FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 1. The primary reason an auditor requests a letter of inquiry be sent to a client’s attorney is to provide the auditor with a. The probable outcome of asserted claims and pending or threatened litigation. b. Corroboration of the information furnished by management about litigation, claims, and assessments. c. The attorney’s opinions of the client’s historical experiences in recent similar litigation. d. A description and evaluation of litigation, claims, and assessments that existed at the balance sheet date. 2. When considering the use of management’s written representations as audit evidence about the completeness assertion, an auditor should understand that such representations: a. Complement, but do not replace, substantive test designed to support the assertion. b. Constitute sufficient evidence to support the assertion when considered in combination with reliance on internal accounting controls. c. Are not parts of the evidential matter considered to support the assertion. d. Replace reliance on internal accounting controls as evidence to support the assertion. 3. Which of the following situations most likely illustrate a risk of fraud or error in online systems? I. On-line data entry is performed at or near the point where transactions originate. II. Invalid transactions are corrected and re-entered immediately. III. On-line access to data and programs is possible through telecommunications systems. IV. Workstations are located throughout the entity. V. Data entry is performed on-line by individuals who understand the nature of the transactions involved. VI. Transactions are not processed immediately by the computer system. a. b.
I, III, IV, VI. III, IV, VI.
c. d.
I, IV, VI. IV, V, VI.
4.
Earl D. Pearl, CPA, is conducting the first examination of a non-public company’s financial statements. Earl hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor auditor’s working papers. This procedure is a. Acceptable if the client and the predecessor auditor agree to it. b. Acceptable if Earl refers in the audit report to reliance upon the predecessor auditor’s work. c. Required if Earl is to render an unqualified opinion. d. Unacceptable because Earl should bring an independent viewpoint to a new engagement.
5.
Ivan Bagayao, CPA, has decided to use statistical sampling for the audit of Gor Corporation. When using statistical sampling, which of the following need not be known to Ivan to evaluate the results of an attribute sample? a. Sample size b. Risk of assessing control risk too low.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam c. Number of deviations in the population d. Number of deviations in the sample 6.
Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories? a. Confirmation of inventories at locations outside the client facilities. b. Analytical review of inventory balances compared to purchase and sales activities. c. Observation of physical inventory counts. d. Examination of paid vendors’ invoices.
7.
The working papers prepared during the engagement are the property of: a. The auditor, but do not include the working papers prepared client for the auditor. b. The auditor, even including those prepared by client for auditor. c. The client. d. The auditor and client jointly.
by
8.
The primary purpose for obtaining an understanding of an audit client’s internal control structure is to: a. Provide a basis for making constructive suggestions in a management letter. b. Determine the nature, timing and extent of tests to be performed in the audit. c. Obtain sufficient, appropriate evidential matter to afford a reasonable basis for an opinion on the financial statements under examination. d. Provide information for a communication of internal control structure-related matters to management.
9.
Which of the following can an auditor observe as a general control procedure used by companies? a. Segregation of functional responsibilities. b. Management philosophy and operating cycle. c. Open lines of communication to the audit committee of the board of directors. d. External influences such as bank examiner audits.
10. An advantage of using internal control flowcharts instead of internal control questionnaires to document information about internal control is that flowcharts a. Identify internal control weaknesses more prominently. b. Provide a visual depiction of clients’ activities. c. Indicate whether control procedures are operating effectively. d. Reduce the need to observe clients’ employees performing routine tasks. 11. In an audit sampling application, an auditor: a. Performs procedures on all the items in a balance and makes a conclusion about the whole balance. b. Performs procedures on less than 100% of the items in a balance and formulates a conclusion about the whole balance. c. Performs procedures on less than 100% of the items in a class of transactions for the purpose of becoming familiar with the client’s accounting system.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam d. Performs analytical procedures on the client’s unaudited financial statements when planning the audit. 12. In micro-computer systems, consider is the: a. Audit techniques. b. Computer technology. c. Control environment. d. Computer software.
the
MOST
important
aspect
for
auditors
to
13. George Company uses the account code 614 for maintenance expense. However, one of the company clerks often codes maintenance expense as 641. The highest account code in the system is 620. What would be the best internal control check to build into the George Company’s computer system to detect this error? a. A manual re-check of the code. c. Valid-character test. b. Sequence check. d. Valid-code test. 14. The most important output control is: a. Distribution control, which assures that only authorized personnel receive the reports generated by the system. b. Review of the data for reasonableness by someone who knows that the output should look like. c. Control totals, which are used to verify that the computer’s results are correct. d. Logic tests, which verify that no mistakes were made in processing. 15. When auditing “around” the computer, solely upon the source documents and a. Test data. b. IT processing.
the c. d.
independent
auditor
focuses
IT output. Compliance techniques.
16. The following statements relate to CAATs. Which one is incorrect? a. CAATs may improve the effectiveness and efficiency of auditing procedures. b. CAATs may provide effective tests of control, but not substantive procedures. c. CAATs are advisable where there are no input documents or a visible audit trail, or where population and sample sizes are very large. d. CAATs are used considering the principle of cost-benefit. 17. Gorgonio Macariola, CPA was considering the sample size needed for a selection of sales invoices for the test of controls audit of the Four Horsemen Company’s internal controls. He presented the following information for two alternative cases: Acceptable risk of underreliance on controls ......................... Acceptable risk of overreliance on controls ......................... Tolerable deviation rate ......... Expected population deviation rate
Case A
Case B
High
Low
High High Low
Low Low High
Gorgonio should expect the sample size for Case A to be:
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam a. b. c. d.
Smaller than the sample size for Case B. Larger than the sample size for Case B. The same as the sample size for Case B. Not determinable relative to the Case B sample size.
