Father Saturnino Urios University Accountancy Program AUDIT THEORY REVIEW Midterm Examination
Name:
Instructor: Mr. Mr. Ace S. Tiape, Tiape, CPA CPA
Encirce the etter o! your choice. NO erasures ao"e#. $. Anayt Anaytica ica proce#ure proce#uress per!orme# per!orme# in the overa overa revie" revie" stage o! an au#it au#it suggest suggest that severa accounts have une%pecte# reationships. The resuts o! these proce#ures most i&ey in#icate that a. Irreguarities e%ist among the reevant account 'aances '. Interna contro proce#ures are not operating operating e!!ectivey c. A##itiona tests o! #etais are re(uire# #. The communication "ith the au#it committee shou# 'e revise# ). The au#itor au#itor !aces !aces a ris& that that the au#it "i "i not #etect #etect materia materia misstatem misstatements ents that that occur in the accounting process. In regar# to minimi*ing this ris&, the au#itor reies primariy on a. Su'stantive tests c. Saes +iscounts ao"e# '. Tests Tests o! contros #. Statistica anaysis . For severa severa years a cient-s cient-s physic physica a inventory inventory count has has 'een o"er o"er than the the 'oo&s have have sho"n at the time o! the count, an# #o"n"ar# a#ustments o! the inventory account have 'een re(uire#. Contri'uting to the inventory pro'em cou# 'e "ea&nesses in interna contro that e# to the !aiure to recor# some a. Purchases returne# to ven#ors c. Saes #iscounts ao"e# '. Saes returns receive# #. Cash purchases /. In o'tainin o'taining g an un#ers un#erstan tan#in #ing g o! interna interna contro contro reevan reevantt to the au#it, au#it, the au#ito au#itorr may trace severa transactions transactions through the system, incu#ing ho" the transactions transactions inter!ace inter!ace "ith "ith any servic servicee organi organi*at *ation ionss "hose "hose servic services es are part part o! the entity entity-s -s in!orma in!ormation tion system. The primary o'ective o! this proce#ure is to a. Eva Evaua uate te the the #esi #esign gn o! inte intern rna a cont contro ro an# an# #ete #eterm rmin inee "het "hethe herr it has has 'een 'een impemente# '. +etermine the e!!ectiveness e!!ectiveness o! interna contro c. +etect !rau# #. 0epace su'stantive tests 1. The au#ito au#itorr sha agree agree the terms o! the au#it au#it engageme engagement nt "ith manage managemen mentt or those those charge# "ith governance, as appropriate. The agree# terms sha 'e recor#e# in a2an a. Engagement etter '. 3etter o! au#it in(uiry c. Management representation etter #. Con!irmation etter 4. A techni techni(u (uee !or !or regu regua ary ry an# syst system emat atic ica ay y appr apprai aisi sing ng a unit unit o! !unc !uncti tion on an# an# its its e!!ectiveness against corporate an# in#ustry stan#ar#s "ith the o'ective o! assuring management that its aims are 'eing carrie# out an#-or i#enti!ying con#itions capa'e o! 'eing improve# a. Su'stantive tests c. operations au#iting '. Compiance au#iting #. Financia au#iting 5. The The use use o! the the comp comput uter er chan change gess the proces processi sing ng,, stor storag age, e, an# an# comm communi unica cati tion on o! !inancia in!ormation. An IT system environment may a!!ect the !oo"ing, e%cept a. the accounting an# interna contro systems o! the entity '. The overa o'ective o'ective an# scope o! an au#it c. The au#itor-s #esign an# per!ormance o! tests o! contros an# su'stantive proce#ures to satis!y the au#it o'ectives #. The speci!ic proce#ures to o'tain &no"e#ge o! the entity-s accounting an# interna contro systems 6. In veri!ying veri!ying a Novem'er Novem'er 7 ssaes ssaes cuto!! cuto!! #ate, #ate, an au#itor au#itor "ou# 'e most most concerne# concerne# "ith "ith comparing recor#s o! a. Novem'er cash receipts "ith +ecem'er 'an& #eposits '. Novem'er purchases "ith +ecem'er +ecem'er shipments
