides reasonable
assurance that the company’s objectives and goals are met efficiently and
economically.
C. Ensure that material weaknesses in the system of internal control are corrected.
D. Determine whether the internal control system ensures that financial statements are
fairly presented.
THE ACCOUNTANCY PROFESSION
26. The members of the Professional Regulatory Board of Accountancy shall be appointed by
the
A. Philippine Institute of CPAs (PICPA).
B. Professional Regulation Commission (PRC).
C. President of the Philippines.
D. Association of CPAs in Public Practice (ACPAPP).
27. The following statements relate to the submission of nominations to the Board of
Accountancy. Which is correct?
A. The Accredited National Professional Organization of CPAs (APO) shall submit its
nominations to the president of the Philippines not later than sixty (60) days prior to
the expiry of the term of an incumbent chairman or member.
B. The APO shall submit its nominations to the PRC not later than thirty (30) days prior to
the expiry of the term of an incumbent chairman or member.
C. If the APO fails to submit its own nominee(s) to the PRC within the required period,
the PRC in consultation with the Board of Accountancy shall submit to the president of
the Philippines a list of five (5) nominees for each position.
D. There should be adequate documentation to show the qualifications and
primary field of professional activity of each nominee.
28. The following statements relate to the term of office of the chairman and members of the
Board of Accountancy (BOA). Which is false?
A. The chairman and members of the BOA shall hold office for a term of three (3) years.
B. Any vacancy occurring within the term of a member shall be filled up for the unexpired
portion of the term only.
C. No person who has served two successive complete terms as chairman or
member shall be eligible for reappointment until the lapse of two (2) years.
D. Appointment to fill up an unexpired term is not to be considered as a complete term.
29. The Board of Accountancy has the power to conduct an oversight into the quality of audits
of financial statements through a review of the quality control measures instituted by
auditors in order to ensure compliance with the accounting and auditing standards and
practices. This power of the BOA is called
A. Quality assurance review
C. Appraisal
B. Peer review
D. Quality control
30. Which of the following statements concerning the issuance of Certificates of Registration
and Professional Identification Cards to successful examinees is correct?
A. The Certificate of Registration issued to successful examinees is renewable every three
(3) years.
B. The Professional Identification Card issued to successful examinees shall remain in full
force and effect until withdrawn, suspended or revoked in accordance with RA 9298.
C. The BOA shall not register and issue a Certificate of Registration and
Professional Identification Card to any successful examinee of unsound
mind.
D. The BOA may, after the expiration of three (3) years from the date of revocation of a
Certificate of Registration, reinstate the validity of a revoked Certificate of Registration.
31. Which of the following statements concerning ownership of working papers is incorrect?
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A.
B.
C.
D.
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All working papers made by a CPA and his/her staff in the course of an examination
remain the property of such CPA in the absence of a written agreement between the
CPA and the client to the contrary.
Working papers include schedules and memoranda prepared and submitted by the
client of the CPA.
Working papers include reports submitted by a CPA to his/her client.
Working papers shall be treated confidential and privileged unless such documents are
required to be produced through subpoena issued by any court, tribunal, or
government regulatory or administrative body.
32. Any person who shall violate any of the provisions of the Accountancy Act or any of its
implementing rules and regulations promulgated by the Board of Accountancy subject to
the approval of the PRC, shall, upon conviction, be punished by
A. A fine of not more than P50,000.
B. Imprisonment for a period not exceeding two years.
C. A fine of not less than P50,000 or by imprisonment for a period not
exceeding two years or both.
D. Lethal injection.
33. A partner surviving the death or withdrawal of all the other partners in a partnership may
continue to practice under the partnership name for a period of not more than how many
years after becoming a sole proprietor?
A. 1
C. 3
B. 2
D. 4
34. The death or disability of an individual CPA and/or the dissolution and liquidation of a firm
or partnership of CPAs shall be reported to the BOA not later than how many days from
the date of such death, dissolution or liquidation.
A. 15
C. 60
B. 30
D. 90
35. Which of the following statements concerning a CPA ’s disclosure of confidential client
information is ordinarily correct?
A. Disclosure may be made to any party on consent of the client.
B. Disclosure should not be made even if such disclosure will protect the CPA ’s
professional interests in legal proceedings.
C. Disclosure should be made only if there is a legal or professional duty to make the
disclosure.
D. Disclosure may be made to any government agency without subpoena.
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THE CPA’ S PROFESSIONAL RESPONSIBILITIES
36. Which of the following statements best explains why the CPA profession has found it
essential to establish ethical standards and means for ensuring their observance?
A. Vigorous enforcement of an established code of ethics is the best way to prevent
unscrupulous acts.
B. Ethical standards that emphasize excellence in performance over material rewards
establish a reputation for competence and character.
C. A distinguishing mark of a profession is its acceptance of responsibility to
the public.
D. A requirement for a profession is to establish ethical standards that stress primarily a
responsibility to clients and colleagues.
37. Which of the following will not create self-interest threat for a professional accountant in
public practice?
A. The possibility of losing a significant client.
B. Direct financial interest in the assurance client.
C. Undue dependence on total fees from a client.
D. Preparing the original data used to generate records that are the subject
matter of the assurance engagement.
38. Familiarity threat could be created under the following circumstances except
A. A professional accountant accepting gifts from a client whose value is
inconsequential or trivial.
B. Senior personnel having a long association with the assurance client.
C. A director or officer of the client or an employee in a position to exert significant
influence over the subject matter of the engagement having recently served as the
engagement partner.
D. A member of the engagement team having a close or immediate family member who
is a director or officer of the client.
39. Which of the following circumstances may create advocacy threat for a professional
accountant in public practice?
A. The firm promoting shares in an audit client.
B. A firm issuing an assurance report on the effectiveness of the operation of financial
systems after designing or implementing the systems.
C. A firm being threatened with dismissal from a client engagement.
D. A firm being concerned about the possibility of losing a significant client.
40. The following circumstances may create intimidation threats, except
A. Being threatened with dismissal or replacement in related to a client engagement.
B. Being pressured to reduce inappropriately the extent of work performed in order to
reduce fees.
C. Being threatened with litigation.
D. A member of the assurance team being, or having recently been, a director
or officer of the client.
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41. Which of the following is an example of engagement-specific safeguards in the work
environment?
A. Advising partners and professional staff of those assurance clients and related entities
from which they must be independent.
B. Disclosing to those charged with governance of the client the nature of
service provided and extent of fees charged.
C. A disciplinary mechanism to promote compliance with the firm ’s policies and
procedures.
D. Published policies and procedures to encourage and empower staff to communicate to
senior levels within the firm any issue relating to compliance with the fundamental
principles that concerns them.
42. According to Section 240 of the Code of Ethics, fees charged for assurance engagements
should be a fair reflection of the value of the work involved. In determining professional
fees, the following should be taken into account, except
A. The time necessarily occupied by each person engaged on the work.
B. The outcome or result of a transaction or the result of the work performed.
C. The skill and knowledge required for the type of work involved.
D. The level of training and experience of the persons necessarily engaged on the work.
43. Financial interests may be held through an intermediary (for example, a collective
investment vehicle, estate or trust). When control over the investment vehicle or the
ability to influence investment decisions exists, the code defines that financial interest to
be
A. Direct financial interest.
B. Material direct financial interest.
C. Indirect financial interest.
D. Material indirect financial interest.
44. The concept of materiality is least important to an auditor when considering the
A. Effects of a direct financial interest in the client upon the auditor ’s
independence.
B. Decision whether to use positive or negative confirmations of accounts receivable.
C. Adequacy of disclosure of a client’s illegal act.
D. Discovery of weaknesses in a client’s internal control.
45. A direct financial interest or a material indirect financial interest in the audit client of a
member of the audit team or his immediate family member may create a significant selfinterest threat. Which of the following safeguards would be least likely considered to
eliminate the threat or reduce it to an acceptable level?
A. Discuss the matter with those charged with governance of the audit client.
B. Dispose of the direct financial interest prior to the individual becoming a member of
the audit team.
C. Dispose of the indirect financial interest in total or dispose of a sufficient amount of it
so that the remaining interest is no longer material prior to the individual becoming a
member of the audit team.
D. Remove the member of the audit team from the audit engagement.
46. When an immediate family member of a member of the assurance team is a director, an
officer, or an employee of the assurance client in a position to exert direct and significant
influence over the subject matter information of the assurance engagement, or was in
such a position during the period covered by the engagement, the threats to
independence can only be reduced to an acceptable level by
A. Where possible, structuring the responsibilities of the assurance team so that the
professional does not deal with matters that are within the responsibility of the
immediate family member.
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B. Withdrawing from the assurance engagement.
C. Removing the individual from the assurance team.
D. Discussing the issue with those charged with governance, such as the audit
committee.