18. The term “error” refers to unintentional statements, and may involve the following:
mistakes
Mathematical or clerical mistakes in the underlying records & accounting data ............................ Oversight or misinterpretation of facts .............. Misapplication of accounting principles .............. Suppression or omission of the effects of transactions from records or documents ...............
in
the
financial
A
B
C
D
Yes No Yes
Yes Yes Yes
Yes Yes No
Yes No No
No
No
No
No
19. Mr. Earl Jimson Garcia, CPA, has organized a gathering of tax experts and CPAs which shall include among others, workshops, technical lectures or subject matter meetings, non-degree training courses and scientific meetings. Under the IRR to RA No. 9298, this shall qualify as: a. Seminars. c. Meetings. b. Conventions. d. Professional gathering. 20. You are Mr. Yannick, CPA, and your client consulted you regarding measures to be taken to address the company’s repeated incidence of lapping of trade accounts receivable. Select which of among the following would be considered as the best protection to deter lapping: a. Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. b. Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts. c. Have customers send payments directly to the company’s depository bank. d. Request that customer’s payment checks be made payable to the company and addressed to the treasurer. 21. Which of the following is an internal control procedure that would prevent a paid disbursement voucher from being processed for payment a second time? a. Vouchers should be prepared by individuals who are responsible for signing disbursement checks. b. Disbursement vouchers should be approved by at least two responsible management officials. c. The date on a disbursement voucher should be within a few days of the date the voucher is presented for payment. d. The official signing the check should compare the check with the voucher and should stamp “PAID” on the voucher documents. 22. Jude Isaac James, CPA, has released a 3,500-page book on Auditing Problems. Technically, his work falls under “authorship” for purposes of CPE credits. Credits earned by Mr. James must be claimed: a. Within 3 years from date of publication. b. Within 1 year from date of publication. c. Within six days from date of publication. d. Within six months from date of publication.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 23. The following are used by the auditor in assessing whether the accounting for assets or liabilities requiring fair value measurements be appropriate, except: a. The auditor’s understanding of the requirements of the financial reporting framework. b. Knowledge of the business and industry. c. Results of other audit procedures. d. Number of personnel involved in the measurement process. 24. When a client auditor uses a report from the auditor of a service organization, the client auditor: a. Makes no reference in his audit report on the service organization. b. Should refer the matter in a separate emphasis of matter paragraph of his audit report. c. Should refer the matter by modifying the scope, and opinion paragraphs of the auditor’s report. d. Should attach the copy of the service organization’s auditor’s report to his audit report. 25. When an auditor expresses an adverse opinion, the opinion paragraph should include: a. The principal effects of the departure from Philippine Financial Reporting Standards. b. A direct reference to a basis for adverse opinion paragraph disclosing the basis for the opinion. c. The substantive reasons for the financial statements being misleading. d. A description of the uncertainty or scope limitation that prevents an unqualified opinion. 26. Alpha Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of the Insurance Commission. If Abad, CPA, Alpha’s auditor, discovers that the statements are not suitably titled, Abad should: a. Disclose any reservation in a Basis for Qualified Opinion paragraph and qualify the opinion. b. Apply to the Insurance Commission for an advisory opinion. c. Issue a special statutory basis report that clearly disclaims any opinion. d. Explain in the notes to the financial statements the terminology used. 27. Prospective financial statements are for: a. General use. b. Limited use only. c. Either general or limited use. d. Used by internal management only. 28. In which of the following situations would a public accounting firm have violated the Code of Ethics in determining its fee? a. A fee is based on whether or not the public accounting firm’s audit report leads to the approval of the client’s application for bank financing. b. A fee is to be established at a later date by the Bankruptcy Court. c. A fee is based upon the nature of the engagement rather than upon the actual time spent on the engagement.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam d. A fee is based on the fee charged by the client’s former auditors. 29. Which of the following would contribute most to the safeguarding of assets? a. Access to computer facilities and records is limited to authorized personnel on an “as needed” basis. b. Training programs are conducted to develop competence of newly hired personnel c. Control and subsidiary accounts are reconciled on a regularly scheduled basis d. Blank stock of all purchase orders and sales invoices are prenumbered. 30. One difference between auditors and other professionals is that most professionals a. Need not be concerned about remaining independent. b. Don’t have requirements for continuing education beyond college. c. Don’t have to pass a rigorous examination. d. Aren’t expected to act in the public interest. 31. The auditor commits a Type I error if: a. a qualified report is issued when the financial statements do not contain any material misstatements b. an unqualified report is issued when the financial statements are materially misstated c. the risk of a material misstatement exceeds the level of assurance d. the cost of additional testing is greater than the expected benefit of risk reduction 32. A client company has not paid its 2015 audit fee. Ethically speaking, for the auditor to be considered independent with respect to the 2016 audit, the 2015 audit fee must be paid: a. Before the 2016 audit work is completed. b. Before the 2016 report is issued. c. Before the 2016 audit work is started. d. On the date of the 2016 audit report. 33. Knowledge of the rules of conduct and related interpretations on independence, integrity a objectivity will help you respond to the following case: CPA Gelai James performs the audit of the local symphony society. Because of her good work, she was elected an honorary member of the board of directors. Gelai will not be considered independent unless: A B C D The position is in fact purely honorary ... Yes Yes Yes Yes Listings of directors show she is an honorary director. ........................ No Yes Yes No She restricts participation strictly to the use of her name ....................... Yes No Yes No She does not vote or participate in management functions ....................... Yes Yes Yes Yes
