FUNDAMENTAL OF AUDITING AND ASSURANCE SERVICES
1.
The Philippine Framework for Assurance Engagements identifies two types of assurance engagements a practitioner is permitted to perform: a reasonable assurance engagement and limited assurance engagement. Which of the following is the objective of a reasonable assurance engagement? a. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a basis for a negative form of expression of the practitioner’s conclusion. b. A reduction in assurance engagement risk to a very low level in the circumstances of the engagement as a basis for a disclaimer of the practitioner’s conclusion. c. A reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as a basis for a positive form of expression of the practitioner’s conclusion. d. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a basis for a qualified form of expression of the practitioner’s conclusion.
2.
Which of the following engagements is covered by the Framework for Assurance Engagements? a. b. c. d.
3.
The following are the elements of an assurance engagement except a. b. c. d.
4.
Suitable criteria An appropriate subject matter A two-party relationship involving a practitioner and intended users Sufficient appropriate evidence
Which of the following is not an assurance engagement? a. b. c. d.
5.
Consulting Engagements Preparation of Tax Returns Independent Financial Statement Audit Agreed-upon procedures Engagement
Compilation Financial statements audit Information reliability services Reviews of prospective financial statements
The risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated a. Assurance engagement risk
b. Materiality risk c. Non-detection risk d. Reasonable assurance risk 6.
Which of the following is not an element of an assurance engagement? a. b. c. d.
7.
Which of the following characteristics need not be exhibited in determining the identified suitability of criteria of a subject matter in an assurance engagement? a. b. c. d.
8.
An appropriate subject matter Suitable criteria Sufficient appropriate evidence Substantial engagement fee
Completeness Relevance Understandability Substantial acquisition cost
An attitude of professional skepticism means that the practitioner a. Should assess critically with questioning mind the validity of evidence obtained b. Should recognize that circumstances may exist that can cause the subject matter information to be materially misstated c. Is alert of evidence that contradicts or brings into question the reliability of documents or representations by the responsible party d. Is expected to eliminate the risk of overlooking suspicious circumstances, of over generalizing when drawing conclusions from observations and of using faulty assumptions in determining the nature, timing and extent of evidence gathering procedures and evaluating the results thereof
9.
Independent auditing can best be described as a a. Branch of accounting b. Discipline that attests to the results of accounting and other functional operations and data c. Professional activity that measures and communicates financial and business data d. Regulatory function that prevents the issuance of improper financial information
10.
Non-assurance engagements include of all of the following except a. b. c. d.
Agreed-upon procedures Management consulting Preparation of tax returns where no conclusion is expressed Compliance audit
11.
The independent audit is important to readers of financial statements because it a. Determines the future stewardship of the management of the company whose financial statements are audited b. Measures and communicates financial and business data included in financial statements c. Involves the objective audit of and reporting on management-prepared statements d. Reports on the accuracy of all information in the financial statements
12.
Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? a. It is difficult to prepare financial statements that fairly present a company’s financial position, cash flow, and operations without the expertise of an independent auditor b. It is management’s responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements c. The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements d. It is a customary courtesy that all stockholders of a company receive an independent report on management’s stewardship in managing the affairs of the business
13.
When a CPA expresses an opinion on financial statements, his or her responsibility extend to a. The underlying wisdom of the client’s management decisions b. Whether the results of the client’s operating decisions are fairly presented in the financial statements c. Active participation in the implementation of the advice given to the client d. An ongoing responsibility for the client’s solvency
14.
The Philippine Framework for Assurance Engagements identifies two types of assurance engagements a practitioner is permitted to perform: a reasonable assurance engagement and a limited assurance engagement. Which of the following is the objective of a limited assurance engagement? a. A reduction in assurance engagement risk to a very low level in the circumstances of the engagement as a basis for a disclaimer of the practitioner’s conclusion. b. A reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as a basis for a positive form of expression of the practitioner’s conclusion c. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a basis for a negative form of expression of the practitioner’s conclusion d. A reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement as a basis for a qualified form of expression of the practitioner’s conclusion
15.
The subject matter of an assurance engagement can take the following forms except a. b. c. d.
16.
The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the a. b. c. d.
17.
International auditing standards Financial reporting standards Regulations of the BIR Regulations of the SEC
The process of recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision-making is a. b. c. d.
20.
Client’s management Independent auditor Audit committee PICPA
The criteria for evaluating quantitative information vary. Example, in the audit of historical financial statements by CPA firms, the criteria are usually a. b. c. d.
19.
Partner assigned to the audit engagement Management of the company Auditor in charge of the field work Securities and Exchange Commission
Which of the following is responsible for the fairness of the representations made in financial statements? a. b. c. d.
18.
Historical or Prospective financial statements Performance of an entity that could indicate efficiency and effectiveness The entity’s internal control Evaluation of a capital investment proposal
Accounting Auditing Management Economics
An audit independence issue might be raised by the auditor’s participation in management advisory services engagements. Which of the following statements is most consistent with the profession’s attitude toward this issue? a. Information obtained as a result of a management advisory services engagement is confidential to that specific engagement and should not influence performance of the attest function
b. The decision as to loss of independence must be made by the client based upon facts of the particular case c. The auditor should not make management decisions for an audit client d. The auditor who is asked to review management decisions is also competent to make these decisions and can do so without loss of independence 21.
This refers to the audit procedures that, in the auditor’s judgment and based on the PSA’s are deemed appropriate in the circumstances to achieve the objective of an audit a. b. c. d.
22.
Which of the following is not an assurance engagement? a. b. c. d.
23.
General competence Familiarity with the particular industry of which the auditor’s client is part Due professional care Independence
Which of the following may not be an appropriate form of the subject matter of an assurance engagement? a. b. c. d.
26.
A subject matter Suitable criteria An engagement process Appropriate professional fees
Which of the following criteria is unique to the auditor’s attest function a. b. c. d.
25.
Information System Reliability Service Business Performance Measurement Risk Assessment Service Management Consulting Service
Assurance engagements should exhibit the following elements except a. b. c. d.
24.
Analytical procedures Scope of an audit Audit sampling Documentation
Historical financial information Systems and processes Behavior Non-physical characteristics of a facility
Which of the following is not an appropriate component of an engagement risk?
a. b. c. d. 27.
Auditing is based on the assumption that financial data and statements are a. b. c. d.
28.
Control risk Inherent risk Business risk Detection risk
In conformity with appropriate criteria Verifiable Presented fairly Consistently applied
The primary reason why a CPA firm establishes quality control policies and procedures for human resources is to a. Comply with the continuing educational requirements imposed for all staff accountants in CPA firms b. Establish in fact as well as in appearance that staff accountants are increasing their knowledge of accounting and auditing matters c. Provide a forum for staff accountants to exchange their experiences and views concerning firm policies and procedures d. Provide reasonable assurance that staff personnel will have the capability, competence and commitment to ethical principles required to enable them to fulfill their responsibilities in accordance with professional standards and regulatory and legal requirements
29.