47. Which of the following would not generally create a threat to independence?
A. The purchase of goods and services from an assurance client by the firm (or
from a financial statement audit client by a network firm) or a member of
the assurance team provided that the transaction is in the normal course of
business and on an arm’ s length basis.
B. A partner or employee of the firm or a network firm serves as Company Secretary for
a financial statement audit client.
C. Determining which recommendations of the firm should be implemented.
D. Reporting, in a management role, to those charged with governance.
48. The following forms of assistance to a financial statement audit client do not generally
threaten the firm’s independence, except
A. Analyzing and accumulating information for regulatory reporting.
B. Assisting in resolving account reconciliation problems.
C. Authorizing or approving transactions.
D. Assisting in the preparation of consolidated financial statements.
49. The following statements relate to the provision of taxation, internal audit or IT Systems
services to audit clients. Which is false?
A. Preparing calculations of current and deferred tax liabilities (or assets) for
an audit client for the purpose of preparing accounting entries that will be
subsequently audited by the firm creates a self-interest threat.
B. A self-review threat may be created when a firm, or network firm, provides internal
audit services to an audit client.
C. The provision of services by a firm or network firm to an audit client that involve the
design and implementation of financial information technology systems that are used
to generate information forming part of a client ’s financial statements may create a
self-review threat.
D. The provision of services in connection with the assessment, design, and
implementation of internal accounting controls and risk management controls does not
create a threat to independence provided that firm or network firm personnel do not
perform management functions.
50. What threat to independence is created when the litigation support services provided to
an audit client include the estimation of the possible outcome and thereby affects the
amounts or disclosures to be reflected in the financial statements?
A. Self-review threat
B. Advocacy threat
C. Intimidation threat
D. Familiarity threat
51. What threat to independence may be created if fees due from an assurance client for
professional services remain unpaid for a long time, especially if a significant part is not
paid before the issue of the assurance report for the following year?
A. Advocacy threat
B. Self-interest threat
C. Intimidation threat
D. Self-review threat
52. These are fees calculated on a predetermined basis relating to the outcome or result of a
transaction or the result of the work performed.
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A.
B.
C.
D.
Contingent fees
Fixed fees
Predetermined fees
Commissions.
53. As defined in the Code of Ethics, what is the communication to the public of information
as to the services or skills provided by professional accountants in public practice with a
view to procuring professional business?
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services
54. As defined in the Code of Ethics, what is the communication to the public of facts about a
professional accountant which are not designed for the deliberate promotion of that
professional accountant?
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services
55. Which of the following statements concerning publicity is incorrect?
A. Booklets and other documents bearing the name of a professional accountant and
giving technical information for the assistance of staff or clients may be issued to such
persons, other professional accountants or other interested parties.
B. Professional accountants who author books or articles on professional
subjects may state their name and professional qualifications; give the
name of their organization; and give any information as to the services that
the firm provides.
C. Appropriate newspapers or magazines may be used to inform the public of the
establishment of a new practice, of changes in the composition of a partnership of
professional accountants in public practice, or of any alteration in the address of a
practice.
D. A professional accountant may develop and maintain a website in the Internet in such
suitable length and style which may also include announcements, press releases,
publications and such other necessary and factual information.
56. A professional accountant in public practice is allowed to
A. Refer to, use or cite actual or purported testimonials by third parties.
B. Publish services in billboard (e.g., tarpaulin, streamers, etc.) advertisements.
C. Publish and compare fees with other CPAs or CPA firms or compare those services
with those provided by another firm or CPA practitioner.
D. Inform interested parties through any medium that a partnership or
salaried employment of an accountancy nature is being sought.
57. After evaluating the significance of the threat created by an actual or threatened litigation,
the following safeguards should be applied to reduce the threat to an acceptable level,
except
A. Disclosing to the audit committee, or others charged with governance, the extent and
nature of the litigation.
B. If the litigation involves a member of the assurance team, removing that individual
from the assurance team.
C. Involving an additional professional accountant in the firm who was not a member of
the assurance team to review the work or otherwise advise as necessary.
D. Withdraw from, or refuse to accept, the assurance engagement.
58. The following statements relate to the provision of legal services to an audit client. Which
is incorrect?
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A.
B.
C.
D.
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The provision of legal services to an audit client involving matters that
would not be expected to have a material effect on the financial statements
may create a self-review threat.
Legal services to support an audit client in the execution of a transaction (e.g.,
contract support) may create a self-review threat.
Acting for an audit client in the resolution of a dispute or litigation in such
circumstances when the amounts involved are material in relation to the financial
statements of the audit client would create advocacy and self-review threats so
significant no safeguards could reduce the threats to an acceptable level.
The appointment of a partner or an employee of the firm or network firm as General
Counsel for legal affairs to an audit client would create self-review and advocacy
threats that are so significant no safeguards could reduce the threats to an acceptable
level.
59. The following circumstances create advocacy threats for a professional accountant in
public practice except
A. Promoting shares in an audit client.
B. Acting as an advocate on behalf of an audit client in litigation or disputes with third
parties.
C. Acting as campaign manager for the president of a client who is running for a public
office.
D. A member of the assurance team having a significant close business
relationship with an assurance client.
60. The primary purpose of establishing quality control policies and procedures for deciding
whether to accept a new client is to
A. Anticipate before performing any fieldwork whether an unqualified opinion can be
expressed.
B. Enable the CPA firm to attest to the reliability of the client.
C. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
D. Minimize the likelihood of association with clients whose management lacks
integrity.
61. As defined in PSQC 1, what is a process comprising an ongoing consideration and
evaluation of the firm’s system of quality control, including a periodic inspection of a
selection of completed engagements, designed to provide the firm with reasonable
assurance that its system of quality control is operating effectively?
A. Monitoring
B. Inspection
C. Engagement quality control review
D. Supervision
62. Which element of a system of quality control is addressed by the establishment of policies
and procedures designed to provide the firm with reasonable assurance that it has
sufficient personnel with the competence, capabilities, and commitment to ethical
principles?
A. Monitoring
B. Leadership responsibilities for quality within the firm
C. Human resources
D. Engagement performance
63. For audits of financial statements of listed entities, the engagement partner should not
issue the auditor’s report until the completion of the
A. Engagement Quality Control Review
B. Management Review
C. Engagement Team Review
D. Engagement Partner Review
64. Who should take responsibility for the overall quality on each audit engagement?
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A.
B.
C.
D.
Engagement quality control reviewer
Engagement partner
Engagement team
CPA firm
65. The engagement partner should take responsibility for the direction, supervision, and
performance of the audit engagement in compliance with professional standards and
regulatory and legal requirements, and for the auditor ’s report that is issued to be
appropriate in the circumstances. Supervision includes the following, except
A. Tracking the progress of the audit engagement.
B. Addressing significant issues arising during the audit engagement, considering their
significance, and modifying the planned approach appropriately.
C. Informing the members of the engagement team of their responsibilities.
D. Identifying matters for consultation or consideration by more experienced engagement
team members during the audit engagement.
THE FINANCIAL STATEMENT AUDIT: CLIENT ACCEPTANCE AND PLANNING
66. 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.
67.
Which of the following statements concerning materiality is not correct?
A. When establishing the overall audit strategy, the auditor shall determine materiality for
the financial statements as a whole.
B. If, in the specific circumstances of the entity, there is one or more particular classes of
transactions, account balances or disclosures for which misstatements of lesser
amounts than materiality for the financial statements as a whole could reasonably be
expected to influence the economic decisions of users taken on the basis of the
financial statements, the auditor shall also determine the materiality level or levels to
those particular classes of transactions, account balances or disclosures.
C. Determining materiality involves the exercise of professional judgment.
D. The materiality level for the financial statements as a whole determined in
the planning stage of the audit should not be affected by changes in the
circumstances of the engagement.
68. Analytical procedures used in planning an audit should focus on
A. Reducing the scope of tests of controls and substantive tests.
B. Providing assurance that potential material misstatements will be identified.
C. Enhancing the auditor’ s understanding of the client ’s business and
identifying areas of potential risk.
D. Assessing the adequacy of the available evidential matter.
69. Which of the following would not be considered an analytical procedure?
A. Estimating payroll expense by multiplying the number of employees by the average
hourly wage rate and the total hours worked.
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B. Projecting an error rate by comparing the results of a statistical sample with
the actual population characteristics.
C. Computing accounts receivable turnover by dividing credit sales by the average net
receivables.
D. Developing the expected sales based on the sales trend of the prior five years.
70. Which of the following auditing procedures most likely would assist an auditor in
identifying related party transactions?
A. Inspecting correspondence with lawyers for evidence of unreported contingent
liabilities.
B. Vouching accounting records for recurring transactions recorded just after the balance
sheet date.
C. Reviewing confirmations of loans receivable and payable for indications of
guarantees.