c. Novem'er accounts receiva'e "ith Novem'er saes #. Novem'er saes "ith Novem'er shipping #ocuments 8. As part o! its purchasing system, an entity-s receiving #epartment receives copies o! purchase or#ers !or use in i#enti!ying an# recor#ing goo#s receive#. The purchase or#ers ist the name o! the ven#or an# the (uantities o! the materias or#ere#. A possi'e error that this system cou# ao" is a. Payment !or unauthori*e# purchases c. 9verpayment o! partia #eiveries '. Payment to unauthori*e# ven#ors #. +eay in recor#ing purchases $7. The i&eihoo# o! assessing contro ris& too high is the ris& that the sampe seecte# to test contros a.. +oes not support the au#itor-s panne# assesse# eve o! contro ris& "hen the true operating e!!ectiveness o! the contro usti!ies such an assessment '. Contains misstatements that cou# 'e materia to the !inancia statements "hen aggregate# "ith misstatements in other account 'aances or transactions casses c. Contains proportionatey !e"er #eviations !rom prescri'e# contros than e%ist in the 'aance or cass as a "hoe #. +oes not support the toera'e misstatement !or some or a o! management-s assertions $$. hich o! the !oo"ing proce#ures can 'e per!orme# ony in the su'se(uent perio#; a. E%amination o! #ata to #etermine that a proper cuto!! has 'een ma#e '. Tests o! #etais o! 'aances c. Tests o! #etais o! transactions #. rea#ing o! minutes o! the 'oar# o! #irector-s meetings $). hich o! the !oo"ing !un#amenta ethica principe prohi'its association o! pro!essiona accountants "ith reports, returns, communications or other in!ormation that is 'eieve# to contain a materiay !ase or misea#ing misstatement; a. Integrity c. Pro!essiona competence an# #ue care '. 9'ectivity #. Con!i#entiaity $. hich o! the !oo"ing #oes not #escri'e a con#ition that creates a #eman# !or au#iting; a. Con!ict 'et"een the in!ormation preparer an# the user can resut in a 'iase# opinion '. In!ormation can have su'stantia economic conse(uences !or a #ecision ma&er c. E%pertise is o!ten re(uire# !or in!ormation preparation an# veri!ication #. Users can #irecty assess the (uaity o! in!ormation $/. An entity-s interna contro system contains manua eements an# o!ten contains manua eements an# o!ten contains automate# eements. Manua eements in interna contro may 'e ess reia'e than automate# eements 'ecause a. Manua contro eements can 'e more easiy 'ypasse#, ignore#, or overri#en an# they are aso more prone to simpe errors an# mista&es '. Manua contro eements !aciitate the a##itiona anaysis o! in!ormation c. Concsistency o! appication o! manua contro eements can a"ays 'e assume# #. Manua contro eements incu#e reiance on systems or programs that are inaccuratey processing #ata, processing inaccurate #ata, or 'oth $1. hich o! the !oo"ing anaytica proce#ures shou# 'e appie# to the income statement; a. Seect saes an# e%pense items an# trace amounts to reate# supporting #ocuments '. Ascertain that the net income amount in the statement o! cash !o"s agrees "ith the net income amount in the income statement c. 9'tain !rom the proper cient representatives the 'eginning an# en#ing inventory amounts that "ere use# to #etermine the cost o! saes #. Compare the actua revenues an# e%penses "ith the correspon#ing !igures o! the previous years an# investigate signi!icant #i!!erences $4. In using the "or& o! an e%pert, an au#itor re!erre# to the e%pert-s !in#ings in the au#itor-s report. This is an appropriate reporting practice i! the a. Au#itor, as a resut o! the e%pert-s "or&, #eci#es to in#icate a #ivision o! responsi'iity "ith the e%pert '. E%pert is a"are that his2her "or& "i 'e use# to evauate the assertions in the !inancia statements c. Au#itor, as a resut o! the e%pert-s "or&, issues a mo#i!ie# au#itor-s report #. Au#itor, as a resut o! the e%pert-s "or&, a##s an emphasis