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam (Numbers 34 and 35) Knowledge of the rules of conduct and related interpretations on independence, integrity a objectivity will help you respond to the following case: Antonio “Tony” Jaramillo, a retired partner of your CPA firm, has just been appointed to the board of directors of Honey Corporation, your firm’s client. Tony is also an ex-officio member of your firm’s income tax advisory committee which meets monthly to discuss income tax problems of the partnership’s clients, some of which are competitors of Honey Corporation. The partnership pays Tony P1,500 for each committee meeting attended and a monthly retirement benefit, fixed by a retirement plan policy, of P10,000. 34. Based solely on the above information, would the above situation impair the appearance of the firm’s independence? a. Yes, because Tony is still active with the firm as an ex-officio member of the income tax advisory committee. b. Yes, because the intimidation threat created is so significant that no safeguard could eliminate or reduce the threat to an acceptable level. c. No, because Tony is already a retired partner of the CPA firm. d. No, because Tony is only an ex-officio member of the firm’s income tax advisory committee. 35. What are the options available to Tony to remedy the situation described above? a. Tony should ask that the audit client be given, consistently, a disclaimer of opinion. b. Tony should either resign from the Board of Directors of Honey Corporation or cease his association with the accounting firm. c. Tony should request that Honey Corporation place him in the company’s audit committee. d. Tony should request the accounting firm to cease giving him P1,500 for each committee meeting attended. 36. What is an auditor’s evaluation of a statistical sample for attributes when a test of 200 documents results in 4 errors if the tolerable rate is 5 percent, the expected occurrence rate is 3 percent, and the allowance for sampling risk is 2 percent? a. Accept the sample results as support for lowering the assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected occurrence rate. b. Do not decrease the assessed level of control risk because the sample occurrence rate plus the allowance for sampling risk exceeds the tolerable rate. c. Do not decrease the assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected occurrence rate. d. Accept the sample results as support for lowering the assessed level of control risk because the sample occurrence rate plus the allowance for sampling risk does not exceed the tolerable rate. 37. It is estimated that up to 70% of all computer frauds involves fraudulent input. This is a much higher percentage than for manual systems because: a. it is difficult to alter the hard copy documents used in manual systems without detection
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam b. frauds in manual systems are concentrated more on the theft of information c. computer controls over processing are less reliable than those used in manual systems d. employees with computer passwords have virtually unlimited ability to alter computer records 38. Which of the following material events occurring subsequent to the reporting date would require an adjustment to the financial statements before they are issued? a. Settlement of long-term debt using ordinary shares. b. Loss of a plant as a result of a flood. c. Major purchase of a business, which is expected to double sales volume. d. Settlement of litigation, in excess of the recorded liability. 39. James Garcia, CPA, is preparing a report on internal control. He has already discussed the internal control weaknesses with the appropriate client officials. During these discussions, the client stated that, given its circumstances, there was no practicable corrective action which could be taken for one of the major weaknesses and therefore asked that it not be included in James Garcia’s report. In the final analysis, James Garcia concurred that no corrective action by management is practicable. Which of the following is the MOST appropriate course of action for James Garcia to take? a. He must include this weakness in his report; otherwise, he will be in violation of GAAS. b. He may omit this weakness from the report without further mention. c. He may omit this weakness from the report but should send a confidential memo to the Board of Directors pointing out the nature of the weakness and why it was omitted from her report. d. He may omit the weakness from his report but should clearly state that the report is restricted to material weaknesses for which corrective action by management may be practicable in the circumstances. 40. Which of the following is an example of fraudulent financial reporting? a. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold. b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses. c. An employee steals inventory and the “shrinkage” is recorded in cost of goods sold. d. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense. 41. If an illegal act is discovered during the audit of a publicly held company, the auditors should a. notify the regulatory authorities. b. determine who was responsible for the illegal act. c. intensify the examination to identify all illegal acts. d. report the act to high level personnel within the client’s organization and to the audit committee.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 42. When planning an audit, the auditor must take steps to provide reasonable assurance that any material frauds will be detected. This level of assurance is less than that provided for the detection of nonfraudulent material misstatements because: a. auditors face less liability for failure to detect fraud b. frauds are extremely rare and therefore a lower level of assurance is appropriate c. most frauds are detected by means other than the audit d. those committing frauds usually take steps to prevent the detection of the frauds 43. The electronic transmission of documents between organizations in a machine-readable form. a. Cryptography. c. Short messaging service b. Computer processing d. Electronic data interchange 44. Which one of the following statements best describes a CPA’s responsibilities when a material amount of an audit client’s transactions are with related parties? a. The CPA should withdraw from the engagement b. If the disclosure of related party transactions is inadequate, the CPA should qualify his or her audit opinion c. Unless related party transactions are eliminated from the financial statements, the auditor must give a qualified or adverse opinion d. The CPA should ensure the transactions are recorded at fair market values 45. Which one of the following is not a valid purpose for performing analytical procedures? a. improve knowledge of the client’s business b. identify material misstatements c. assess inherent risk d. assess control risk 46. Which one of the following audit tests is not a valid analytical procedure method? a. scanning disbursements for unusual items b. comparing account balances to budgeted amounts c. examining documentation supporting disbursements d. predicting account balances using regression analysis 47. After discovering a misstatement in a sample taken from a population, a CPA is most likely to: a. extrapolate the misstatement to the population as a whole b. examine additional sample items to ensure that the sample results were representative c. consider issuing a qualified opinion d. compare the discovered misstatement to the amount considered material 48. Which of the following is the best audit procedure for determining the existence of unrecorded liabilities? a. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of accounts payable. b. Examine unusual relationships between monthly accounts payable balances and recorded purchases.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam c. Examine a sample of invoices a few days prior to and subsequent to year end to ascertain whether they have been properly recorded. d. Examine a sample of cash disbursements in the period subsequent to year end. 49. The close relationship that can develop between an auditor and a small business client has raised concerns among accounting critics. These concerns are heightened when the auditor provides both auditing and consulting services to the client. The main concern raised is: a. auditors may not have the sufficient expertise to provide business advice to clients b. auditors may not be able to maintain client confidentiality with respect to information learned during the course of the consulting engagement c. client information learned during the consulting engagement gives the auditor an unfair advantage in a competitive bid for the audit d. auditors may not be able to maintain their objectivity when auditing systems they have provided to clients 50. Which of the following best describes an auditor’s review for subsequent events? a. it is generally performed after an audit report is issued b. it need not be performed unless the auditor has reason to believe that material unusual transactions occurred after the balance sheet date c. it can result in a change in financial statement amounts or the addition of a footnote to the financial statements d. it is usually performed in conjunction with tests of internal control 51.