D. Performing analytical procedures for indications of possible financial difficulties.
71. Which of the following most likely would indicate the existence of related parties?
A. Writing down obsolete inventory just before year-end.
B. Failing to correct previously identified internal control deficiencies.
C. Depending on a single product for the success of the entity.
D. Borrowing money at an interest rate significantly below the market rate.
72. If the results of the auditor’s expert’s work do not provide sufficient appropriate audit
evidence or are not consistent with other audit evidence, the auditor should
A. Report the matter to the appropriate regulatory agency of the government.
B. Resolve the matter.
C. Withdraw from the engagement.
D. Express an unqualified opinion with reference to the work of the expert.
RISK ASSESSMENTS AND INTERNAL CONTROL
73. 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 unmodified opinion has been
issued is the
A. Inherent risk.
B. Acceptable audit risk.
C. Control risk.
D. Detection risk.
74.
Which of the following is not one of the three primary objectives of effective internal
control?
A. Reliability of financial reporting.
B. Efficiency and effectiveness of operations.
C. Compliance with laws and regulations.
D. Assurance of elimination of business risk.
75.
Which of the following statements concerning the relevance of various types of controls to
a financial statement audit is correct?
A. All controls are ordinarily relevant to a financial statement audit.
B. Controls over safeguarding of assets and liabilities are of primary importance, while
controls over the reliability of financial reporting may also be relevant.
C. Controls over the reliability of financial reporting are ordinarily most
directly relevant to a financial statement audit, but other controls may also
be relevant.
D. An auditor may ordinarily ignore a consideration of controls when a substantive audit
approach is taken.
76. 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.
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B. The frequency and effectiveness of the controls.
C. The design and implementation of the controls.
D. The implementation and efficiency of the controls.
77. Authorizations can be either general or specific. Which of the following is not an example
of a general authorization?
A. Automatic reorder points for raw materials inventory.
B. A sales manager’ s authorization for a sales return.
C. Credit limits for various classes of transactions.
D. A sales price list for merchandise.
78. An auditor should obtain sufficient knowledge of an entity ’s information system, including
the related business processes relevant to financial reporting, to understand the
A. Policies used to detect the concealment of fraud.
B. Process used to prepare significant accounting estimates.
C. Safeguards used to limit access to computer facilities.
D. Procedures used to assure proper authorization of transactions.
79. Which of the following controls most likely would provide reasonable assurance that all
credit sales transactions of an entity are recorded?
A. The accounting department supervisor controls the mailing of monthly statements to
customers and investigates any differences reported by customers.
B. The accounting department supervisor independently reconciles, on a monthly basis,
the accounts receivable subsidiary ledger to the accounts receivable control account.
C. The billing department supervisor matches prenumbered shipping
documents with entries in the sales journal.
D. The billing department supervisor sends copies of approved sales orders to the credit
department for comparison to authorized credit limits and current customer account
balances.
80. Which of the following control activities in an entity ’s revenue/receipt cycle would provide
reasonable assurance that all billed sales are correctly posted to the accounts receivable
ledger?
A. Each shipment of goods on credit is supported by a prenumbered sales invoice.
B. The accounts receivable subsidiary ledger is reconciled daily to the accounts receivable
control account in the general ledger.
C. Daily sales summaries are compared to daily postings to the accounts
receivable ledger.
D. Each sales invoice is supported by a prenumbered shipping document.
81. Which of the following controls is not usually performed in the accounts payable
department?
A. Indicating on the voucher the affected asset and expense accounts to be debited.
B. Approving vouchers for payment by having an authorized employee sign the vouchers.
C. Accounting for unused prenumbered purchase orders and receiving reports.
D. Matching the vendor’s invoice with the related purchase requisition, purchase order,
and receiving report.
82.
After gaining an understanding of internal control and assessing the risks of material
misstatement, an auditor decided to perform tests of controls. The auditor most likely
decided that
A. Additional evidence to support a further reduction in control risk is not available.
B. It is not possible or practicable to reduce the risks of material misstatement
at the assertion level to an acceptably low level with audit evidence
obtained only from substantive test procedures.
C. There were many internal control weaknesses that could allow misstatements to enter
the accounting system.
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D. An increase in the assessed level of control risk is justified for certain financial
statement assertions.
83. An auditor may decide to assess control risk at the maximum level for certain assertions
because the auditor believes
A. Controls are unlikely to pertain to the assertions.
B. The entity’s control components are interrelated.
C. Sufficient appropriate audit evidence to support the assertions is likely to be available.
D. More emphasis on tests of controls than substantive tests is warranted.
84. Which of the following statements is correct concerning an auditor ’s assessment of control
risk?
A. Assessing control risk may be performed concurrently during an audit with
obtaining an understanding of the entity’s internal control.
B. Evidence about the operation of controls in prior audits may not be considered during
the current year’s assessment of control risk.
C. The basis for an auditor’s conclusions about the assessed level of control risk need not
be documented unless control risk is assessed at the maximum level.
D. The lower the assessed level of control risk, the less assurance the evidence must
provide that the controls are operating effectively.
85.
In performing tests of the operating effectiveness of an entity ’s controls, an auditor
selects from a variety of techniques, including
A. Reperformance and observation.
B. Inquiry and analytical procedures.
C. Comparison and confirmation.
D. Inspection and verification.
86.
Which of the following tests of controls most likely would help assure an auditor that
goods shipped are properly billed?
A. Scan the sales journal for sequential and unusual entries.
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales summaries.
D. Inspect unused sales invoices for consecutive prenumbering.
87. When there are numerous property and equipment transactions during the year, an
auditor who plans to assess control risk at a low level usually performs
A. Tests of controls and extensive tests of property and equipment balances at the end of
the year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment
transactions.
D. Analytical procedures for property and equipment balances at the end of the year.
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FRAUD AND ERROR
88.“Error” includes
A. Engaging in complex transactions that are structured to misrepresent the financial
position or financial performance of the entity.
B. Concealing, or not disclosing, facts that could affect the amounts recorded in the
financial statements.
C. An
incorrect
accounting
estimate
arising
from
oversight
or
misinterpretation of facts.
D. Intentional misapplication of accounting policies relating to amounts, classification,
manner of presentation, or disclosure.
89. Fraud involving one or more members of management or those charged with governance
is referred to as
A. Management fraud.
C. Fraudulent financial reporting.
B. Employee fraud.
D. Misappropriation of assets.
90. The auditor is concerned with fraud that causes a material misstatement in the financial
statements. There are two types of intentional misstatements that are relevant to the
auditor: misstatements resulting from fraudulent financial reporting and misstatements
resulting from
A. Management fraud.
B. Employee fraud.
C. Misappropriation of assets.
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D. Collusion within the entity or with third parties.
91. Fraudulent financial reporting involves intentional misstatements including omissions of
amounts or disclosures in financial statements to deceive financial statement users. It
may be accomplished in a number of ways, including
A. Embezzling receipts.
B. Stealing physical assets or intellectual property.
C. Using an entity’s assets for personal use.
D. Manipulation, falsification, or alteration of accounting records or supporting
documentation from which the financial statements are prepared.
92.
The following are examples of fraud risk factors relating to misstatements arising from
misappropriation of assets, except
A. Recurring negative cash flows from operating activities while reporting
earnings and earnings growth.
B. Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
C. Inadequate segregation of duties or independent checks.
D. Adverse relationship between the entity and employees with access to cash or other
assets susceptible to theft created by recent changes made to employee compensation
or benefit plans.
93. Opportunities to misappropriate assets increase when there are
A. Known or anticipated future employee layoffs.
B. Promotions, compensation, or other rewards inconsistent with expectations.
C. Recent or anticipated changes to employee compensation or benefit plans.
D. Inventory items that are small in size, of high value, or in high demand.
94. Which of the following conditions or events may create incentives/pressures to commit
fraud?
A. Inadequate system of authorization and approval of transactions.
B. Lack of mandatory vacations for employees performing key control functions.
C. Excessive pressure on management or operating personnel to meet
financial targets established by those charged with governance, including
sales or profitability incentive goals.
D. Inadequate access controls over automated records.
95.
When the auditor identifies a misstatement in the financial statements, the auditor should
consider whether such a misstatement may be indicative of fraud and if there is such an
indication, the auditor should
A. Consider the implications of the misstatement in relation to other aspects of
the audit.
B. Withdraw from the engagement.
C. Communicate the information to regulatory and enforcement authorities.
D. Report the matter to the person or persons who made the audit appointment.
AUDITING IN A CIS/IT ENVIRONMENT
96. The use of a computer changes the processing, storage, and communication of financial
information. A CIS environment may affect the following, except
A. The accounting and internal control systems of the entity.
B. The overall objective and scope of an audit.
C. The auditor’s design and performance of tests of control and substantive procedures
to satisfy the audit objectives.
D. The specific procedures to obtain knowledge of the entity ’s accounting and internal
control systems.