In pursuing its quality control objectives with respect to assigning personnel to engagements, a CPA firm may use policies and procedures such as the following a. Rotating employees from assignment to assignment on a random basis to aid in the staff training effort b. Requiring timely identification of the staff requirements of specific engagements so that enough qualified personnel can be made available c. Allowing staff to select the assignments of their choice to promote better client relationships d. Assigning a number of employees to each engagement in excess of the number required so as not to overburden the staff and interfere with the quality of the audit work performed
30.
The accounting firm should establish policies and procedures assigned to promote an internal culture based on the recognition that quality is essential in performing engagements. This may be communicated through the following means except a. b. c. d.
Training seminars Formal and informal dialogue Publication in PICPA newsletter Mission statements
31.
In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm is not likely to a. b. c. d.
32.
Make inquiries of the proposed client’s legal counsel Review financial statements of the proposed client Make inquiries of previous auditors Review the personnel practices of the proposed client
A CPA establishes quality control policies and procedures for deciding whether to accept or continue a client. The primary purpose for establishing such policies and procedures is to a. Enable the auditor to attest to the integrity or reliability of a client b. Comply with the quality control standards established by the regulatory bodies c. Lessen the exposure to litigation resulting from failure to detect irregularities in client financial statements d. Minimize the likelihood of association with clients whose managements lack integrity
33.
In pursuing its quality control objectives with respect to independence, a CPA firm may use policies and procedures such as the following except a. Emphasizing independence in mental attitude in firm training programs and in supervision and review of work b. Prohibiting employees from owning shares of the stock of publicly traded companies c. Suggesting that employees conduct their banking transactions with banks that do not maintain accounts with client firms d. Assigning employees who may lack independence to research positions that do not require participation in the field audit work
34.
Engagement risk is influenced by the risks associated with the following except a. b. c. d.
35.
Which of the following is not an element of quality control that should be considered by a firm of independent auditors? a. b. c. d.
36.
Nature and form of the subject matter Nature and form of the criteria applied to the subject matter Nature and extent of the process used to collect and evaluate evidence Unreasonably low professional fee
Assigning personnel to engagements Consultation with appropriate persons Keeping records of quality control policies and procedures Supervision
A practitioner should plan and conduct the assurance engagement in an effective manner to meet the objective of the engagement. Which of the following matters need not be a
concern of the practitioner in planning the work? a. b. c. d. 37.
A firm of CPAs may use policies and procedures such as notifying professional personnel as to the names of audit clients having publicly held securities and confirming periodically with such personnel that prohibited relations do not exist. This is done to achieve effective quality control in which of the following areas? a. b. c. d.
38.
Relevance Neutrality Reliability Sufficiency
A CPA establishes quality control procedures for deciding whether to accept a new client or to continue to perform services for a current client. The primary purpose for establishing such policies and procedures is to a. b. c. d.
40.
Acceptance and continuance of clients Human resources Ethical requirements Leadership responsibilities for quality within the firm
The decision of whether the criteria are suitable involves considering whether the subject matter of the assurance engagement is capable of reasonably consistent evaluation or measurement using such criteria. Which of the following characteristics is not considered necessary in determining whether the criteria are suitable? a. b. c. d.
39.
Criteria to be used Engagement objective Personnel and expertise requirements Specific format of the assurance report
Comply with financial reporting standards Comply with the quality control standards established by the regulatory bodies Comply with standards of auditing Minimize the likelihood of association with clients whose management lacks integrity
The accounting firm should establish accounting policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements. Which of the following is not among the fundamental principles of professional ethical requirements relating to assurance and related services? a. b. c. d.
Integrity Objectivity Professional competence and due care Maximization of wealth
41.
An operational audit differs in many ways from an audit of financial statements. Which of the following is the best example of one of these differences? a. The usual audit of financial statements covers the four basic statements, whereas the operational audit is usually limited to either the balance sheet or the income statement b. The boundaries of an operational audit are often drawn from an organization chart and are not limited to a single accounting period c. Operational audits do not ordinarily result in the preparation of a report d. The operational audit deals with pre-tax income
42.
The review of a company’s financial statements by a CPA firm: a. b. c. d.
43.
Operational auditing is primarily oriented toward: a. b. c. d.
44.
Determine whether the financial statements fairly present the entity’s operations Evaluate the feasibility of attaining the entity’s operational objectives Make recommendations for improving future performance Report on the entity’s relative success in attaining profit maximization
A review of any part of an organization’s procedures and methods for the purpose of evaluating efficiency and effectiveness is classified as a(n) a. b. c. d.
46.
Future improvements to accomplish the goals of management The accuracy of data reflected in management’s financial records The verification that a company’s financial statements are fairly presented Past protection provided by existing internal control
A typical objective of an operational audit is for the auditor to: a. b. c. d.
45.
Is substantially less in scope of procedures than audit Requires detailed analysis of the major accounts Is of similar scope as an audit and adds similar credibility to the statements Culminates an issuance of report expressing the CPA’s opinion as to fairness of the statements
Audit of financial statements Compliance audit Operational audit Production audit
An audit to determine whether the auditee is following specific procedures or rules set down by some higher authority is classified as a(n) a. Audit of financial statements b. Compliance audit c. Operational audit
d. Production audit 47.
The primary reason for an audit by an independent, external audit firm is to a. Satisfy governmental regulatory requirements b. Guarantee that there are no misstatements in the financial statements and ensure that any fraud will be discovered c. Relieve management of responsibility for the financial statements d. Provide increased assurance to users as to the fairness of the financial statements
48.
Which of the following attributes is more closely associated with assurance services performed by a CPA firm than with other lines of professional work? a. b. c. d.
49.
Which of the following types of management advisory services may not be performed by a CPA firm that wants to maintain its independence with respect to the client? a. b. c. d.
50.
Training employees Making recommendations for improvements in internal control Screening and interviewing applicants for a new accounting position Supervising computer employees
In pursuing its quality control objectives, a CPA firm may maintain records indicating which of its partners or employees were previously employed by its clients. Which quality control element would this be most likely to satisfy? a. b. c. d.
51.
Integrity Competence Independence Keeping informed in current professional developments
Leadership responsibilities for quality within the firm Human resources Ethical requirements Engagement performance
In determining the scope and nature of services to be performed in public practice, a CPA firm should: a. Require independence for all services performed b. Determine that the performance of all services is consistent with the firm’s members’ role as professionals c. Have in place internal control procedures d. Only perform accounting related services
52.
Error that arises from an isolated event that has not recurred other than or specifically
identifiable occasions and is therefore not representative of errors in the population a. b. c. d. 53.
A government audit evaluates a disbursement to determine if it is necessary, excessive or extravagant in accordance with existing rules and regulations. What kind of audit is he coming?
a. b. c. d.
54.
Most audit evidence is persuasive rather than conclusive Use of testing Accounting and internal control system limitation Incompetence of an auditor
Economic and efficient use of resources Effective achievement of business objectives Attesting to the fairness of the financial statements Compliance with company policies
Which of the following is not one of the concepts in the framework of auditing theory a. b. c. d.