This document contains the norms and principles governing the practice of the accountancy profession in the highest standards of ethical conduct: A. Code of Ethics for CPAs in the Philippines B. Republic Act No. 9298 C. IRR to RA9298 D. PSA 220 on Quality Control
52.
The Commission on Audit is one of the organizations affecting the practice of accountancy in the Philippines. Which of the following is not one of the duties of the COA)? A. Define the scope of its audit and examination B. Promulgate accounting rules and regulations C. Assume fiscal responsibility for the Government and its instrumentalities D. Keep the general accounts of the government
53.
Which of the following criteria is unique to the independent auditor’s attest function? A. General competence. B. Familiarity with the particular industry of each client. C. Due professional care. D. Independence.
54.
When a practitioner is inappropriately associated with financial information, the following remedies are available, except: A. Require the other party (i.e., management) to cease associating the CPA with the subject matter. B. Informing any known third party users of the inappropriate use of the
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam C. D.
practitioner’s name. Seek legal advice. Keep silent about the matter.
55.
In government auditing, the three elements of expanded scope auditing are: A. Goal analysis, audit of operations, audit of systems. B. Financial and compliance, economy and efficiency, program results. C. Pre-audit, post-audit, internal audit. D. National government audit, local government audit, corporation audit.
56.
The underlying conditions that create demand for users for reliable financial information do not include (the): A. Transactions that are numerous and complex. B. Expression of an opinion on the fairness of the financial statements. C. Users separated from accounting records by distance and time. D. Financial decisions that are important to investors and users.
57.
Who is responsible for leading debriefing and setting the direction for improvement of both individual and team performance in the future? A. Quality Review Committee B. Board of Accountancy C. The client and the audit team D. The engagement partner
58.
If a change in the type of engagement from higher to lower level of assurance is not justified, the auditor should: A. Qualify the report on the original engagement. B. Continue with the revised engagement, but make explicit reference about the original engagement. C. Refuse to agree to management’s request on the change of engagement and continue with the original engagement. D. Withdraw from the engagement.
59.
According to PSA 315, the scope of the audit engagement includes the following, except: A. The financial reporting framework on which the financial information to be audited has been prepared, including any need for reconciliations to another financial reporting framework. B. The entity’s timetable for reporting, such as interim and final stages. C. Industry-specific reporting requirements, such as reports mandated by industry regulators. D. The expected audit coverage, including the number and locations of components to be included.
60.
Tests of controls may include the following, except: Reperformance of internal control procedures. Inquiries about, and observation of, internal controls which leave no audit trail. C. Inspection of documentary support for transactions evidencing authorization. D. Analytical procedures involving comparison of operating expenses with budgeted amount. A. B.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 61.
The scope of substantive tests as compared to the scope of tests of controls generally vary: A. In a parallel manner. C. Directly. B. Inversely. D. Equally.
62.
If the auditor uses the primarily substantive approach instead of the lower control risk approach: A. A higher level of understanding of internal control is required. B. The auditor plans to assess control risk at a lower level. C. The auditor plans heavier reliance on substantive tests. D. The auditor plans to restrict substantive tests.
63.
“Physical examination” is the inspection or count by the auditor of assets such as: A. Cash or inventory only. B. Cash, inventory, cancelled checks, and sales documents. C. Cash, inventory, securities, notes receivable, and tangible fixed assets. D. Cash, inventory, cancelled checks, and tangible fixed assets.
64.
Which of the following methods is considered the best combination in obtaining audit evidence assuming documentary evidence is available to the auditor? A. Inspection and Reperformance. B. Observation and inquiry. C. Inquiry and inspection. D. Inquiry and analytical procedures.
65. A. B. C. D.
The most difficult type of misstatement to detect is fraud based on The over-recording of transactions. The non-recording of transactions. Recorded transactions in subsidiaries. Related party receivables.
66.
During audit planning, an auditor and his client agreed on a timetable for the preparation and delivery of the audit schedules and reports needed by the auditor in the conduct of his engagement. The deadline arrived and still the client was not able to give the auditor the needed schedules and reports. Accordingly, the auditor should: A. Issue a qualified opinion or disclaimer of opinion due to a scope limitation. B. Prepare his/her own audit requirements, notwithstanding the selfreview threat created. C. Withdraw from the audit and issue a memorandum stating the reasons thereof. D. Agree on a revised timetable within which the requirements are to be prepared by the client.
67.
(Glossary) An approximation of the amount of an item in the absence of a precise means of measurement: A. Professional judgment C. Scope limitation B. Analytical procedures D. Accounting estimate
68.
Material errors which occur in the accounting process may not be detected by the auditor in his examination of the firm is quite a big risk. In order to minimize this risk, the auditor relies on:
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam A. B. 69.
Compliance tests. Internal controls.
C. D.
Substantive tests. Statistical risk analysis.