97. The following are benefits of using IT-based controls, except
A. Ability to process large volume of transactions.
B. Over-reliance on computer-generated reports.
C. Ability to replace manual controls with computer-based controls.
D. Reduction in misstatements due to consistent processing of transactions.
98. Which of the following statements concerning the Internet is incorrect?
A. The Internet is a shared public network that enables communication with other
entities and individuals around the world.
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B. The Internet is a private network that only allows access to authorized
persons or entities.
C. The Internet is interoperable, which means that any computer connected to the
Internet can communicate with any other computer connected to the Internet.
D. The Internet is a worldwide network that allows entities to engage in e-commerce/ebusiness activities.
99.
The auditor shall consider the entity’s CIS environment in designing audit procedures to
reduce risk to an acceptably low level. Which of the following statements is incorrect?
A. The auditor’s specific audit objectives do not change whether financial information is
processed manually or by computer.
B. The methods of applying audit procedures to gather audit evidence are not
influenced by the methods of computer processing.
C. The auditor may use either manual audit procedures, computer-assisted audit
techniques (CAATs), or a combination of both to obtain sufficient appropriate audit
evidence.
D. In some CIS environments, it may be difficult or impossible for the auditor to obtain
certain data for inspection, inquiry, or confirmation without the aid of a computer.
100. A characteristic that distinguishes computer processing from manual processing is
A. The potential for systematic error is ordinarily greater in manual processing than in
computerized processing.
B. Errors or fraud in computer processing will be detected soon after their occurrences.
C. Most computer systems are designed so that transaction trails useful for audit
purposes do not exist.
D. Computer processing virtually eliminates the occurrence of computational
errors normally associated with manual processing.
101. Which of the following statements most likely represents a disadvantage for an entity that
maintains data files on personal computers (PCs) rather than manually prepared files?
A. It is usually more difficult to compare recorded accountability with the physical count
of assets.
B. Random error associated with processing similar transactions in different ways is
usually greater.
C. Attention is focused on the accuracy of the programming process rather than errors in
individual transactions.
D. It is usually easier for unauthorized persons to access and alter the files.
102. The internal controls over computer processing include both manual procedures and
procedures designed into computer programs (programmed control procedures). These
manual and programmed control procedures comprise the general CIS controls and CIS
application controls. The purpose of general CIS controls is to
A. Establish specific control procedures over the accounting applications in order to
provide reasonable assurance that all transactions are authorized and recorded and
are processed completely, accurately, and on a timely basis.
B. Establish a framework of overall controls over the CIS activities and to
provide a reasonable level of assurance that the overall objectives of
internal control are achieved.
C. Provide reasonable assurance that systems are developed and maintained in an
authorized and efficient manner.
D. Provide reasonable assurance that access to data and computer programs is restricted
to authorized personnel.
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103. An entity has recently converted its purchasing cycle from a manual process to an online
computer system. Which of the following is a probable result associated with conversion
to the new IT system?
A. Traditional duties are less separated.
B. Increased processing time.
C. Reduction in the entity’s risk exposure.
D. Increased processing errors.
104. An entity should plan the physical location of its computer facility. Which of the following
is the primary consideration for selecting a computer site?
A. It should be in the basement or on the ground floor.
B. It should maximize the visibility of the computer.
C. It should minimize the distance that data control personnel must travel to deliver data
and reports and be easily accessible by a majority of company personnel.
D. It should provide security.
105. An entity installed antivirus software on all its personal computers. The software was
designed to prevent initial infections, stop replication attempts, detect infections after
their occurrence, mark affected system components, and remove viruses from infected
components. The major risk in relying on antivirus software is that it may
A. Consume too many system resources.
B. Interfere with system operations.
C. Not detect certain viruses.
D. Make software installation too complex.
AUDIT OBJECTIVES, PROCEDURES,EVIDENCE, AND DOCUMENTATION
106. Which of the following should be considered by the auditor in deciding which means (or
combination of means) to use in selecting items for testing?
I. The risk of material misstatement related to the assertion being tested.
II. Audit efficiency.
A. I only
C. Both I and II
B. II only
D. Neither I nor II
107. The quantity of audit evidence needed is affected by the risk of misstatement and also by
the quality of such audit evidence.
The reliability of audit evidence is influenced by its source and by its nature and is
dependent on the individual circumstances under which it is obtained.
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A. Both statements are true.
B. Both statements are false.
C. True; False.
D. False; True.
108. Which of the following is a false statement about audit objectives?
A. There should be a one-to-one relationship between audit objectives and procedures.
B. Audit objectives should be developed in light of management assertions about the
financial statement components.
C. Selection of tests to meet audit objectives should depend upon the understanding of
internal control.
D. The auditor should resolve any substantial doubt about any of management ’s material
financial statement assertions.
109. Which of the following statements concerning evidential matter is true?
A. Appropriate evidence supporting management’s assertions should be convincing rather
than merely persuasive.
B. Effective internal control contributes little to the reliability of the evidence created
within the entity.
C. The cost of obtaining evidence is not an important consideration to an auditor in
deciding what evidence should be obtained.
D. A client’s accounting records cannot be considered sufficient evidence to support the
financial statements.
110. Which of the following types of audit evidence is the most persuasive?
A. Prenumbered purchase order forms.
B. Client worksheets supporting cost allocations.
C. Bank statements obtained from the client.
D. Client representation letter.
111. Which of the following generalizations does not relate to the appropriateness of evidence?
A. Audit evidence from external sources (for example, confirmation received from a third
party) is more reliable than that generated internally.
B. An auditor’s opinion, to be economically useful, is formed within reasonable time and
based on evidence obtained at a reasonable cost.
C. Audit evidence generated internally is more reliable when the related accounting and
internal control systems are effective.
D. Audit evidence obtained directly by the auditor is more reliable than that obtained
from the entity.
112. Each of the following might, by itself, form a valid basis for an auditor to decide to omit a
test except for the
A. Difficulty and expense involved in testing a particular item.
B. Assessment of control risk at a low level.
C. Inherent risk involved.
D. Relationship between the cost of obtaining evidence and its usefulness.
113. In which of the following circumstances would the use of the negative form of accounts
receivable confirmation most likely be justified?
A. A substantial number of accounts may be in dispute and the accounts receivable
balance arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts receivable
balance arises from sales to many customers with small balances.
C. A small number of accounts may be in dispute and the accounts receivable balance
arises from sales to a few major customers.
D. A small number of accounts may be in dispute and the accounts receivable balance
arises from sales to many customers with small balances.
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114. Which of the following statements is correct concerning the use of negative confirmation
requests?
A. Unreturned negative confirmation requests rarely provide significant explicit evidence.
B. Negative confirmation requests are effective when detection risk is low.
C. Unreturned negative confirmation requests indicate that alternative procedures are
necessary.
D. Negative confirmation requests are effective when understatements of account
balances are suspected.
115. Which of the following most likely would give the most assurance concerning the valuation
and allocation assertion of accounts receivable?
A. Vouching amounts in the subsidiary ledger to details on shipping documents.
B. Comparing receivable turnover ratios with industry statistics for reasonableness.
C. Inquiring about receivables pledged under loan agreements.
D. Assessing the allowance for uncollectible accounts for reasonableness.
116. Confirmation is “the process of obtaining and evaluating a direct communication from a
third party in response to a request for information about a particular item affecting
financial statement assertions.” Two assertions for which confirmation of accounts
receivable balances provides primary evidence are
A. Completeness and valuation
B. Valuation and rights and obligations
C. Rights and obligations and existence
D. Existence and completeness
117. To gain assurance that all inventory items in a client ’s inventory listing schedule are valid,
an auditor most likely would vouch
A. Inventory tags noted during the auditor’s observation to items listed in the inventory
listing schedule.
B. Inventory tags noted during the auditor’s observation to items listed in receiving
reports and vendors’ invoices.
C. Items listed in the inventory listing schedule to inventory tags and the auditor ’s
recorded count sheets.
D. Items listed in receiving reports and vendors’ invoices to the inventory listing schedule.
118. Which of the following is not an audit procedure that the independent auditor would
perform with respect to litigation, claims, and assessments?
A. Inquire of and discuss with management the policies and procedures adopted for
litigation, claims, and assessments.
B. Obtain from management a description and evaluation of litigation, claims, and
assessments that existed at the balance sheet date.
C. Obtain assurance from management that if has disclosed all unasserted claims that the
lawyer has advised are probable of assertion and must be disclosed.
D. Confirm directly with the client’s lawyer that all claims have been recorded in the
financial statements.