57.
Economy Audit No Yes Yes No
Operational auditing refers to the study of business operations for the purpose of making recommendations for all of the following except a. b. c. d.
56.
Compliance Audit Yes No Yes No
Inherent limitations in an audit stem from the following factors except a. b. c. d.
55.
Expected error Anomalous error Sampling error Unintentional error
Ethical conduct Conflict of interest Evidence Fair presentation
The forecast projection standards do not require a. A caveat that the prospective results may not be achieved b. A statement that examination was made in accordance with standards established by the ASC c. An opinion on the prospective financial statement d. A statement that the accountant should be independent
58.
Internal auditors’ role in preventing and detecting fraud would not include the a. b. c. d.
59.
A CPA examines the financial statements of a local bank. According to the Code of Ethics, the appearance of independence ordinarily would not be impaired if the CPA a. b. c. d.
60.
Audit of abnormal expenditures Audit of sensitive expenses such as foreign sale expenses Review of the company’s policies regarding questionable payments Direct responsibility of reporting fraud to the SEC
Serves on the bank’s committee that approves loans Owns several of the bank’s ordinary shares Obtains a short-term loan from the bank Uses the bank’s timesharing computer service to solve client-related problems
A CPA should not undertake a management advisory service engagement that includes continued participation through implementation, unless a. Upon implementation of a new study and evaluation of the system of internal control is performed b. Upon implementation, the client’s personnel will have the knowledge and ability to adequately maintain and operate such systems as may be involved c. The CPA accepts overall responsibility for implementation of the chosen course of action d. The CPA acquires an overall knowledge of the client’s business that is equivalent to that possessed by management
61.
Santos, a CPA not in public practice, is an employee in the internal audit department of Tower’s Company. The management has asked Santos to perform examinations of potential acquisitions and to express an opinion thereon. Santos will use the reports for internal purposes and to show to its bankers in accordance with certain loan agreements. How should Santos sign the report? a. b. c. d.
62.
Santos, CPA Santos, Internal Auditor Santos, CPA (Internal Auditor) Santos, Internal Auditor (CPA)
An auditor should not render a report on a. b. c. d.
The achievability of forecasts Client internal control Management performance Quarterly financial information
63.
The CPA in public practice violates the Code of Ethics for Professional Accountants if he accepts a fee which was a. b. c. d.
64.
Fixed by a public authority Determined, based on the results of judicial proceedings Payable after a specified finding was obtained Based on the actual audit time charges
Contingent fees charged by CPAs engaged in tax practice are permitted under the rules of professional conduct because a. This practice establishes fees which are commensurate with the value of the services b. Attorneys in tax practice customarily set contingent fees c. Determination by taxing authorities are a matter of judicial proceedings which do not involve third parties d. The consequences are based upon findings of judicial proceedings or the findings of tax authorities
65.
A CPA accepts an engagement for a professional service without violating the rules of Professional Conduct if the service involves a. The preparation of cost projections for submission to a government agency as an application for a rate increase, and the fee will be paid if there is a rate increase b. Tax preparation, and the fee will be based on whether the CPA signs the tax return prepared c. A litigatory, and the fee is not known but it is to be determined by a district court d. Tax return preparation and the fee is to be based on the amount of taxes saved
66.
The Code of Ethics provides that when a CPA is required to express an opinion on combined or consolidated financial statements which include a subsidiary, branch, or other component audited by another independent public accountant, the CPA may
a. Insist on auditing any such component which the CPA deems necessary to warrant the expression of an opinion b. Insist only on performing a review of any such component c. Not insist on auditing any such component but may request copies of all working papers relevant to the other independent public accountant’s examinations d. Not insist on auditing any such component or reviewing working papers belonging to the other independent public accountant 67.
Which of the following act when committed by a CPA constitute a violation of the Code of Ethics: a. Rendering management services to a non-audit client b. Offering a position with higher salary to a staff member of another CPA c. Charging professional fee on the savings gained by a client on a tax case
d. Providing accounting service to a non-audit client 68.
An auditing firm is allowed to offer employment to an employee of another CPA in a public practice if the CPA a. b. c. d.
69.
The CPA should not a. b. c. d.
70.
Advertise only as to his expertise in preparing income tax returns Base his audit fee on a percentage of the proceeds of his client’s stock issue Own preferred stock in a corporation which is an audit client Perform an examination for a financially distressed client at less than his customary fees
Which of the following is allowable under the rules against advertising? a. b. c. d.
72.
Render management consulting services to an audit client Accept a position with another firm without informing his present employer Advise clients and professional contacts of the opening of a new office Describe himself as tax expert or management consulting specialist
Ethically, the auditor could a. b. c. d.
71.
Inform the other CPA in public practice prior to making the offer Makes the offer verbally to an employee who is not a CPA Makes the offer on behalf of an audit client Has an executive search staff that is involved in personal placement
A news item relating to a technical paper read by a CPA at a seminar A bold listing of the CPAs name and address in a telephone directory An announcement as to the expertise in providing taxation services by the CPA A letter to trade chamber offering audit services at reduced group rates
Inclusion of which of the following in a promotional brochure published by a CPA firm would be most likely to result in a violation of the Code of Ethics? a. Names and addresses, telephone numbers, number of partners, office hours, foreign language competence, and date the firm was established b. Services offered c. Educational and professional attainments, including date and place of certification, degrees received, and membership in professional associations d. Names, addresses and telephone numbers of the firm’s clients, including the number of years served
PROFESSIONAL PRACTICE OF PUBLIC ACCOUNTING 1.
PAS 120, Framework of Philippine Standards on Auditing describes the framework within which Philippine Standards on Auditing (PSAs) are issued in relation to the services which may be performed by auditors. It requires that financial statements need to be prepared in accordance with one, or a combination of the following except: a. International Accounting Standards b. Accounting standards generally accepted in the Philippines c. Other authoritative and comprehensive financial reporting framework designed for use in financial reporting and identified in the financial statements d. Procedures recommended by the industry association of accountants
2.
Which of the following services of a professional accountant is considered to provide moderate level of assurance that information subject to review is free of material misstatement?
a. a. b. c. d. 3.
Which of the following is not among the ethical principles governing the auditor’s professional responsibilities? a. b. c. d.
4.
Independence Integrity Objectivity Size and profile of clientele
An audit has inherent limitations that affect the auditor’s ability to detect material misstatements. Which of the following is not among the factors that result to these inherent limitations? a. b. c. d.
5.
Audit Agreed-upon procedures Review Compilation
Use of testing Inherent limitations of accounting and internal control system Evidence are basically persuasive rather than conclusive Physical limitations of auditors due to fatigue and stress
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. Quality assurance review b. Monitoring c. Documenting
d. Auditing 6.
Which of the following does a firm need not establish and maintain a system of quality control for? a. b. c. d.
7.
________________ refers to application of relevant training, knowledge and experience, within the context provided by auditing, accounting and ethical standards in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement a. b. c. d.
8.