his2her unmo#i!ie# au#itor-s report $5. The !re(uency o! the comparison o! recor#e# accounta'iity "ith assets = !or the purpose o! sa!eguar#ing assets> shou# 'e #etermine# 'y a. the amount o! assets in#epen#ent o! the cost o! comparison '. The nature an# amount o! the asset an# the cost o! ma&ing the comparison c. The cost o! the comparison an# "hether the suscepti'iity to oss resuts !rom errors or !rau# #. The au#itor in consutation "ith cient management $6. hie this type o! engagement invoves the appication o! au#it s&is an# techni(ues an# the gathering o! evi#ence, it #oes not or#inariy invove an assessment o! accounting an# interna contro systems, tests o! recor#s, an# o! responses to in(uiries 'y o'taining corro'orating evi#ence through inspection, o'servation, con!irmation, an# computation a. Compiation c. Agree# upon proce#ures '. 0evie" #. Consutancy $8. hich o! the !oo"ing has the po"er to con#uct an oversight into the (uaity o! au#its o! !inancia statements through the revie" o! the (uaity contro measure institute# 'y au#itors; a. ?ureau o! Interna 0evenue '. Securities an# E%change Commission c. ?oar# 9! Accountancy #. Insurance Commission )7. Mr. Soya has 'een retaine# as au#itor o! Time% Company. The !unction o! his opinion on the !inancia statements o! Time% is to a. Improve !inancia #ecisions o! company management '. 3en# cre#i'iity to management-s representations c. +etect !rau# an# a'use in management operations #. Serve the re(uirement o! the ?I0, SEC or ?SP )$. The statements 'eo" #escri'e the interreationship o! au#it ris& components. hich is !ase; a. There is an inverse reationship 'et"een #etection ris& an# the com'ine# eve o! inherent an# contro ris&s '. hen inherent an# contro ris&s are high, the accepta'e eve o! #etection ris& nee#s to 'e o" to re#uce au#it ris& to an accepta'y o" eve c. hen inherent an# contro ris&s are o", an au#itor can accept a higher #etection ris& an# sti re#uce au#it ris& to an accepta'y o" eve #. The assesse# eve o! inherent an# contro ris&s can 'e su!!icienty o" to eiminate the nee# !or the au#itor to per!orm any su'stantive proce#ures )). The CPA revie"s Smantha-s payro proce#ures. An e%ampe o! an interna contro "ea&ness is to assign to a #epartment supervisor the responsi'iity !or a. +istri'uting payro chec&s to su'or#inate empoyees '. 0evie"ing an# approving time reports !or su'or#inates c. Intervie"ing appicants !or su'or#inate positions prior to hiring 'y the personne #epartment #. Initiating re(uests !or saary a#ustments !or su'or#inate empoyees ). The interna au#itor recogni*es that certain imitations are inherent in any interna contro system. hich one o! the !oo"ing scenarios is the resut o! an inherent imitation o! interna contro; a. The controer 'oth ma&es an# recor#s cash #eposits '. A security guar# ao"s one o! the "arehouse empoyees to remove company assets !rom the premises "ithout authori*ation c. The !irm ses to customers on account, "ithout cre#it approva #. An empoyee, "ho is una'e to rea#, is assigne# custo#y o! the !irm-s computer tape i'rary an# run manuas that are use# #uring the thir# shi!t )/. Theoreticay, it is possi'e to provi#e an in!inite range o! assurance !rom a very o" eve o! assurance to an a'soute eve o! assurance. In practice, pro!essiona accountants cannot provi#e a'soute assurance 'ecause o! the ! oo"ing,e%cept a. Pro!essiona accountants empoy testing process '. The interna contro has inherent imitations c. The use o! u#gment in gathering evi#ence an# #ra"ing concusions 'ase# on that