119. Audit documentation may be recorded on paper or on electronic or other media. The
following are examples of audit documentation, except
A. Audit programs
B. Letters of confirmation and representation
C. Correspondence (including e-mail) concerning significant matters
D. The entity’s accounting records
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120. The completion of the assembly of the final audit file after the date of the auditor ’s report
does not ordinarily involve
A. The performance of new audit procedures or the drawing of new conclusions.
B. Sorting, collating and cross-referencing working papers.
C. Deleting or discarding superseded documentation.
D. Signing off on completion checklists relating to the file assembly process.
AUDIT SAMPLING
121. Audit sampling involves the
A. Selection of all items over a certain amount.
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B. Application of audit procedures to less than 100% of items within a class of
transactions or an account balance such that all items have a chance of selection.
C. Application of audit procedures to all items that comprise a class of transactions or an
account balance.
D. Application of audit procedures to all items over a certain amount and those that are
unusual or have a history of error.
122. Population, as defined in PSA 530, means the entire set of data from which a sample is
selected and about which the auditor wishes to draw conclusions. It is important for the
auditor to ensure that the population is
I. Appropriate to the objective of the audit procedure.
II. Complete.
A. I only
C. Both I and II
B. II only
D. Neither I nor II
123. An advantage of statistical over nonstatistical sampling methods in tests of controls is that
the statistical methods
A. Afford greater assurance than a nonstatistical sample of equal size.
B. Provide an objective basis for quantitatively evaluating sampling risks.
C. Can more easily convert the sample into a dual-purpose test useful for substantive
testing.
D. Eliminate the need to use judgment in determining appropriate sample sizes.
124. 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 characteristic 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.
125. Which of the following statistical selection techniques is least desirable for use by an
auditor?
A. Systematic selection
C. Block selection
B. Stratified selection
D. Sequential selection
COMPLETING THE AUDIT AND POST-AUDIT RESPONSIBILITIES
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126. Analytical procedures used in the overall review stage of the audit generally include
A. Retesting controls that appeared to be ineffective during the assessment of control
risk.
B. Considering unusual or unexpected account balances that were not previously
identified.
C. Gathering evidence concerning account balances that have not changed from the prior
year.
D. Performing tests of transactions to corroborate management ’s financial statement
assertions.
127. Analytical procedures performed in the overall review stage of an audit suggest that
several accounts have unexpected relationships. The results of these procedures most
likely indicate that
A. The communication with the audit committee should be revised.
B. Irregularities exist among the relevant account balances.
C. Additional substantive tests of details are required.
D. Internal control activities are not operating effectively.
128. Which of the following events most likely indicates the existence of related parties?
A. Making a loan without scheduled terms for repayment of the funds.
B. Discussing merger terms with a company that is a major competitor.
C. Selling real estate at a price that differs significantly from its book value.
D. Borrowing a large sum of money at a variable rate of interest.
129. An auditor searching for related party transactions should obtain an understanding of each
subsidiary’s relationship to the total entity because
A. This may permit the audit of intercompany account balances to be performed as of
concurrent dates.
B. This may reveal whether particular transactions would have taken place if the parties
had not been related.
C. The business structure may be deliberately designed to obscure related party
transactions.
D. Intercompany transactions may have been consummated on terms equivalent to
arm’s-length transactions.
130. After determining that a related party transaction has, in fact, occurred, an auditor should
A. Obtain an understanding of the business purpose of the transaction.
B. Substantiate that the transaction was consummated on terms equivalent to an arm ’slength transaction.
C. Add a separate paragraph to the auditor’s report to explain the transaction.
D. Perform analytical procedures to verify whether similar transactions occurred, but were
not recorded.
131. Which of the following statements best describes the “date of the financial statements? ”
A. The date on which those with the recognized authority assert that they have prepared
the entity’s complete set of financial statements, including the related notes, and that
they have taken responsibility for them.
B. The date that the auditor’s report and audited financial statements are made available
to third parties.
C. The date of the end of the latest period covered by the financial statements, which is
normally the date of the most recent balance sheet in the financial statements subject
to audit.
D. The date on which the auditor has obtained sufficient appropriate audit evidence on
which to base the opinion on the financial statements.
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132. Which of the following procedures would an auditor most likely perform to obtain evidence
about the occurrence of subsequent events?
A. Inquiring as to whether any unusual adjustments were made after the date of the
financial statements.
B. Confirming a sample of material accounts receivable established after the date of the
financial statements.
C. Comparing the financial statements being reported on with those of the prior period.
D. Investigating personnel changes in the accounting department occurring after the date
of the financial statements.
133. Which of the following statements best expresses the auditor ’s responsibility with respect
to facts discovered after the date of the auditor ’s report but before the date the financial
statements are issued?
A. The auditor should amend the financial statements.
B. If the facts discovered will materially affect the financial statements, the auditor
should issue a new report which contains either a qualified opinion or an adverse
opinion.
C. The auditor should consider whether the financial statements need amendment,
discuss the matter with management, and consider taking actions appropriate in the
circumstances.
D. The auditor should withdraw from the engagement.
134. After issuing a report, an auditor has no obligation to make continuing inquiries or
perform other procedures concerning the audited financial statements, unless
A. Final determinations or resolutions are made of contingencies that had been disclosed
in the financial statements.
B. Information about an event that occurred after the date of the auditor ’s report comes
to the auditor’s attention.
C. The control environment changes after issuance of the report.
D. Information, which existed at the report date and may affect the report, comes to the
auditor’s attention.
135. Which of the following events occurring after the issuance of an auditor ’s report most
likely would cause the auditor to make further inquiries about the previously issued
financial statements?
A. A technological development that could affect the entity ’s future ability to continue as
a going concern.
B. The entity’s sale of a subsidiary that accounts for 30% of the entity ’s consolidated
sales.
C. The discovery of information regarding a contingency that existed before the financial
statements were issued.
D. The final resolution of a lawsuit disclosed in the notes to the financial statements.
136. Which of the following statements best describes the auditor ’s responsibility concerning
the appropriateness of the going concern assumption in the preparation of the financial
statements?
A. The auditor’s responsibility is to make a specific assessment of the entity ’s ability to
continue as a going concern.
B. The auditor’s responsibility is to predict future events or conditions that may cause the
entity to cease to continue as a going concern.
C. The auditor’s responsibility is to consider the appropriateness of management ’s use of
the going concern assumption and consider whether there are material uncertainties
about the entity’s ability to continue as a going concern that need to be disclosed in
the financial statements.
D. The auditor’s responsibility is to give a guarantee in the audit report that the entity
has the ability to continue as a going concern.
137. 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. Cash flows from operating activities are negative.
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B. Stock dividends replace annual cash dividends.
C. Significant related party transactions are pervasive.
D. Research and development projects are postponed.
138. 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. Restrictions on the disposal of principal assets are present.
B. Usual trade credit from suppliers is denied.
C. Significant related party transactions are pervasive.
D. Arrearages in principal stock dividends are paid.
139. Which of the following audit procedures would most likely assist an auditor in identifying
conditions and events that may indicate there could be substantial doubt about an entity ’s
ability to continue as a going concern?
A. Confirmation of bank balances.
B. Confirmation of accounts receivable from major customers.
C. Reconciliation of interest expense with debt outstanding.
D. Review of compliance with terms of debt agreements.
140. When an auditor concludes that there is substantial doubt about a continuing audit client ’s
ability to continue as a going concern for a reasonable period of time, the auditor ’s
responsibility is to
A. Consider the adequacy of disclosure about the client ’s possible inability to continue as
a going concern.
B. Issue a qualified or adverse opinion, depending upon materiality, due to the possible
effects on the financial statements.
C. Report to the client’s audit committee that management ’s accounting estimates may
need to be adjusted.
D. Reissue the prior year’s auditor’s report and add an emphasis of matter paragraph that
specifically refers to “substantial doubt” and “going concern.”
141. When an audit is made in accordance with generally accepted auditing standards, the
auditor should always
A. Observe the taking of physical inventory on the balance sheet date.
B. Obtain certain written representations from management.
C. Employ analytical procedures as substantive tests to obtain evidence about specific
assertions related to account balances.
D. 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.
142. When considering the use of management’s written representations as audit evidence
about the completeness assertion, an auditor should understand that such representations
A. Constitute sufficient appropriate audit evidence to support the assertion when
considered in combination with a sufficiently low assessed level of control risk.
B. Are not part of the audit evidence considered to support the assertion.
C. Replace a low assessed level of control risk as audit evidence to support the assertion.
D. Complement, but do not replace, substantive tests designed to support the assertion.
143. A written representation from a client ’s management that, among other matters,
acknowledges responsibility for the fair presentation of financial statements, should
normally be signed by the
A. Chief financial officer and the chair of the board of directors.
B. Chief executive officer and the chief financial officer.
C. Chief executive officer, the chair of the board of directors, and the client ’s lawyer.
D. Chair of the audit committee of the board of directors.
144. The date of the management representation letter should coincide with the date of the
A. Statement of Financial Position
B. Latest related party transaction
C. Auditor’s report
D. Latest interim financial information
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145. Which of the following statements concerning management representations is incorrect?