Nature of the entity Nature of the financial statements Whatever laws or regulation prescribes the applicable financial reporting framework Size of the entity
Which of the following factors will not influence the decision of an auditor of a parent entity who is also the auditor of a component whether to send a separate audit engagement letter to the component? a. b. c. d.
10.
Professional judgment Reasonable assurance Professional skepticism Compliance
Which of the following is not among the factors that are relevant to the auditor’s determination of the acceptability of the financial reporting framework to be applied in the preparation of the financial statements? a. b. c. d.
9.
Leadership responsibilities for quality within the firm Relevant ethical requirements Maximizing revenue Engagement performance
Whether a separate auditor’s report is to be issued on the component Legal requirements in relation to audit appointments Degree of ownership of parent The fee to be paid by the parent entity
When evaluating the appropriate competence and capabilities expected of the engagement team as a whole, the engagement partner may take the following into consideration except a. The team’s understanding and practical experience with audit engagements of a similar nature and complexity through appropriate timing and participation b. The team’s technical experience c. The team’s knowledge of relevant industries in which the client operates
d. The team’s average cumulative age and length of service to the firm 11.
Audit documentation serves the following services except a. b. c. d.
12.
Assisting the engagement team to plan and perform the audit Computing the fee to be billed the client Enabling the engagement team to be accountable for its work Assisting members of the engagement team responsible for supervision to direct and supervise the audit work
The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor having now previous connection with the audit, achieve the following except a. To understand the nature, timing and extent of the audit procedures performed to comply with the PSAs and applicable legal regulatory requirement b. To estimate the amount of audit revenue earned corresponding to the bulk of working papers prepared c. To understand the results of the audit procedure performed and the audit evidence obtained d. To appreciate significant matters arising during the audit, the conclusions reached thereon and significant professional judgment made in reaching those conclusions
13.
In documenting the nature, timing and extent of audit procedure performed, the auditor shall record the following except a. b. c. d.
14.
The identifying characteristics of the specific items or matters tested Who performed the audit work as well as the date such work was completed Who reviewed the audit work performed and the date and extent of such review The time charges in performing the procedure as well as the corresponding audit revenue generated
Professional skepticism can be described as any of the following except a. Expertise in the authentication of documents examined b. An attitude that includes a questioning mind and a criteria assessment of audit evidence c. Conducting ongoing questioning of whether the information and audit evidence suggests that a material misstatement due to fraud may exist d. Using the work of an expert to assess the document authenticity
15.
When auditor suspects material misstatement in the financial statements resulting from management fraud, he/she may direct inquiries from the following personnel within the entity except a. In-house legal counsel b. Chief ethics officer of equivalent person
c. Operating personnel not directly involved in the financial reporting process d. Top executives who initiated, approved and authorized recording of complex and unusual transactions 16.
Which of the following is not considered among the “Fraud risk factors”? a. b. c. d.
17.
The need to meet expectations of third parties to obtain additional equity financing The granting of significant bonuses if unrealistic profit targets are met Ineffective control environment The existence and enforcement of a written code of conduct
Which of the following unusual relationships between the auditor and manager would not necessarily indicate possibility of fraud? a. Denial of access to records, facilitate certain employees, vendors or customers or others from whom audit evidence might be sought b. Undue time pressures imposed by management to resolve complex or contentious issues c. Unusual delays by the entity in providing requested information d. Willing by management to permit the auditor to meet privately with those charged with governance
18.
Which of the following is not among the business risks that management faces relation to the entity’s e-commerce activities? a. Loss of transaction integrity which may be compounded by the lack of an adequate audit trail in either paper or electronic form b. Non-compliance with taxation and other legal and regulatory requirements particularly when internet/e-commerce transactions are conducted across international boundaries c. Failure to ensure that contracts evidenced only by electronic means are binding d. Under-reliance on e-commerce when placing significant business systems or other business transactions on the internet
19.
This refers to an approximation of the amount of an item in the absence of a precise means of measurement a. b. c. d.
20.
Projection Forecast Probable amount Accounting estimate
The term that describes the role of persons entrusted with the supervision, control and direction of an entity is a. Management b. Administration
c. Governance d. Government 21.
The term that refers to acts of omission or commission by the entity being audited, either intentional or unintentional which are contrary to the prevailing laws or regulations a. b. c. d.
22.
This refers to the financial information based on assumptions about events that may occur in the future and possible actions by an entity a. b. c. d.
23.
Projected data Prospective financial information Accounting estimates Budget
This refers to the audit procedures deemed necessary in the circumstances deemed necessary to achieve the objective of the audit a. b. c. d.
24.
Error Noncompliance Fraud Misstatement
Compliance audit procedures Substantive audit procedures Scope of an audit Analytical procedures
A special purpose auditor’s report is issued in connection with the independent audit of the following financial information except a. Financial statements prepared in accordance with a comprehensive basis of accounting b. Specified accounts, elements of accounts or items in a financial statement c. Compliance with contractual agreements d. Financial statements prepared in accordance with IFRS
25.
The objective of the ordinary examination by the independent auditor is the expression of an opinion on a. b. c. d.
26.
The fairness of the financial statements The accuracy of the financial statements The accuracy of the annual report The balance sheet and income statement
The reason auditors accumulate evidence is to
a. b. c. d.
27.
In distinguishing between the management of a material management fraud and an equally material error, audits a. b. c. d.
28.
Should provide complete assurance of detection Should be expected to provide the same degree of assurance Cannot be expressed to provide the same degree of assurance Provide no assurance of detecting either
Which of the following is not one of the seven broad categories of financial statement assertions, as classified in Glossary of Terms? a. b. c. d.
29.
Defend themselves in the event of a lawsuit Justify the conclusions they have otherwise reached Satisfy the requirements of the Securities Act Enable them to reach conclusions about the fairness of the financial statements and issue an appropriate audit report
General or specific transaction objectives Existence Valuation Presentation and disclosure
Which of the following statements is not correct? a. It would be a violation of the completeness assertion if management would record a sale that did not take place b. The completeness assertion deals with matters opposite from those of the existence/occurrence assertion c. The completeness assertion is concerned with the possibility of omitting items from the financial statements that should have been included d. The existence/occurrence is concerned with inclusion of amounts that should have not been
30.
While performing services for their clients, professionals have a duty to provide a level of care which is a. b. c. d.
31.
Free from judgment errors Superior Greater than average reasonable
An arrangement which offers the injured party a potential gain when the lawsuit is successful but minimal loss when it is unsuccessful is a. the public defender’s office
b. the contingent-fee basis c. no-fault insurance d. liability assurance 32.
When the auditor issues an erroneous opinion as the result of an underlying failure to comply with the requirements of standards on auditing, it results in a. b. c. d.
33.
business failure audit failure audit risk all of the above
In connection with the examination of financial statements, an independent auditor could be responsible for failure to detect a material fraud if a. statistical sampling techniques were not used on the audit engagement b. the auditor planned the work in a hasty and inefficient manner c. accountants performing important parts of the work failed to discover a close relationship between the treasurer and the cashier d. the fraud was perpetrated by one client employee, who circumvented the existing internal controls
34.