evi#ence #. The ac& o! e%pertise o! pro!essiona accountants in #oing a systematic engagement process )1. hich o! the !oo"ing statements reating to the appropriateness o! evi#entia matter is a"ays true; a. Evi#entia matter gathere# 'y an au#itor !rom outsi#e an enterprise is reia'e '. Accounting #ata #eveope# un#er satis!actory con#itions o! interna contro are more reevant than #ata #eveope# un#er satis!actory con#itions o! interna contro con#itions c. 9ra representations ma#e 'y management are not vai# evi#ence #. Evi#ence gathere# 'y an au#itor must 'e 'oth vai# an# reevant to 'e consi#ere# appropriate )4. The au#itor shou# o'tain an un#erstan#ing o! the entity-s o'ectives an# strategies, an# those 'usiness ris&s that may resut in ris&s o! materia misstatement. hich o! the !oo"ing statements concerning the entity-s 'usiness ris& is incorrect; a. ?usiness ris& is 'roa#er than the ris& o! materia misstatement o! the !inancia statements, though it incu#es the atter '. An un#erstan#ing o! the 'usiness ris&s !acing the entity increases the i&eihoo# o! i#enti!ying ris&s o! materia misstatement c. The au#itor has a responsi'iity to i#enti!y or assess a 'usiness ris&s #. ?usiness ris& may arise !rom the #eveopment o! ne" pro#ucts or services that may !ai )5. The negative !orm o! accounts receiva'e con!irmation re(uest is use!u e%cept "hen a. Interna contro surroun#ing accounts receiva'e is consi#ere# to 'e e!!ective '. A arge num'er o! sma 'aances are invove# c. The au#itor has reason to 'eieve the persons receiving the re(uests are i&ey to give them consi#eration #. In#ivi#ua account 'aances are reativey arge )6. The engagement partner shou# 'e satis!ie# that appropriate proce#ures regar#ing the acceptance an# continuance o! cient reationships an# speci!ic au#it engagements have 'een !oo"e#, an# that concusions reache# in this regar# are appropriate an# have 'een #ocumente#. Acceptance an# continuance o! cient reationships an# speci!ic au#it engagements incu#e consi#ering: I. The integrity o! the principa o"ners, &ey management, an# those charge# "ith governance o! the entity II. hether the engagement team is competent to per!orm the au#it engagement an# has the necessary time an# resources III. hether the !irm an# the engagement team can compy "ith ethica re(uirements a. I ony c. II an# III ony '. I an# II ony #. I, II, an# III )8. hich o! the !oo"ing most i&ey "ou# not 'e consi#ere# an inherent imitation o! the potentia e!!ectiveness o! an entity-s interna contro; a. Incompati'e #uties c. Mista&es in u#gment '. Management overri#e #. Cousion among empoyees 7. In connection "ith the au#it o! !inancia statements 'y an in#epen#ent au#itor, the cient suggests that mem'ers o! the interna au#it sta!! to 'e utii*e# to minimi*e au#it costs. hich o! the !oo"ing tas&s cou# most appropriatey 'e #eegate# to the interna au#it sta!!; a. Seection o! accounts receiva'e !or con!irmation, 'ase# on the interna au#itor-s u#gment as to ho" many accounts an# "hich accounts "i provi#e su!!icient coverage '. Preparation o! sche#ues !or negative accounts receiva'e responses c. Evauation o! the interna contro !or accounts receiva'e an# saes #. +etermination o! the a#e(uacy o! the ao"ance !or #ou't!u accounts $. A common #i!!icuty in au#iting a computeri*e# accounting system is a. ?ecause o! the ac& o! an au#it trai, computer systems have "ea&er contros an# more su'stantive testing is re(uire# '. 'ecause o! the uni!orm nature o! transaction processing, computer systems have strong contros an# ess su'stantive testing is re(uire# c. +ata can 'e erase# !rom the computer "ith no visi'e evi#ence #. The arge #issemination o! entry points into the computer system ea#s to "ea&