A. Representations by management can be a substitute for other audit evidence that the
auditor could reasonably expect to be available.
B. If the auditor is unable to obtain sufficient appropriate audit evidence regarding a
matter, which has, or may have, a material effect on the financial statements and such
audit evidence is expected to be available, this will constitute a limitation in the scope
of the audit, even if a representation from management has been received on the
matter.
C. If a representation by management is contradicted by other audit evidence, the
auditor should investigate the circumstances and, when necessary, reconsider the
reliability of other representations by management.
D. The auditor’s working papers would ordinarily include a summary of oral discussions
with management or written representations from management.
146. What type of opinion should be expressed if the client ’s management refuses to provide a
representation that the auditor considers necessary?
A. Qualified opinion or a disclaimer of opinion.
B. Qualified opinion or an adverse opinion.
C. Adverse opinion or a disclaimer of opinion.
D. Unqualified opinion.
147. The primary reason an auditor requests that letters of inquiry be sent to a client ’s
attorneys is to provide the auditor with
A. A description and evaluation of litigation, claims, and assessments that existed at the
balance sheet date.
B. The attorneys’ opinions of the client’s historical experiences in recent similar litigation.
C. Corroboration of the information furnished by management about litigation, claims,
and assessments.
D. The probable outcome of asserted claims and pending or threatened litigation.
148. The letter of audit inquiry should be
A. Prepared and sent by the auditor.
B. Prepared by management and sent by the auditor.
C. Prepared and sent by management.
D. Prepared by the auditor and sent by management.
149. The refusal of a client’s lawyer to provide a representation on the legality of a particular
act committed by the client is ordinarily
A. Proper grounds to withdraw from the engagement.
B. Insufficient reason to modify the auditor’s report because of the lawyer ’s obligation of
confidentiality.
C. Considered to be a scope limitation.
D. Sufficient reason to issue a “subject to” opinion.
150. Management’s refusal to give the auditor permission to communicate with the entity ’s
legal counsel is most likely to lead to
A. An adverse opinion.
B. A qualified opinion or an adverse opinion.
C. An unqualified opinion.
D. A qualified opinion or a disclaimer of opinion.
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THE AUDITOR’ S REPORT ON FINANCIAL STATEMENTS
151. 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 date of the financial
statements (i.e., the balance sheet date).
152. In which of the following circumstances would an auditor most likely add an emphasis of
matter paragraph to the auditor’s report while expressing an unqualified opinion?
A. There is a substantial doubt about the entity’s ability to continue as a going concern.
B. Management’s estimates of the effects of future events are unreasonable.
C. No depreciation has been provided in the financial statements.
D. Certain transactions cannot be tested because of management ’s records retention
policy.
153. A note to the financial statements of the Prudent Bank indicates that all of the records
relating to the bank’s business operations are stored on magnetic disks, and that no
emergency backup systems or duplicate disks are stored because the bank and its
auditors consider the occurrence of a catastrophe to be remote. Based upon this note,
the auditor’s report should express
A. A qualified opinion
C. An adverse opinion
B. An unmodified opinion
D. A “subject to” opinion
154. When would the auditor refer to the work of an appraiser in the auditor ’s report?
A. An adverse opinion is expressed based on a difference of opinion between the client
and the outside appraiser as to the value of certain assets.
B. A disclaimer of opinion is expressed because of a scope limitation imposed on the
auditor by the appraiser.
C. A qualified opinion is expressed because of a matter unrelated to the work of the
appraiser.
D. An unqualified opinion is expressed and an emphasis of matter paragraph is added to
disclose the use of the appraiser’s work.
155. When audited financial statements are presented in a document (e.g., annual report)
containing other information, the auditor
A. Should read the other information to consider whether it is inconsistent with the
audited financial statements.
B. Has no responsibility for the other information because it is not part of the basic
financial statements.
C. Has an obligation to perform auditing procedures to corroborate the other information.
D. Is required to express a qualified opinion if the other information has a material
misstatement of fact.
156. An auditor concludes that there is a material inconsistency in the other information in an
annual report to shareholders containing audited financial statements. If the auditor
concludes that the financial statements do not require revision, but the client refuses to
revise or eliminate the material inconsistency, the auditor may
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B.
C.
D.
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Disclaim an opinion on the financial statements after explaining the material
inconsistency in an emphasis of matter paragraph.
Revise the auditor’s report to include an other matter paragraph describing the
material inconsistency.
Express a qualified opinion after discussing the matter with the client ’s directors.
Consider the matter closed because the other information is not in the audited
statements.
157. In which of the following situations would an auditor ordinarily choose between
expressing a qualified opinion or an adverse opinion?
A. The auditor wishes to emphasize an unusually important subsequent event.
B. The financial statements fail to disclose information that is required by Philippine
Financial Reporting Standards.
C. Events disclosed in the financial statements cause the auditor to have substantial
doubt about the entity’s ability to continue as a going concern.
D. The auditor did not observe the entity’s physical inventory and is unable to become
satisfied as to its balance by other auditing procedures.
158. An auditor should disclose the substantive reasons for expressing an adverse opinion in
the Basis for Adverse Opinion paragraph
A. Following the opinion paragraph.
B. Preceding the opinion paragraph.
C. Following the introductory paragraph.
D. Within the notes to the financial statements.
159. The predecessor auditor, who is satisfied after properly communicating with the incoming
auditor, has reissued his/her auditor’s report on prior year financial statements. The
predecessor auditor’s report should
A. Refer to the work of the incoming auditor in the scope and opinion paragraphs.
B. Refer to the report of the incoming auditor only in the scope paragraph.
C. Refer to both the work and the report of the incoming auditor only in the opinion
paragraph.
D. Not refer to the report or the work of the incoming auditor.
160. The following statements relate to unaudited prior year financial statements that are
presented in comparative form with audited current year financial statements. Which is
incorrect?
A. The incoming auditor should state in the auditor ’s report that the comparative financial
statements are unaudited.
B. The incoming auditor need not perform audit procedures regarding opening balances
of the current period.
C. Clear disclosure in the financial statements that the comparative financial statements
are unaudited is encouraged.
D. In situations where the incoming auditor identifies that the prior year unaudited
figures are materially misstated, the auditor should request management to revise the
prior year’s figures or if management refuses to do so, appropriately modify the
report.
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OTHER REPORTING RESPONSIBILITIES
161. Financial statements of an entity that have been reviewed by an accountant should be
accompanied by a report stating that a review
A. Provides only limited assurance that the financial statements are fairly presented.
B. Includes examining, on a test basis, information that is the representation of
management.
C. Consists principally of inquiries of company personnel and analytical procedures
applied to financial data.
D. Does not contemplate obtaining corroborating evidential matter or applying certain
other procedures ordinarily performed during an audit.
162. An accountant’s report on a review of the financial statements of an entity should state
that the accountant
A. Does not express an opinion or any form of limited assurance on the financial
statements.
B. Conducted the review in accordance with the Philippine Standard on Review
Engagements.
C. Obtained reasonable assurance about whether the financial statements are free of
material misstatements.
D. Examined evidence, on a test basis, supporting the amounts and disclosures in the
financial statements.
163. Financial statements of an entity that have been reviewed by an accountant should be
accompanied by a report stating that
A. The scope of the inquiry and analytical procedures performed by the accountant has
not been restricted.
B. The financial statements are the responsibility of the company ’s management.
C. A review includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to present
financial statements that are free of material misstatements.
164. When compiling the financial statements of an entity, an accountant should
A. Review agreements with financial institutions for restrictions on cash balances.
B. Understand the accounting principles and practices of the entity ’s industry.
C. Inquire of key personnel concerning related parties and subsequent events.
D. Perform ratio analyses of the financial data of comparable prior periods.
165. When compiling an entity’s financial statements, an accountant would be least likely to
A. Perform analytical procedures designed to identify relationships that appear to be
unusual.
B. Read the compiled financial statements and consider whether they appear to include
adequate disclosure.
C. Obtain an acknowledgment from management of its responsibility for the financial
statements.
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P a g e | 31
D. Plan the work so that an effective engagement will be performed.
166. Which of the following should not be included in an accountant ’s report based upon the
compilation of an entity’s financial statements?
A. A statement that a compilation of the company ’s financial statements was made in
accordance with the Philippine Standard on Related Services applicable to compilation
engagements.
B. A statement that management is responsible for the financial statements.
C. A statement that the accountant has not audited or reviewed the statements.
D. A statement that the accountant does not express an opinion but provides only
negative assurance on the statements.
167. An accountant may accept an engagement to apply agreed-upon procedures that are not
sufficient to express an opinion on one or more specified accounts or items of a financial
statement provided that
A. The accountant’s report does not enumerate the procedures performed.
B. The financial statements are prepared in accordance with a comprehensive basis of
accounting other than generally accepted accounting principles.