Most accounting and auditing professionals agree that when an audit has failed to uncover material misstatements, and the wrong type of audit opinion is issued, the audit firm a. b. c. d.
35.
In the auditing environment, failure to meet the standards on auditing is often a. b. c. d.
36.
has failed to follow the standards on auditing deserves to lose the lawsuit should be asked to defend the quality of the audit should not be held responsible for the financial loss suffered by others
an accepted practice a suggestion of negligence conclusive evidence of negligence tantamount to criminal behavior
A common way for a CPA firm to demonstrate its defense of a lack of duty to perform is by use of a(n) a. b. c. d.
expert witness’ testimony engagement letter letter of representation confirmation letter
37.
The criteria by which the quality of performance of auditing engagements are measured. This indicates levels of performance which must be attained for the completion of a satisfactory audit and these relate to the personal qualifications of the auditor and the exercise of his judgment in performing the examination and in rendering his report. These are called the a. Statement of Financial Accounting Standards (SFAS)/ International Accounting Standards (IAS) b. Philippine Standards on Auditing (PSA) c. Cost standards d. Standards of reporting
38.
“Philippine Standards on Auditing (PSAs)” is best described to mean a. b. c. d.
39.
Acts to be performed by the auditor Measures of the quality of the auditor’s performance Procedures to be used to gather evidence to support financial statements Audit objectives generally determined on audit engagements
Choose one of the following which would describe best the phrase “Philippine Standards on Auditing” a. They identify the policies and procedures for the conduct of the audit b. They define the nature and extent of the auditor’s responsibilities c. They provide guidance to the auditor with respect to planning the audit and writing the audit report d. They set forth a measure of the quality of the performance of audit procedures
40.
The PSAs established by the Board of Accountancy apply a. b. c. d.
41.
only to the PICPA membership to all CPAs only to those who choose to follow them only when conducting audits subject to the Board’s jurisdiction
On every audit engagement, the CPA should comply with applicable PSA a. without exception b. except in examinations that result in a qualified report c. except in engagements where the CPA is associated with unaudited financial statements d. except in examinations of interim financial statements
42.
Professional experience is an important aspect of the training and proficiency of the junior assistant just entering upon an auditing career. Professional experience should be obtained
a. b. c. d. 43.
with proper supervision and review of work by a more experienced supervisor through a thorough study of the PSAs by completing a number of continuing education courses each year by taking appropriate professional certification exams
An auditor in accepting an audit engagement wherein he does not possess the industry expertise of the business entity, should a. engage financial experts familiar with the nature of the business entity b. obtain a knowledge of matters that relate to the nature of the entity’s business c. refer substantial portion of the audit to another CPA who will act as the principal auditor d. first inform management that an unqualified opinion cannot be issued
44.
During the course of an audit engagement, the CPA needed additional studies and consultation with experts. This additional study and consultation is deemed to be a. b. c. d.
45.
Juan dela Cruz, CPA, accepted the audit engagement of XYZ Corporation. During the audit, Juan dela Cruz became aware of the fact that he did not have the competence required for the engagement. He must a. b. c. d.
46.
disclaim an opinion issue a “Subject to” opinion suggest that XYZ Corporation engage in another CPA to perform the audit rely on the competence of client personnel
A CPA’s opinion on financial statements is of little value to those who relied on him unless he a. b. c. d.
47.
an unusual practice which should have voided the audit engagement lack of competence on the part of the CPA an appropriate part of the professional conduct of the audit engagement undertaken as a responsibility of management
issues an unqualified opinion maintains a program of continuing education serves his client with professional concern for their best interest maintains his independence
The essence of a CPA’s independence is a. b. c. d.
avoiding significant financial interest in the client’s business performing the examination from the viewpoint of the stockholders maintaining a mental attitude of impartiality making sure no relatives or personal friends are employed by the client
48.
In determining independence with respect to any audit engagement, the ultimate decision as to whether the auditor is independent must be made by the a. b. c. d.
49.
auditor client audit committee public
A CPA in an audit engagement, where he lacks independence, should a. disclaim an opinion on the financial statements b. issue a piecemeal opinion c. list, in the auditor’s report, all the generally accepted auditing procedures actually performed by him d. state the reason for his lack of independence in his auditor’s report
50.
To emphasize auditor independence from management, many corporations follow the practice of a. appointing a partner of the CPA firm conducting the examination to the corporation’s audit committee b. establishing a policy of discouraging social contact between employees of the corporation and the staff of the independent auditor c. requesting that a representative of the independent auditor to be on hand at the annual stockholders’ meeting d. having the independent auditor report to an audit committee of outside members of the board of directors
51.
Which of the following best describes why publicly traded public corporations follow the practice of having the outside auditor appointed by the board of directors or elected by the stockholders? a. b. c. d.
52.
To comply with the regulations of the Financial Reporting Standards Council To emphasize auditor independence from the management of the corporation To encourage a policy of rotation of the independent auditors To provide the corporate owners with an opportunity to voice their opinion concerning the quality of the auditing firm selected by the directors
It would not be appropriate for the auditor to initiate discussion with the audit committee concerning with a. The extent to which the work of internal auditors will influence the scope of the examination b. Details of procedures which the auditor intends to apply c. The extent to which change in the company’s organizations will influence the scope of
the examination d. Details of potential problems which the auditor believes might cause a qualified opinion 53.
With respect to the auditor’s planning of the year-end examination, which of the following is always true? a. An engagement should not be accepted after the fiscal year end b. An inventory count must be observed at the balance sheet date c. The client’s audit committee should not be told of the specific audit procedures which will be performed d. It is an acceptable practice to carry out substantial parts of the examination at interim dates
54.
Rogers & Co., CPAs have policies requiring that all members of the audit staff submit weekly time reports to the audit manager, who then prepares a weekly summary work report regarding variance from the budget for Roger’s review. This provides written evidence of Rogers & Co., CPAs professional concern regarding compliance with which PSAs? a. b. c. d.
55.
Quality control Due professional care Adequate review Adequate planning
Generally, evidential matter is considered sufficient when a. It is competent b. There is enough of it to afford a reasonable basis for an opinion on financial statements c. It has the qualities of being relevant, objective, and free from unknown bias d. It has been obtained by random selection
56.
Evidential matter is considered to be competent when a. b. c. d.
57.
It has the qualities of being relevant, objective, and free from unknown bias There is enough of it to afford a reasonable basis for an opinion on financial statement It has been obtained by random selection It consistent of written statements made by managers of the enterprise under audit
One of the requirements of the auditing standards is sufficient and evidential matter should be obtained. The term “competent” refers primarily to a. b. c. d.
Relevance of the evidence Measurability of the evidence Consistency of the evidence Dependability of the evidence
58.
The sufficiency and competency of evidential matter is determined by a. b. c. d.
59.
Madison Corporation has a few large accounts receivable that total P1,000,000. Nassau Corporation has a great number of small accounts receivable that also total P1,000,000. The importance of an error in any one account is, therefore, greater for Madison than for Nassau. This is an example of the auditor’s concept of a. b. c. d.