Assertions are representations of management that are embodied in financial statement components. They can be either explicit or implicit. Which of these assertions is not about valuation or allocation? A. Notes payables in the balance sheet include all such obligations of the entity. B. Trade accounts receivables in the balance sheet are stated at net realizable value. C. Property is recorded at historical cost. D. Property cost is systematically allocated to appropriate accounting period.
70. new A. B. C. D.
Which of the following would most likely cause a CPA not to accept a audit engagement? a high level of client business risk. being approached by the client just before the fiscal year end. concluding that there was a high inherent risk of management fraud. lack of adequate knowledge of the client’s business.
71.
Which of the following topics is not normally included in an engagement letter? A. The auditor’s preliminary assessment of internal control. B. The auditor’s estimate of the fee for the engagement. C. Limitations on the scope of the engagement. D. A description of responsibility for the detection of fraud.
72.
When performing analytical tests, a CPA is least likely to compare the current year’s balances or ratios to expectations derived from: A. informed judgment C. industry data B. budgetary data D. unaudited data
73.
A preliminary or entrance conference with the auditee is a useful step in avoiding misunderstandings. Which of the following items is usually not covered in a preliminary conference? a. Special problems known to be relevant to the audit. b. Extent to which the independent auditor will need assistance and cooperation from the organization’s personnel. c. Condition of accounting records and other data sources which may affect the scope of the audit and difficulty of completion. d. Audit program to be followed.
74.
The term incoming auditor refers to: The auditor of the financial statements of the current period, where either the financial statements of the prior period have been audited by another auditor (i.e., successor auditor) II. The auditor of the financial statements of the current period, where the audit is an initial audit engagement. A. I only C. Both I and II B. II only D. Neither I nor II I.
75.
The record of work performed, results obtained, and conclusions the practitioner reached: A. Engagement documentation C. Engagement letter B. Assurance engagement report D. Quality control documentation
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 76.
This refers to the gathering of professionals which shall include among others, workshops, technical lectures or subject matter meetings, nondegree training courses and scientific meetings. A. Seminars. C. Meetings. B. Conventions. D. Professional gathering.
77.
Lorie, CPA, is planning the audit of ABC Manufacturing, Inc., a mediumsized manufacturing concern with less than one hundred (100) shareholders, which one of the following areas would require the least amount of audit time? A. Revenue. C. Liabilities. B. Assets. D. Owners’ Equity.
78.
Baby James, CPA, is performing pre-engagement activities. Which of the following must Baby James obtain from his predecessor, prior to the acceptance of the engagement? A. Analysis of income statement accounts. B. Analysis of balance sheet accounts. C. All matters of continuing accounting significance. D. Reason for the change in auditors.
79.
Which of the following statements is incorrect? A component is a division, branch, subsidiary, joint venture, associated company or other entity whose financial information is included in financial statements audited by the principal auditor. B. An error is an unintentional fraud in the financial statements, while fraud is an intentional error by one or more individuals, among management, employees, or third parties, which results in a misrepresentation of financial statements. C. An expert is a person or a firm possessing special skill, knowledge and experience in a particular field other than accounting and auditing. D. One procedure an auditor considers using is inquiry, which consists of seeking information of knowledgeable persons inside or outside the entity. A.
80.
Peter Etcetera, CPA, has performed analytical procedures during the audit of the 2010 financial statements of SQUIZ COMPANY. Which of the following would be a possible reason why Peter performed analytical procedures? A. Peter believes that their use can be less effective or efficient than tests of details in reducing detection risk for specific financial statement assertions. B. Peter is trying to form a conclusion as to the effectiveness of the internal control system of Squiz Company. C. Peter is about to write his report on the fairness of the internal control system of the company. D. Peter is obtaining an understanding of the business and identifying areas of potential risk.
81.
The phrase “the report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.” should be construed to require: A. An implied measure of fairness. B. A statement of fact by the CPA.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam C. D.
An objective measure of compliance. An opinion by the auditor.
82.
A CPA must earn at least 60 credit units for three years, with a minimum of 15 credit units earned per year. Excess credit units, if any, shall not be carried over to the next three-year period except: A. Credit units earned for authoring an article of national significance. B. Credit units earned for serving as professorial chair. C. Credit units earned for an invention of significance to the profession. D. Credit units earned for doctoral or masteral degrees.
83.
Tomahawk Corp. orally engaged Indian & Co., CPAs, to audit its financial statements. Tomahawk’s management informed Indian that it suspected that the accounts receivable were materially overstated. Although the financial statements that Indian audited did, in fact, include a materially overstated accounts receivable balance, Indian issued a standard unqualified report. If Tomahawk sues Indian for negligence in failing to discover the overstatement, Indian’s best defense would be that: A. Indian had signed no engagement letter. B. Indian performed the audit in accordance with PSAs. C. Indian was not in privity of contract with Tomahawk. D. Indian did not perform the audit recklessly or with an intent to deceive.
84. S1 The auditor cannot assume that an instance of fraud is an isolated occurrence. S2 If the auditor believes that a misstatement is or may be the result of fraud, but the effect of the misstatement is not material to the financial statements, the auditor evaluates the implications, especially those dealing with the organizational position of the individual(s) involved. A. True, false C. True, true B. False, true D. False, false 85.
This term means to identify and analyze the relevant issues, including performing further audit procedures as necessary, to come to a specific conclusion on a matter. A. Investigate C. Assess B. Express D. Evaluate
86.
The following statements relate to Republic Act No. 9298. Which statement is correct? A. The Board of Accountancy has the authority to remove, after due process, any member of the Professional Regulation Commission for negligence, incompetence or any other just cause. B. The functions of the Board of Accountancy include the preparation of the contents of the CPA licensure examination and the rating of examination papers. C. After two years, subject to certain conditions, the Board of Accountancy must order the reinstatement of a CPA whose certificate of registration has been revoked. D. Insanity is a ground for issuing a certificate of registration to a successful CPA candidate.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 87.