C. Distribution of the accountant’s report is restricted.
D. The accountant is also the entity’s continuing auditor.
168. When an accountant examines prospective financial statements, the accountant ’s report
should include a separate paragraph that
A. Contains an opinion as to whether the prospective financial statements are properly
prepared on the basis of the assumptions and are presented in accordance with
generally accepted accounting principles in the Philippines.
B. Provides an explanation of the differences between an examination and an audit.
C. States that the accountant is responsible for events and circumstances up to 1 year
after the report’s date.
D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the
prospective financial statements.
169. The following statements relate to the examination of prospective financial information.
Which is false?
A. The auditor should express an opinion as to whether the results shown in the
prospective financial information will be achieved.
B. Before accepting an engagement to examine prospective financial information, the
auditor should consider the intended use of the information.
C. The auditor should not accept, or should withdraw from, an engagement to examine
prospective financial information when the assumptions are clearly unrealistic.
D. When in the auditor’s judgment an appropriate level of satisfaction has been obtained,
the auditor is not precluded from expressing positive assurance regarding the
assumptions.
170. Which of the following is a prospective financial information for general use upon which an
accountant may appropriately report?
A. Financial projection
B. Partial presentation
C. Pro forma financial statement
D. Financial forecast
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Report of Independent Auditors
The Stockholders and Board of Directors
We have audited the accompanying balance sheet of
the ABC Company as of December 31, 2005, and the
related statements of income, changes in equity and
cash flows for the year then ended. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an
opinion on these financial statements based on our
audit.
We conducted our audit in accordance with generally
accepted auditing standards in the Philippines. Those
Standards require that we plan and perform the audit
to obtain reasonable assurance about whether the
financial
statements
are
free
of
material
misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used
and significant estimates made by management, as
well as evaluating the overall financial statement
presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements present fairly,
in all material respects, the financial position of the
Company as of December 31, 2005, and of the
results of its operations and its cash flows for the year
then ended in accordance with generally accepted
accounting principles in the Philippines.
Emong & Bobads, CPAs
March 31, 2006
Makati City
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDITING THEORY
TEST OF CONTROL PROCEDURES
Revenue and Receipt Cycle
1. After the auditor has prepared a flowchart of internal control for sales, and cash receipts
transactions and evaluated the design of the system, the auditor would perform tests of
controls on all control procedures
a. Documented in the flowchart.
b. Considered to be deficiencies that might allow errors to enter the accounting system.
c. Considered to be strengths that the auditor plans to rely on in assessing control risk.
d. That would aid in preventing irregularities.
2. Which of the following is not a universal rule for achieving control over cash?
a. Separate the cash-handling and record-keeping functions.
b. Deposit each day’s cash receipts by the end of the day.
c. Have bank reconciliation’s performed by employees who do not handle cash.
d. Decentralize the receiving of cash as much as possible.
3. The least crucial element of control over cash is
a. Separation of cash record keeping from custody of cash.
b. Preparation of the monthly bank reconciliation.
c. Separation of cash receipts from cash disbursements.
d. Batch processing of checks.
4. The use of fidelity bonds protects a company from embezzlement losses and also
a. Minimizes the possibility of employing persons with dubious records in positions of trust.
b. Protects employees who make unintentional errors form possible monetary damages
resulting from such errors.
c. Allows the company to substitute the fidelity bonds for various parts of internal control.
d. Reduces the company’s need to obtain expensive business interruption insurance.
5. An auditor is reviewing internal control for accounts receivable:
I. The billing function should not be assigned to the person who is responsible for maintaining
accounts receivable records.
II. Responsibility for approval of the write-off of accounts receivable that are uncollectible
should not be assigned to the cashier.
a. Only I is true
c. Both I and II are true
b. Only II is true
d. Neither I nor II is true
6. Which of the following is an effective internal control over accounts receivable?
a. Only persons who handle cash receipts should be responsible for the preparation of
documents that reduce accounts receivable balances.
b. Responsibility for approval of the write-off of uncollectible accounts receivable should be
assigned to the cashier.
c. Balances in the subsidiary accounts receivable ledger should be reconciled to the general
ledger control account once a year, preferably at year-end.
d. The billing function should be assigned to persons other than those responsible for
maintaining accounts receivable subsidiary records.
7. To achieve control when there is no billing department, the billing function should be performed
by the
a. Accounting department
c. Shipping department
b. Sales department
d. Credit and collection department
8. The person who opens the mail commonly prepares a remittance advice when a customer fails
to return one with a payment. Consequently, mail should be opened by the
a. Credit manager.
c. Sales manager.
b. Receptionist.
d. Accounts receivable clerk.
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9. Which of the following would the auditor consider to be an incompatible operation if the cashier
receives remittances from the mail room?
a. The cashier makes the daily deposit at a local bank.
b. The cashier prepares the daily deposit.
c. The cashier endorses the checks.
d. The cashier posts the receipts to the accounts receivable subsidiary ledger.
10. Which of the following would best protect a company that wishes to prevent lapping?
a. Segregating duties so that accounting has no access to an incoming mail
b. Segregating duties so that no employee has access both to checks from customers and to
currency from daily cash receipts
c. Having customers send payments directly to the company’s bank
d. Requesting that customers checks be made payable to the company and be addressed to
the treasurer
11. Defective merchandise returned by customers should be presented to
a. Inventory control personnel.
c. Purchasing personnel
d. Receiving personnel
b. Sales personnel.
12. In considering internal control within the revenue/receipt cycle, what is the purpose of a
transaction walk through?
a. To assure that employees are performing assigned functions accurately.
b. To confirm the auditor’s understanding of the internal control structure.
c. To select documents for detailed tests of controls.
d. To verify the results of the auditor’s sampling plan.
13. To determine whether internal control operates effectively to minimize errors of failure to bill a
customer for a shipment, the auditor would select a sample of transactions from the population
represented by the
a. Shipping records file
c. Sales invoice
b. Customer order file
d. Subsidiary customer accounts ledger
14. The purpose of tests of controls over shipping is to determine whether
a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent.
d. Credit is approved before goods are shipped.
15. The purpose of tests of controls over billing is to determine whether
a. Billed goods have been shipped.
b. Shipments are billed.
c. Billing department personnel are competent.
d. Credit is approved before goods are billed.
16. Which of the following control procedures could prevent or detect errors or frauds arising from
shipments made to unauthorized parties?
a. Document policies and procedures for scheduling shipments.
b. Establish procedures for reviewing and approving prices and sales terms before sale.
c. Prenumber bills of lading and assure that related billings are made on a periodic basis.
d. Prepare and periodically update lists of authorized customers.
Expenditure and Disbursement Cycle
1. The accounts payable department receives a purchase order form to accomplish all of the
following except
a. Comparing invoice price to purchase order price.
b. Ensuring that the purchase had been properly authorized.
c. Comparing quantity ordered to quantity purchased.
d. Ensuring that the goods had been received by the party requesting the goods.
2. Which of the following is a primary function of the purchasing department?
a. Ensuring the acquisition of goods of a specified quality.
b. Authorizing the acquisition of goods.
c. Verifying the propriety of goods of a specified quality.
d. Reducing expenditures for goods acquired.
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3. Matching the suppliers’ invoice, the purchase order, and the receiving report normally should
be the responsibility of the
a. Receiving department
c. Accounting function
b. Purchasing department
d. Treasury function
4. The accounts payable department generally should
a. Cancel supporting documentation after a cash payment is mailed
b. Approve the price and quantity of each purchase requisition
c. Assure that the quantity ordered is omitted from the receiving department’s copy of the
purchase order
d. Agree the vendor’s invoice with the receiving report and purchase order
5. Internal control is improved when the quantity of merchandise ordered is omitted from the copy
of the purchase order sent to the
a. Department that initiated the requisition
c. Purchasing agent
b. Receiving department
d. Accounts payable department
6. When goods are received, the receiving clerk should match the goods with the
a. Purchase order and requisition.
b. Vendor’s invoice and the receiving report.
c. Vendor’s shipping document and the purchase order.
d. Receiving report and the vendor’s shipping documents.
7. The accounts payable department should compare the information on each vendor’s invoice
with the
a. Receiving report and the purchase order.
b. Receiving report and the vendor.
c. Vendor’s packing slip and the purchase order.
d. Vendor’s packing slip and the voucher.
8. The mailing of disbursement checks and remittance advices should be controlled by the
employee who
a. Signed the checks last
b. Approved the vouchers for payment
c. Matched the receiving reports, purchase orders, and vendor invoices
d. Verified the mathematical accuracy of the vouchers and remittance advices
9. What is the reason for ensuring that every copy of a vendor’s invoice has a receiving report?
a. To ascertain that merchandise billed by the vendor was received by the company.
b. To ascertain that merchandise received by the company was billed by the vendor.
c. To ascertain that the invoice was correctly prepared.
d. To ascertain that a check was prepared for every invoice.