60.
Philippines Standards on Auditing Judgment of the auditor Availability of corroborating data Relevance of evidential matter
Materiality Comparative analysis Reasonable assurance Relative risk
Which one of the following statements is correct concerning the concept of materiality? a. Materiality is determined by reference to guidelines established by the Philippine Institute of CPAs b. Materiality depends only on the peso amount of an item relative to other fees in the financial statements c. Materiality depends on the nature of an item rather than the peso amount d. Materiality is a matter of professional judgment
61.
Which of the following best describes the element of relative risk which underlies the application of the PSAs? a. Cash audit work may have to be carried out in a more conclusive manner than inventory audit work b. Intercompany transactions are usually subject to less detailed scrutiny than arm’s length transactions with outside parties c. Inventories may require more attention by the auditor on an engagement for a merchandising enterprise than on an engagement for a public utility d. The scope of the examination need not be expanded if errors that arouse suspicion of fraud are of relatively insignificant amounts
62.
Independence of an auditor in relation to the enterprises may be impaired in the following cases, except a. Direct or material indirect financial interest in the enterprise b. Connection with the enterprise as a promoter, underwriter, voting trustee, director, officer or employee c. Having a loan to or from the enterprise or any officer, director or principal stockholder
thereof, with certain exceptions d. Engaged to render management advisory services to the enterprise 63.
One of a CPAs firm’s basic objective is to provide professional services that conform to professional standards. Reasonable assurance achieving this basic objective is provided through a. b. c. d.
64.
65.
When restrictions that significantly limit the scope of the audit are imposed by the client, the auditor generally should issue which of the following opinions? a. “Except for” b. Disclaimer c. Adverse d. Unqualified An auditor has withdrawn from an audit engagement of a publicly held company after finding irregularities which may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence to the a. b. c. d.
66.
Securities and Exchange Commission Client’s legal counsel Stock exchanges where the company’s stock is traded Board of Directors
In pursuing its quality control objectives with respect to acceptance of a client, a CPA firm is not likely to a. b. c. d.
67.
A system of quality control A system of peer review Continuing professional education Compliance with generally accepted reporting standards
Make inquiries of the proposed client’s legal counsel Review financial statements of the proposed client Make inquiries of previous auditors Review the personnel practices of the proposed client
Which of the following statements is false? a. The firm should obtain written confirmation of compliance with its policies and procedures on independence from all firm personnel required to be independent by the Code of Ethics b. The firm should establish policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements c. The firm’s quality control policies and procedures need not be documented and communicated to the firm’s personnel d. The firm should establish policies and procedures requiring appropriate documentation
to provide evidence of the operations of each element of its system of quality control 68.
In determining the form and content of documentation evidencing the operation of each of the element of the system of quality control, the following factors should be considered except a. b. c. d.
69.
70.
Size of the firm and the number of offices Degree of authority that both personnel and officers have Nature and complexity of the firm’s practice and organization Geographical location of the offices
A practitioner should accept an assurance engagement only when the engagement exhibits all of the following characteristics except a. Subject matter is appropriate b. Criteria to be used are suitable and are available to the intended users c. Sufficient appropriate evidence to support the practitioner’s conclusion is accessible to the practitioner d. Practitioner is assured of being paid the engagement fee Criteria need to be available to the intended users in an assurance engagement to allow them to understand how the subject matter has been evaluated or measured. Which of the following is not among the ways, by which these criteria could be made available to the intended users? a. Publicly b. Through inclusion in a clear manner in the presentation of the subject matter information c. Through inclusion in the firm’s office policy manual d. Through inclusion in a clear manner in the assurance report
71.
Which of the following is not a component of assurance engagement risk? a. b. c. d.
72.
Inherent risk Control risk Business risk Detection risk
“Reasonable assurance” is less than absolute assurance. Reducing assurance engagement risk to zero is very rarely attainable or cost beneficial because of the following factors except a. b. c. d.
Use of selective testing Inherent limitation of internal controls Difficulty in meeting the stringent requirements of the regulatory agencies Use of judgment in gathering and evaluating evidence and forming conclusions based on that evidence
73.
PSA 300 (Redrafted), Planning an Audit of Financial Statements, requires, in part, that audit work be properly planned. Proper planning as intended by this Standard would occur when the auditor a. Eliminates the possibility of counting inventory items more than once by arranging to make extensive test counts b. Uses negative accounts receivable confirmations instead of positive confirmations because the latter require mailing of second requests and review of subsequent cash collections c. Compares all cash as of a particular date to avoid performing time-consuming cash cutoff procedures d. Physically observes the movement of securities already counted to guard against the substitution of such securities for others that are not actually on hand
74.
The PSA recognizes that early appointment of the independent auditor has many advantages to the auditor and the client. Which of the following advantages is least likely to occur as a result of early appointment of the auditor? a. b. c. d.
75.
Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit? a. b. c. d.
76.
Time and expense summary Engagement letter Progress flowchart Audit program
In the audit of a medium-sized trading company, which one of the following areas would be expected to require the greatest amount of audit time? a. b. c. d.
77.
The auditor will be able to plan the audit work so that it may be done expeditiously The auditor will be able to complete the audit work in less time The auditor will be able to better plan for the observation of the physical inventories The auditor will be able to perform the examination more efficiently and will be finished at an early date after the year end
Liabilities Assets Revenues Owners’ Equity
During the course of an audit of a medium-sized trading company, which one of the following areas would be expected to require the greatest amount of audit time? a. b. c. d.
Assets Liabilities Revenues Owners’ Equity
78.
When planning an examination, an auditor should a. Consider whether the extent of substantive tests may be reduced based on the results of the internal control questionnaire b. Make preliminary judgments about materiality levels for audit purposes c. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them d. Prepare a preliminary draft of the management representation letter
79.
The auditor is likely to accumulate more evidence when the audit is for a company a. b. c. d.
80.
Whose stock is publicly held Which has extensive indebtedness Which is to be sold in the near future All three of the above
Which of the following statements describes why a properly designed and executed audit may not detect a material irregularity? a. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an internal misstatement that is concealed through collusion b. An audit is designed to provide reasonable assurance of detecting material error, but there is no similar responsibility concerning material irregularities c. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements d. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole
81.
Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity’s financial statements? a. Supporting records that should be readily available are frequently not produced when requested b. Reportable conditions previously communicated have not been corrected c. Clerical errors are listed on a monthly computer-generated exception report d. Differences are discovered during the client’s annual physical inventory count
82.
Disclosure of irregularities to parties other than a client’s senior management and its audit committee or board of directors ordinarily is not part of an auditor’s responsibility. However, to which of the following outside parties may a duty to disclose irregularities exist? To the SEC when the client reports an auditor
To a successor auditor when the successor
To a government funding agency from which the
change a. b. c. d. 83.
makes appropriate inquiries Yes No Yes Yes
Yes Yes No Yes
client receives financial assistance No Yes Yes Yes
What assurance does the auditor provide that errors, irregularities, and direct effect illegal acts that are material to the financial statements will be detected?
a. b. c. d.