overa reiance in in!ormation generate# 'y a computer ). hich o! the !oo"ing reates to rights an# o'igations assertions; a. The entity ho#s or contros the rights to assets, an# ia'iities are o'igations o! the entity '. A assets, ia'iities an# e(uity interests that shou# have 'een recor#e# have 'een recor#e# c. Transactions an# events that have 'een recor#e# have occurre# an# pertain to the entity #. Assets, ia'iities, an# e(uity interests are incu#e# in the !inancia statements at appropriate amounts . The au#itor-s ris& assessment proce#ures a. ?y themseves, #o not provi#e su!!icient appropriate au#it evi#ence on "hich to 'ase the au#it opinion '. Shou# not consi#er in!ormation o'taine# !rom the au#itor-s previous e%perience "ith the entity c. Are #esigne# to #etect materia misstatements at the assertion eve !or casses o! transactions, account 'aances an# #iscosures #. Are #esigne# to test the e!!ectiveness o! the entity-s contro /. hich o! the !oo"ing statements a'out tests o! contros is most accurate; a. Au#iting proce#ures cannot concurrenty provi#e 'oth evi#ence o! the e!!ectiveness o! interna contro proce#ures an# evi#ence re(uire# !or su'stantive tests '. Tests o! contros incu#e o'servations o! the proper segregation o! #uties that or#inariy may 'e imite# to the norma au#it perio# c. Tests o! contros shou# 'e 'ase# upon proper appication o! an appropriate statistica samping pan #. Tests o! contros oe#inariy shou# 'e per!orme# as o! the 'aance sheet #ate or #uring the perio# su'se(uent to that #ate 1. In gathering evi#ence in the per!ormance o! su'stantive tests, the au#itor a. Shou# use the test month approach '. 0eies on persuasive rather than convincing evi#ence in the maority o! cases c. ou# consi#er the cient-s #ocumentary evi#ence more competent than evi#ence gathere# !orm o'servation an# physica inspection #. ou# e%press an a#verse opinion i! s=he> has su'stantia #ou't as to any assertion o! materia signi!icance 4. A secon#ary resut o! the au#itor-s consi#eration o! interna contro is that the consi#eration may a. Provi#e a 'asis !or #etermining the nature, timing an# e%tent o! au#it tests '. Assure that management-s proce#ures to #etect !rau# are propery !unctioning c. ?ring to the au#itor-s attention possi'e signi!icant #e!iciences in the #esign or operation o! interna contro #. +eveop evi#ence to support the assesse# eve o! contro ris& 5. hen consi#ering interna contro an au#itor must 'e a"are o! the concept o! reasona'e assurance, "hich recogni*es that a. Empoyment o! competent personne provi#es assurance that the o'ectives o! interna contro "i 'e achieve# '. Esta'ishment an# maintenance o! interna contro is an important responsi'iity o! the management an# not o! the au#itor c. Cost o! interna contro proce#ures shou# not e%cee# the 'ene!its e%pecte# to 'e #erive# !rom the contro #. Segregation o! incompati'e !unctions is necessary to ascertain that the contro proce#ures are e!!ective 6. hich o! the !oo"ing au#it proce#ures provi#es the 'est evi#ence a'out the coecti'iity o! notes receiva'e; a. Con!irmation o! notes receiva'e 'aances "ith the #e'tors '. E%amination o! notes !or appropriate #e'tors- signatures c. 0econciiation o! the #etais o! notes receiva'e an# the provision !or uncoecti'e accounts #. E%amination o! cash receipts recor#s to #etermine promptness o! interest an# principa payments