Jackson, CPA, has just concluded a meeting with Michael Company, a prospective client. Unfortunately, Jackson believes that an understanding with Michael has not been established. In this case, Jackson should ordinarily: A. Perform the engagement with increased professional skepticism. B. Decline to accept or perform the engagement. C. Assess control risk at a HIGH level and implement the primarily substantive audit approach. D. Modify the assessment of control risk due to fraud.
88.
Which of the following situations apply to errors as well as to fraud? A. Mathematical or clerical mistakes in the underlying records & accounting data. B. Misinterpretation of facts. C. Misapplication of accounting principles. D. Suppression of the effects of transactions from records or documents.
89.
Which statement is incorrect? A review involves the application of audit skills and techniques and the gathering of evidence. B. A review comprises inquiry, confirmation, and analytical procedures which are designed to review the reliability of an assertion that is the responsibility of one party for use by another party. C. In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing expertise. D. No assurance is expressed in a compilation engagement, but users of compiled information still derive some benefit, because the service has been performed with due professional skill and care. A.
90.
Which of the following factors or conditions is an auditor least likely to plan an audit to discover? A. Financial pressures affecting employees. B. Inadequate monitoring of significant controls. C. High turnover of senior management. D. Inability to generate positive cash flows from operations.
91.
A set of guidelines not having the authority of standards defined by an authoritative body at a national level and commonly applied by auditors in the conduct of an audit, review, other assurance or related services. A. Framework of Assurance Engagements C. Code of ethics B. National practices D. PAPS
92.
Material misstatements due to fraudulent financial reporting often result from: A. An overstatement of revenues (such as premature revenue recognition) B. An understatement of revenues (such as shifting income to a later period) C. Both a and b D. Neither a nor b
93.
(Glossary) The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties, in an arms’ length transaction: A. Fair value C. Net realizable value B. Settlement value D. Commercial substance
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 94.
Describes the role of persons entrusted with the supervision, control and direction of an entity. A. Management C. Audit committee B. Governance D. Steward of company resources
95.
This exists when other information (such as those presented in an annual report) contradicts information contained in the financial statements. A. Material misstatement of fact C. Material misstatements B. Material scope limitations D. Material inconsistency
96.
What threat to independence is created when the same senior personnel are used for assurance engagements over a prolonged period? A. Self-review threat C. Advocacy threat B. Intimidation threat D. Familiarity threat
97.
The following are examples of the type of information that may come to the auditor’s attention which might indicate that noncompliance with laws or regulations has occurred. One of them is not. Identify the exception: A. Media comment. B. Industry is regulated by various government agencies. C. Unusual payments in cash, purchases in the form of cashier’s checks payable to bearer or transfers to numbered bank accounts. D. Payments without proper exchange control documentation.
98.
Audit risk has three components: inherent risk, control risk, and detection risk. The following statements pertain to these components. Which one is incorrect? A. The acceptable level of detection risk is inversely related to the combined assessed levels of inherent risk and control risk. B. The higher the assessment of inherent and control risks, the lower the detection risk that can be accepted by the auditor. C. Detection risk cannot be changed at the auditor’s discretion. D. The auditor considers the combined assessments of inherent risk and control risk in order to determine the level of detection risk which may be accepted.
99.
Which of the following statements is not true regarding the appropriateness of audit evidence? A. Relevance is enhanced by an effective information system. B. To be appropriate, evidence must be both valid and relevant. C. Validity is related to the quality of the client’s information system. D. Relevance must always relate to audit objectives.
100. Which of the following is most likely a quality control procedure on client acceptance and continuance? A. Designate individuals as specialists to serve as authoritative sources. B. Periodically counsel personnel as to their progress and career opportunities. C. Evaluate clients upon the occurrence of specified events to determine whether the relationships ought to be continued. D. Provide adequate supervision at all organizational levels, considering training, ability and experience of personnel assigned in engagements.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 101. Family and personal relationships between a member of the assurance team and a director, an officer or certain employees, depending on their role, of the assurance client create: A B C D Self-interest threat No Yes No Yes Self-review threat Yes No Yes Yes Intimidation threat No Yes Yes Yes Familiarity threat Yes Yes Yes No 102. A client company has not paid its 2009 audit fee. Ethically speaking, for the auditor to be considered independent with respect to the 2010 audit, the 2009 audit fee must be paid: A. Before the 2010 audit work is completed. B. Before the 2010 audit work is started. C. Before the 2010 report is issued. D. On the date of the 2010 audit report. 103.
Engagement quality control reviewers consider: The work has been performed in accordance with GAAP. Consultation with experts has been made for all phases of the engagement. C. The work performed supports the conclusions reached and is appropriately documented; D. Whether the system of quality control is operating effectively and adequately. A. B.
104. Ethically, an auditor could: A. Base his audit fee on a percentage of the proceeds of his client’s share issue. B. Advertise only as to his expertise in preparing tax returns. C. Own preference shares in a corporation which is an audit client. D. Perform an examination for a financial distressed client at less than his customary fees. 105. A professional accountant who does not consider and apply the guidance included in a relevant Practice Statement should be prepared to: A. Explain to the Board of Accountancy tribunal why the practice statement was not complied with B. Bear the consequences of such non-compliance, such as suspension or revocation of license, plus imprisonment of not more than two (2) years. C. Face the shareholders of the entity, and explain in the meeting why such practice statement was not complied with, provided that the explanation is also put in writing, and signed in the presence of the Chairperson of the Auditing and Assurance Standards Council. D. Explain how the basic principles and essential procedures in the Engagement Standards addressed by the Practice Statements have been complied with. 106. A requirement of the application of PSAs is for the auditor: A. Not to obtain clients by solicitation. B. To undertake a proper study and evaluation of the existing internal control. C. To charge fees fairly and in relation to time and cost of the engagement.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam D.