Errors Limited Limited Reasonable Reasonable
Direct effect irregularities Negative Limited Limited Reasonable
Illegal acts Limited Reasonable Limited Reasonable
THE FINANCIAL STATEMENTS AUDIT 1.
Audit engagement letters generally include reference to the following except a. b. c. d.
2.
When a professional accountant is the auditor of a parent entity and also the auditor of its subsidiary, branch or division (component), which of the following factors need not be considered in deciding whether to send separate engagement letter to the component? a. b. c. d.
3.
Who appoints the auditor of the component Whether a separate audit report is to be issued on the component Legal requirements Number of reports to be prepared during the peak audit season
On recurring audits, the auditor may decide not to send a new engagement letter each period. In which of the following situations will there be no need to send a new letter? a. b. c. d.
4.
Objective of the financial statements Management’s responsibility for the financial statements Scope of the audit Identification of the audit team members
Revision of special terms of the engagement Significant change in nature or size of the client’s business Recent change of middle management and rank and file organization structure Indications of misunderstanding of the objective and scope of the audit
Which of the following will not necessarily lead the client to request for the auditor to change the engagement to one which provides a lower level assurance?
a. Restrictions on the scope of the engagement, whether imposed by management or caused by circumstances b. Misunderstanding as to the nature of an audit or related service originally requested c. Recent changes in senior management, board of directors or ownership d. Change in circumstances affecting the need for the service 5.
For initial engagements, the auditor should obtain sufficient appropriate audit evidence for the following except a. That the opening balances do not contain misstatement that materially affect the current period’s financial statements b. That the prior period’s closing balances have been correctly brought forward to the current period, or, when appropriate have been restated c. That appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for or adequately disclosed d. That the client has informed the predecessor auditor of his appointment as the new auditor
6.
Before accepting an engagement to audit a new client, an auditor is required to a. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client b. Obtain the prospective client’s signature to the engagement letter c. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan d. Discuss the management representation letter with the prospective client’s audit committee
7.
Which of the following is not one of the three main reasons why the auditor should properly plan engagements? a. b. c. d.
8.
One of the major parts of audit planning is preplanning. Which of the following is not involved during the preplanning phase? a. b. c. d.
9.
To help keep audit costs reasonable To avoid misunderstandings with the client To enable the auditor to obtain sufficient competent evidence To enable proper on-the-job training of employees
Deciding whether to accept or continue this client Obtaining information about client’s legal obligations Selecting staff for the engagement Obtaining an engagement letter
Which of the following would not be a consideration of a CPA firm in deciding whether to
accept a new client? a. b. c. d. 10.
Where client is changing auditors, PSA requires communication between predecessor and successor auditors. The burden of initiating the communication rests with the a. b. c. d.
11.
Client’s probability of achieving an unqualified opinion Client’s financial ability Client’s relation with its previous CPA firm Client’s standing in the business community
Predecessor Client successor SEC
The purpose of an engagement letter is to a. Reduce the terms to writing in order to minimize misunderstandings b. Reduce the CPA firm’s responsibility to external users of the audited financial statements c. Satisfy the Statute of Frauds which requires that contracts for professional services must be in writing to be enforceable d. Notify the audit staff of an upcoming engagement so that personnel scheduling can be facilitated
12.
The engagement letter will do one, some, or all of the following: 1. 2. 3. 4. 5.
State whether the CPA will perform audit, review, or compilation services State whether the CPA will perform tax or management advisor or other services State any restriction to be imposed on the CPA’s work Identify deadlines for completing the work State the amount and type of work to be done by client’s personnel in generating auditor’s workpapers 6. State the CPA’s fees for the engagement 7. Inform the client that the CPA does not have responsibility for detecting fraud The engagement letter will do a. Numbers 1, 2, 4, and 6 b. Numbers 1, 2, 3, 4, and 6 c. Numbers 1, 3, 5, and 7 d. All seven of the above stated items 13.
The engagement letter a. Does affect the CPA firm’s responsibility to external users of audited financial statements b. Can affect legal responsibilities to the client
c. Can be used to alter the auditor’s responsibilities under the standards on auditing d. Is useful only if it is an engagement, but has no effect for review or compilation services 14.
After preliminary audit arrangements have been made, an engagement confirmation letter should be sent to the client. The letter usually would not include a. A reference to the auditor’s responsibility for the detection of errors or irregularities b. An estimation of the time to be spent on the audit work by audit staff and management c. A statement that management advisory services would be made available upon request d. A statement that a management letter will be issued outlining comments and suggestions as to any procedures requiring the client’s attention
15.
Early appointment of the independent auditor will enable a. b. c. d.
16.
In an audit situation, communication between the successor and predecessor auditors should be a. b. c. d.
17.
The auditors’ preliminary assessment of internal control The auditors’ estimate of the fee for the engagement Limitations on the scope of the engagement A description of responsibility for the detection of fraud
Preliminary arrangements agreed to by the auditors and the client should be reduced to writing by the auditors. The best place to set forth these arrangements is in a. b. c. d.
19.
Authorized in an engagement letter Acknowledged in a representation letter Either written or oral Written and included in the working papers
Which of the following topics is not normally included in an engagement letter? a. b. c. d.
18.
A more thorough examination to be performed A proper study and evaluation of internal control to be performed Sufficient competent evidential matter to be obtained A more efficient examination to be planned
A memorandum to be placed in the permanent section of the auditing working papers An engagement letter A client representation letter A confirmation letter attached to the constructive services letter
Which statement is correct relating to a potential successor auditor’s responsibility for
communicating with the predecessor auditors in connection with a prospective new audit client? a. The successor auditors have no responsibility to contact the predecessor auditors b. The successor auditors should obtain permission from the prospective client to contact the predecessor auditors c. The successor auditors should contact the predecessors regardless of whether the prospective client authorizes contact d. The successor auditors need not contact the predecessors if the successors are aware of all available relevant facts 20.
An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity, should a. Engage financial experts familiar with the nature of the business entity b. Obtain a knowledge of matters that relate to the nature of the entity’s business c. Refer a substantial portion of the audit to another CPA who will act as the principal auditor d. First inform management that an unqualified opinion cannot be issued
21.
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s a. Awareness of the consistency in the application of financial reporting standards between periods b. Evaluation of all matters of continuing accounting significance c. Opinion of any subsequent events occurring since the predecessor’s audit report was issued d. Understanding as to the reasons for the change of auditors
22.
An auditor who has been invited to submit a proposal for an audit engagement is a a. b. c. d.
23.
Predecessor auditor Successor auditor Principal auditor Interim auditor
Legacy Commercial Inc. engages the services of Mr. C. Dimalanta, CPA, to make a project study on the expanded food vending operations of the corporation with the corresponding staffing and compensation package for its executive staff. Dimalanta, however, has primarily auditing expertise and only in general merchandising operations. Mr. Dimalanta may properly a. Accept the engagement and carry it out consistent with the standards on auditing b. Accept the engagement but exercise due professional care c. Accept the engagement and acquire the necessary competence or consult with established authorities
d. Decline the engagement for lack of experience or competence in an entirely new line of specialization 24.