8. hich o! the !oo"ing situations "i normay resut to a #ecrease in the e%tent o! au#it proce#ures; a. Increase in the ris& o! materia misstatement '. Increase in the #egree o! assurance the au#itor pans to o'tain c. Increase in materiaity eve #. Increase in contro ris& assessment /7. In connection "ith the panning phase o! an au#it engagement, "hich o! the !oo"ing statements is a"ays correct; a. Fina sta!!ing must 'e ma#e prior to competiion o! the panning stage '. 9'servation o! inventory count shou# 'e per!orme# at year II. The nature, timing an# e%tent o! panne# !urther au#it proce#ures at the assertion eve, as #etermine# un#er PSA 7 = The Au#itor-s 0esponses to Assesse# 0is&s> a. I ony c. ?oth I an# II '. II ony #. Neither I nor II
/6. The most reia'e !orms o! #ocumentary evi#ence are those #ocuments that are a. Prenum'ere# '. Internay generate# c. Issue# su'se(uenty #. Authori*e# 'y a responsi'e o!!icia /8. hich o! the !oo"ing is the 'est e%panation o! the #i!!erence, i! any, 'et"een au#it o'ectives an# au#it proce#ures; a. Au#it proce#ures esta'ish 'roa# genera goas@ au#it o'ectives speci!y the #etaie# "or& to 'e per!ome# '. Au#it o'ectives are taior
c. 0is& assessment, 'ac& up !aciities, responsi'iity accounting, an# reguatory re(uirements #. 3ega environment o! the enityty, management phiosophy, an# organi*ationa structure 15. The !oo"ing statements reate to the au#itor-s consi#eration o! the "or& o! interna au#iting. hich is incorrect; a. The roe o! interna au#iting is #etermine# 'y management, an# its o'ectives #i!!er !rom those o! the e%terna au#itor "ho is appointe# to report in#epen#enty on the !inancia statements '. The e%terna au#itor shou# o'tain a su!!icient un#erstan#ing o! interna au#it activities to assist in panning the au#it an# #eveoping an e!!ective au#it approach c. +uring the course o! panning the au#it, the e%terna au#itor shou# per!orm a preiminary assessment o! the interna au#it !unction "hen it appears that interna au#iting is reevant to the e%terna au#it o! the !inancia statements in speci!ic au#it areas #. Interna au#iting activities #o not incu#e revie" o! the economy, e!!eciency an# e!!ectiveness o! the entity-s operations 16. An au#itor-s e%pert a. Is an in#icvi#ua or organi*ation possessing e%pertise in a !ie# other than accounting or au#iting, "hose "or& in that !ie# is use# 'y the entity in preparing its !inancia statements '. A mem'er o! the engagement team "ith e%pertise in a speciai*e# area o! accounting or au#iting c. An in#ivi#ua or organi*ation possessing e%pertise in accounting or au#iting "hose "or& is use# 'y the au#itor in o'taining su!!icient appropriate au#it evi#ence #. May 'e either an au#itor-s interna e%pert or an au#itor-s e%terna e%pert 18. hen an au#itor 'eieves that an un#erstan#ing "ith the cient has not 'een esta'ishe#, he or she shou# or#inariy a. Per!orm the au#it "ith increase# pro!essiona s&epticism '. ?ecine to accept or per!orm the au#it c. Assess contro ris& at the ma%imum eve an# per!orm a primariy su'stantive au#it #. Mo#i!y the scope o! the au#it to re!ect an increase# ris& o! materia misstatement #ue to !rau# 47. The principe o! pro!essiona competence an# #ue care imposes "hich o! the !oo"ing o'igations on pro!essiona accountants; a. To maintain pro!essiona &no"e#ge an# s&i at the eve re(uire# to ensure that cients or empoyers receive competent pro!essiona service '. To re!rain !rom #iscosing con!i#entia in!ormation o'taine# as a resut o! pro!essiona an# 'usiness reationships "ithout proper an# speci!ic authority uness there is a ega or pro!essiona right or #uty to #iscose c. To compy "ith reevant a"s an# reguations an# avoi# any situation that may may 'ring #iscre#it to the pro!ession #. Not to compromise pro!essiona or 'usiness u#gment 'ecause o! 'ias, con!ict o! interest or un#ue in!uence o! others