To inspect all fixed assets acquired during the year.
107. Generally, advertising and publicity in any medium are acceptable provided (select the exception): A. It has as its objective the notification to the public or such sectors of the public as are concerned, of matters of fact (e.g., name, address, contact numbers, services offered) in a manner that is false, misleading or deceptive B. It is in good taste C. It avoids frequent repetition of, and any undue prominence being given to the name of the firm or professional accountant in public practice D. It is professionally dignified 108. Which of the following is allowed under the revised rules on advertising? A. Publishing services in billboard (e.g., tarpaulin, streamers, etc.) advertisements B. Using words or phrases which are hard to define and even more difficult to substantiate objectively C. Giving too much emphasis on competitive differences D. None of these are allowed forms of advertising. 109. Asser Tamayo, CPA, has listed his practice in a directory. the following cannot be included in the listing? A. Complete name B. Address and contact number C. Professional description and services offered D. All of these may be included in the directory listing.
Which of
110. Antonio, CPA and partner of Dayag and Lee auditing firm, is being interviewed by Chris Espenilla, CPA in his noontime business show, “Chris per Minute”. During the course of the interview, which of the following responses by Antonio would most likely be construed as a violation of the Code of Ethics and the revised rules on advertising? A. “Derivatives require higher accounting knowledge, but they are relatively easy with study and practice.” B. “PFRS No. 3 covers business combinations. It has been the recent subject of the IASB Improvements Project.” C. “Alright, I would be more than willing to entertain accounting questions from the audience.” D. “Dayag and Lee offers audit and other assurance services, and also management consulting services, including creation and installation of accounting systems. Our clients account for 35% of the total audit market. Our clients include top universities and manufacturing companies in the Luzon area.” 111. A violation of the profession’s ethical standards would most likely occur when a CPA who A. is also admitted to the Bar represents on letterhead to be both an attorney and a CPA. B. Writes a newsletter on financial management also permits a publishing company to solicit subscriptions by direct mail. C. is controller of a bank permits the bank to use the controller’s CPA title in the listing of officers in its publications. D. forms a partnership for accountancy practice with non-CPA’s.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 112. In using a general model for making ethical decisions, the CPA should do all of the following except A. Gather or identify all the relevant facts about situation that raises the ethical issue. B. Consider the alternative course of action. C. Consider the possible consequences of some of the courses of action. D. Select a course of action from among the alternatives. 113. Which of the following is not a potential benefit of having the auditor provide both auditing and consulting services to the client? A. as a consequence of the knowledge gained during the audit, the auditor can provide the consulting services more efficiently than an outside consultant B. information acquired during the course of the consulting engagement may help in the planning and performing of the audit C. systems designed by the auditor as part of a consulting engagement do not need to be audited as carefully as systems designed by an outside consultant since the auditor has prior knowledge of their reliability D. consulting practice increases the auditor’s understanding of the client and the client’s industry, This understanding reduces the potential for an audit failure 114. The accounting firm of Dawson and Creek, CPAs, is negotiating a fee with ABC Company, a new audit client. ABC is in a high-risk industry. They agree as follows: Client will pay P75,000 if Dawson issues a clean, unqualified opinion, P50,000 if a qualified opinion is issued, P40,000 if an adverse opinion is issued and P10,000 if a disclaimer of opinion is issued. Is there a violation of the Code of Ethics? A. No. The fees have been set in accordance with the Code of Professional Ethics. B. Yes. It is a contingent fee arrangement. C. Yes. The fees are not contingent, but they are inadequate in light of the risk involved. There might be a risk of a perception that the quality of work could be impaired. D. No. The fees have been set in the proper manner, since an unqualified opinion demands more audit work to detect and adjust misstatements, while a disclaimer is not really an opinion, but a refusal to express an opinion. 115. CPA Ela Santos performs the audit of the local symphony society. Because of her good work, she was elected an honorary member of the board of directors. Ela will not be considered independent unless: A B C D Yes Yes Yes Yes - The position is in fact purely honorary No Yes Yes No - Listings of directors show she is an honorary director. - She restricts participation strictly to Yes No Yes No the use of her name. - She does not vote or participate in Yes Yes Yes Yes management functions (Numbers 116 and 117) Antonio “Tony” Jaramillo, a retired partner of your CPA firm, has just been appointed to the board of directors of Honey Corporation, your firm’s client. Tony is also an ex-officio member of your firm’s income tax advisory committee which meets monthly to discuss income tax problems of
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam the partnership’s clients, some of which are competitors of Honey Corporation. The partnership pays Tony P1,500 for each committee meeting attended and a monthly retirement benefit, fixed by a retirement plan policy, of P10,000. 116. Based solely on the above information, would the above situation impair the appearance of the firm’s independence? A. Yes, because Tony is still active with the firm as an ex-officio member of the income tax advisory committee. B. Yes, because the intimidation threat created is so significant that no safeguard could eliminate or reduce the threat to an acceptable level. C. No, because Tony is already a retired partner of the CPA firm. D. No, because Tony is only an ex-officio member of the firm’s income tax advisory committee. 117. What are the options available to Tony to remedy the situation described above? A. Tony should ask that the audit client be given, consistently, a disclaimer of opinion. B. Tony should either resign from the Board of Directors of Honey Corporation or cease his association with the accounting firm. C. Tony should request that Honey Corporation place him in the company’s audit committee. D. Tony should request the accounting firm to cease giving him P1,500 for each committee meeting attended. 118. GELAI, CPA, was requested to perform a review engagement for Beauty, Inc., a non-public entity. GELAI has an immaterial direct financial interest. In this situation, GELAI is: A. Not independent, and therefore, may not be associated with the financial statements. B. Not independent, and therefore, may not issue a review report. C. Not independent, and therefore, may issue a review report, but may not issue an auditor’s report. D. Independent because the financial interest is immaterial, and therefore, may issue a review report. 119. A public accounting firm would least likely be considered in violation of the independence rules in which of the following instances? A. A partner’s checking account, which is fully insured by the Philippine Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services. B. A manager of the firm donates service as vice-president of a charitable organization that is an audit client of the firm. C. An attest client owes the firm fees for this and last year’s annual engagements. D. A covered member’s dependent son owns stock in an attest client. 120. Rita, CPA is in charge of the audit of Mabuhay Resort, Inc. Seven young members of the audit firm’s professional staff are working with Rita on this engagement, all of which are avid divers. Mabuhay Resort owns two condominiums in Boracay, which it uses primarily to entertain clients. The controller of Mabuhay Resort has told Ms. Rita that her whole team is welcome to use the condominiums at no charge any time that they are not already in use. How should Rita, CPA, respond to this offer? A. Rita should withdraw from the engagement due to a significant threat to independence.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam B. C. D.