Engagement letters are widely used in practice for professional engagements of all types. The primary purpose of the engagement letter is to? a. Remind management that the primary responsibility for the financial statements rests with management b. Satisfy the requirements of the CPA’s liability insurance policy c. Provide a starting point for the auditor’s preparation of the preliminary audit program d. Provide a written record of the agreement with the client as to services to be provided
25.
In making arrangements for an audit, there should be a clear understanding between the auditor and the client as to the following except a. b. c. d.
26.
The type of audit to be performed Terms of settlement of audit services Assurance of auditor’s independence Official to whom audit report shall be addressed
When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This procedure is necessary because the predecessor may be able to provide the successor with information that will assist the successor in determining a. Whether the predecessor’s work should be utilized b. Whether the company follows the policy of rotating its auditors c. Whether in the predecessor’s opinion, internal control of the company has been satisfactory d. Whether the engagement should be accepted
27.
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding a. Disagreements of the predecessor had with the client concerning auditing procedures and accounting principles b. The predecessor’s evaluation of matters of continuing accounting significance c. The degree of cooperation the predecessor received concerning the inquiry of the client’s lawyer d. The predecessor’s assessments of inherent risk and judgments about materiality
28.
The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can be limited to stating that no information will be provided when a. Predecessor auditor has poor relations with successor auditor
b. Client is dissatisfied with predecessor’s work c. There are legal problems between client and predecessor d. Predecessor believes that client lacks integrity 29.
Aquino, CPA, requested permission to communicate with the predecessor auditors of a prospective client. The prospective client’s refusal to permit this will bear directly on Aquino’s decision concerning the a. b. c. d.
30.
Which of the following most accurately summarizes what is meant by the term “material misstatement”? a. b. c. d.
31.
Adequacy of the preplanned audit program Ability to establish consistency in application of accounting principles between years Apparent scope limitation Integrity of management
Fraud and direct-effect illegal acts Fraud involving senior management and material fraud Material error, material fraud, and certain illegal acts Material error and material illegal acts
Which of the following statements is correct relating to the auditor’s consideration of fraud? a. The auditor’s interest in fraud consideration relates to fraudulent acts that cause a material misstatement of financial statements b. A primary factor that distinguishes fraud from error is that fraud is always intentional, while errors are generally, but not always, intentional c. Fraud always involves a pressure or incentive to commit fraud, and a misappropriation of assets d. While an auditor should be aware of the possibility of fraud, management, and not the auditor, is responsible for detecting fraud
32.
Which of the following factors or conditions is an auditor least likely to plan an audit to discover? a. b. c. d.
33.
Financial pressures affecting employees High turnover of senior management Inadequate monitoring of significant controls Inability to generate positive cash flows from operations
Management’s attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity’s control environment a. External policies established by parties outside the entity affect its accounting
practices b. Management is dominated by one individual who is also a shareholder c. Internal auditors have direct access to the board of directors and the entity’s management d. The audit committee is active in overseeing the entity’s financial reporting policies 34.
Which of the following is least likely to be required on an audit? a. b. c. d.
35.
Which of the following factors would most likely to heighten an auditor’s concern about the risk of fraudulent financial reporting? a. b. c. d.
36.
Test appropriateness of journal entries and adjustment Review accounting estimates for biases Evaluate the business rationale for significant unusual transactions Make a legal determination of whether fraud has occurred
Large amounts of liquid assets that are easily convertible into cash Low growth and profitability as compared to other entities in the same industry Financial management’s participation in the initial selection of accounting principles An overly complex organizational structure involving unusual line of authority
An auditor who discovers that a client’s employees have paid small bribes to public officials most likely would withdraw from the engagement if the a. Client receives financial assistance from a government agency b. Evidential matter that is necessary to prove that the illegal acts were committed does not exist c. Employees’ actions affect the auditor’s ability to rely on management’s representations d. Notes to the financial statements fail to disclose the employees’ actions
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT INCLUDING ITS INTERNAL CONTROL AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
1.
Which of the following is most correct concerning the understanding of internal control needed by auditors to plan the audit? a. The auditors must understand the control environment, but not the accounting system or the control procedures b. The auditors must understand the control environment, the accounting system, and not the control procedures c. The auditors must understand the control environment, the accounting system, and must use judgment as to the control procedures which must be considered d. The auditors must understand the control environment, the accounting system, and all
control procedures 2.
Which of the following would be of least interest to the auditors in considering internal control? a. Procedures that are concerned with the decision processes leading to management’s authorization of transactions b. Procedures restricting access to assets c. Procedures related to recording transactions d. Policies concerning the reconciliation of accounting records to existing assets
3.
If the auditors do not perform tests of controls of certain assertions, a. They have performed a substandard audit b. They are not required to communicate reportable conditions relating to those accounts to management and the board of directors c. They must issue a qualified opinion d. They must assess control risk at the maximum level for those assertions
4.
Which of the following comes closest to outlining the auditor’s responsibility for internal control on all financial statement audits? a. An understanding of the control environment and the accounting system is necessary; an understanding of control procedures is necessary for areas in which the auditor is performing tests of controls b. The auditor must obtain an understanding of each of the three internal control elements sufficient to plan the audit c. When tests of controls have been performed, control risk must be assessed at a level less than the maximum d. An understanding of the control environment is necessary, but not of the accounting system or control procedures unless control risk is assessed at a level less than the maximum
5.
In the consideration of internal control, the effectiveness of the design of controls is tested by a. b. c. d.
6.
Flowcharts Tests of controls Substantive tests Decision tables
A significant deficiency in the design or functioning of the internal control structure that could adversely affect an organization’s ability to record, process, summarize, and report financial data is referred to as a(n) a. Material weakness in internal control
b. Inherent limitation of internal control c. Management override d. Reportable conditions 7.
For good internal control, which of the following functions should not be assigned to the company’s accounting department? a. b. c. d.
8.
Which of the following is not a responsibility that should be assigned to a company’s internal audit department? a. b. c. d.
9.
Reconciling accounting records with existing data Recording financial transaction Signing and paying check Preparing financial reports
Evaluating internal control Balancing subsidiary ledger Reporting on the effectiveness of operating segments Investigating potential merger candidates
Which of the following is true about the auditor’s consideration of internal control? a. The auditors must assess control risk at a level lower than the maximum b. The auditors must prepare a flowchart description of internal control for their working papers c. The auditors must obtain an understanding of the steps in processing major types of transactions d. The auditors must perform tests of controls
10.
Which of the following is an advantage of describing internal control through the use of a standardized questionnaire? a. Questionnaires highlight weaknesses in the system b. Questionnaire are more flexible than other methods of describing internal control c. Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system d. Questionnaire provide a clearer more specific portrayal of a client’s system than other methods of describing internal control