10. How can an auditor test to determine whether Receiving Department procedures are applied
properly?
a. Test a sample of receiving documents.
b. Observe receiving procedures on a surprise basis.
c. Review procedures manuals.
d. Interview Receiving personnel.
11. Which of the following control procedures could prevent or detect payment of goods not
received?
a. Counting goods when received.
b. Matching the purchase order, receiving report, and vendor’s invoice.
c. Comparing goods received with goods requisitioned.
d. Verifying vouchers for accuracy and approval.
12. Which of the following would prevent a paid disbursement from being paid a second time?
a. Individuals responsible for signing checks should prepare vouchers.
b. Disbursements should be approved by at least two responsible officials.
c. The disbursement date should be within a few days of the date the voucher is presented for
payment.
d. The official signing the check should cancel the supporting documents.
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13. Assume an auditor’s interim consideration of internal control in the expenditure/disbursement
cycle reveals that control risk can be assessed below the maximum and detection risk above
the minimum for some assertions. Which of the following is true about substantive tests
applied to accounts payable?
a. The auditor is more apt to confirm payable balances.
b. The auditor is less apt to perform substantive tests at the balance sheet date.
c. The auditor is more apt to increase the extent of substantive tests.
d. The auditor is more apt to ignore the risk of incorrect acceptance when sampling accounts
payable.
14. A CPA learns that his client has paid a vendor twice for the same shipment, once based upon
the original invoice and once based upon the monthly statement. A control procedure that
should have prevented this duplicate payment is
a. Attachment of the receiving report to the disbursement support.
b. Prenumbering of disbursement vouchers.
c. Use of a limit or reasonableness test.
d. Prenumbering of receiving reports.
15. The authority to accept incoming goods in receiving should be based on a(n)
a. Vendor’s invoice
c. Bill of lading
b. Materials requisitions
d. Approved purchase order
Personnel and Payroll
1. Which of the following control procedures could best prevent direct labor from being charged to
manufacturing overhead?
a. Comparison of daily journal entries with factory labor summary.
b. Examination of routing tickets from finished goods on delivery.
c. Reconciliation of work in process inventory with cost records.
d. Recomputation of direct labor based on inspection of time cards.
2. For appropriate segregation of duties, journalizing and posting summary payroll transactions
should be assigned to
a. The treasurer’s department
c. Payroll accounting
b. General accounting
d. The timekeeping department
3. Low Tek, Inc. has changed from a conventional to a computerized payroll clock card system.
Factory employees now record time in and out with magnetic cards, and the computer system
automatically updates all payroll records. Because of this change,
a. The auditor must audit through the computer
b. Internal control has improved
c. Part of the audit trail has been lost
d. The potential for payroll related fraud has been diminished
4. To minimize the opportunities for fraud, unclaimed cash payroll should be
a. Deposited in a safe deposit box.
b. Held by the payroll custodian.
c. Deposited in a special bank account.
d. Held by the controller.
5. A common audit procedures in the audit of payroll transactions involves tracing selected items
from the payroll journal to employee time cards that have been approved by supervisory
personnel. This procedure is designed to provide evidence in support of the audit proposition
that
a. Only bona fide employees worked, and their pay was properly computed
b. Jobs on which employees worked were charged with the appropriate labor cost
c. Internal controls relating to payroll disbursements are operating effectively
d. All employees worked the number of hours for which their pay was computed
6. For internal control purposes, which of the following individuals should preferably be
responsible for the distribution of payroll checks?
a. Bookkeeper
c. Cashier
b. Payroll clerk
d. Receptionist
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7. The purpose of segregating the duties of hiring personnel and distributing payroll checks is to
separate the
a. Human resources function from the controllership function
b. Administrative controls from the internal accounting controls
c. Authorization of transactions from the custody of related assets
d. Operational responsibility from the record keeping responsibility
8. Which of the following departments most likely would approve changes in pay rates and
deductions from employee salaries?
a. Personnel
c. Controller
b. Treasurer
d. Payroll
9. Which of the following is not a common activity within personnel and payroll?
a. Initiating terminations.
b. Preparing and updating personnel records.
c. Preparing and recording payroll.
d. Distributing paychecks to employees.
10. Which of the following best describes proper internal control over payroll?
a. The preparation of the payroll must be under the control of the personnel department.
b. The confidentiality of employee payroll data should be carefully protected to prevent fraud.
c. The duties of hiring, payroll computation, and payment to employees should be segregated.
d. The payment of cash to employees should be replaced with payment by checks.
Production (Conversion) Cycle
1. Which of the following policies is an internal control weakness related to the acquisition of
factory equipment?
a. Advance executive approvals are required for equipment acquisitions.
b. Variances between authorized equipment expenditures and actual costs are to be
immediately reported to management.
c. Depreciation policies are reviewed only once a year.
d. Acquisitions are to be made through and approved by the department in need of the
equipment.
2. Which of the following procedures is most likely to ensure that employee job time tickets are
accurate?
a. Approve the payroll voucher in the accounts payable department.
b. Keep employment information in the human resources department.
c. Make sure that the number of hours per week on each employee’s job time ticket is 40.
d. Check the employee check cards against the job time tickets.
3. The objectives of the internal structure for a production cycle are to provide assurance that
transactions are properly executed and recorded, and that
a. Production orders are prenumbered and signed by a supervisor
b. Custody of work in process and of finished goods is properly maintained
c. Independent internal verification of activity reports is established
d. Transfers to finished goods are documented by a completed production report and a quality
control report
4. To strengthen control procedures over the custody of heavy mobile equipment, the client would
most likely institute a policy requiring a periodic
a. Increase in insurance coverage.
b. Verification of liens, pledges, and collateralizations.
c. Accounting for work orders.
d. Inspection of equipment and reconciliation with accounting records.
5. When perpetual inventory records are maintained in quantities and in dollars, and internal
control procedures over inventory are deficient, the auditor would probably
a. Want the client to schedule the physical inventory count at the end of the year.
b. Insist that the client perform physical counts of inventory items several times during the
year.
c. Increase the extent of tests for unrecorded liabilities at the end of the year.
d. Have to disclaim an opinion on the income statement that year.
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6. Which of the following activities is not common to the conversion cycle?
a. Maintaining perpetual inventory records.
b. Accounting for fixed asset disposals and retirements.
c. Recording depreciation allocations.
d. Implementing a just-in-time order entry system.
7. An auditor's tests of a client's cost accounting system are designed primarily to determine that
a. Quantities on hand have been computed based on acceptable methods that reasonably
approximate actual quantities on hand.
b. Physical inventories substantially agree with book inventories.
c. The system complies with generally accepted accounting principles and functions as
planned.
d. Costs have been assigned properly to finished goods, work in process, and cost of goods
sold.
8. An effective internal control procedures covering fixed asset additions should require:
a. Classification as investments of those fixed asset additions that are not used in the
business.
b. Capitalization of the cost of fixed asset addition in excess of a specific peso amount.
c. Performance of recurring fixed asset maintenance work solely by company maintenance
staff.
d. Authorization and approval of major fixed asset additions.
Investing and Financing Cycle
1. A company holds bearer bonds as a short-term investment. Responsibility for custody of these
bonds and submission of coupons for periodic interest collections probably should be
delegated to the
a. Chief accountant
c. Cashier
d. Treasurer
b. Internal auditor
2. Which of the following questions would an auditor most likely include on an internal control
questionnaire for notes payable?
a. Are assets that collateralize note payable critically needed for the entity’s continued
existence?
b. Are two or more authorized signatures required on checks that repay notes payable?
c. Are the proceeds from notes payable used for the purchase of noncurrent assets?
d. Are direct borrowings on notes payable authorized by the board of directors?
3. A company has additional funds to invest. The Board of Directors decided to purchase
marketable securities and assigned the future purchase and sale decisions to a responsible
financial executive. The best person(s) to make periodic reviews of the investment activity
should be
a. An investment committee of the Board of Directors.
b. The chief operating officer.
c. The corporate controller.
d. The treasurer.
4. When no independent stock transfer agents are employed and the corporation issues its own
stocks and maintains stock records, canceled stock certificates should
a. Not be defaced but segregated from other stock certificates and retained in a canceled
certificates file.
b. Be destroyed to prevent fraudulent reissuance.
c. Be defaced and sent to the secretary of state.
d. Be defaced to prevent reissuance and attached to their corresponding stubs.
5. In reviewing and evaluating internal control over marketable securities, the auditor would be
specially concerned about:
a. Recording of stock investments by the controller.
b. Approval of stock investment purchases by the Board of Directors.
c. Access to stock certificates by the corporate treasurer.
d. Access to stock certificates by the controller.
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