Rita alone may accept the offer, but her staff may not use the condominiums. Rita should decline the offer, both for herself and her staff. Rita may accept the offer, but only in favor of her staff; she cannot use the condominiums because as partner, Rita will sign the report.
121. PSQC No. 1 requires complaints and allegations against the firm to be dealt with appropriately. Complaints and allegations may come from: A B C D Firm personnel Yes No Yes Yes Clients Yes Yes No Yes Other third parties No Yes No Yes 122. A(n) ______________ auditor is one who is asked to replace an existing auditor: A. Existing B. Predecessor C. Successor D. Proposed 123. Which of the following is not mandatory when performing an audit in accordance with AASC-issued Engagement Standards (i.e., Philippine Standards on Auditing)? A. proper supervision of assistants B. efficient performance of audit procedures C. understanding the client’s internal controls D. adequate planning of work to be performed 124. Ordinarily, predecessor auditor permits the successor to review the predecessor’s working paper analyses relating to Balance sheet Balance sheet Contingencies accounts Contingencies accounts A. Yes Yes C. No Yes B. Yes No D. No No 125. Select the proper reply as to the allowable form of the understanding with a client when an audit is being performed A. While preferably written, it may be oral: but in all cases it should be documented in the working papers. B. While preferably written, it may be oral, in which case it need not be documented in the working papers. C. The understanding must be obtained in written form and included in the working papers. D. No requirement exists that the auditor obtain an understanding with the client. 126. S1 PSA 300 applies only to initial audits. S2 An initial audit normally requires more time in obtaining an understanding of the entity and its environment. S3 An initial audit requires consideration of internal control, while a recurring audit does not require such consideration. A. True, true, true. C. False, true, false. B. True, true, false. D. False, false, false. 127. The primary objective of procedures performed to obtain an understanding of an entity’s control environment is to provide the auditor with:
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam A. B.
sufficient knowledge to assess control risk knowledge needed to plan the audit
C. D.
a basis for determining tests of control a basis for planning analytical procedures
128. The practice of auditing firms to spread work throughout the year by carrying out as many auditing procedures as practicable before the balance sheet date in order to minimized the load during the peak period. A. test of recorded transactions. C. observation and test-check of inventories. B. confirmation of receivables and D. interim work. payables. 129. For purposes of PAPS, a small entity is any entity where there is concentration of ownership and management in a small number of individuals (often a single individual) and one or more of the following are found: A. Few sources of income. B. Unsophisticated record-keeping. C. Limited internal controls together with the potential for management override of controls. D. All of these. 130. Most audits of a company are done annually by the same CPA firm. Except for initial engagements, the auditor begins the audit with a great deal of information about the client’s internal control structure developed in prior years. Because systems and controls usually do not change frequently, A. The auditor can skip the evaluation of this area on repeat engagements. B. This information can be updated and carried forward to the current year’s audit. C. It eases the burden on the auditor’s requirement to do a complete study of controls this year. D. It is sufficient for the auditor just to inquire of client personnel whether the controls have been changed since last year. 131. In the context of an audit of financial statements, analytical procedures are required to be performed: A. At the planning stage only. B. At the planning stage and as a substantive test. C. At the planning stage and at the audit completion stage. D. At the planning stage, as a substantive test, and at the audit completion stage. 132. Analytical procedures used in planning an audit engagement generally use data: A. Presented in a detailed manner. B. Aggregated at a high level. C. Which are accurate and free from misstatements. D. From two unaudited financial statements. 133.
S1 The auditor is not expected to have a particular knowledge of the economy and the industry in which the entity operates. S2 The auditor is expected to know more about the client’s operations and business strategies as compared to the client’s top management. A. True, false B. False, true C. True, true D. False, false
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 134. Which one of the following audit tests is not a valid procedure method? A. scanning disbursements for unusual items B. comparing account balances to budgeted amounts C. examining documentation supporting disbursements D. predicting account balances using regression analysis
analytical
135.
S1 Analytical procedures can replace tests of controls in gathering evidence to support the LESS THAN HIGH assessment of control risk. S2 Analytical procedures are more effective than tests of details and transactions. A. True, false B. False, true C. True, true D. False, false
136.
Business risk is: A. Broader than the risk of material misstatement of the financial statements. B. Narrower than the risk of material misstatement of the financial statements. C. As broad as the risk of material misstatement of the financial statements. D. Not considered at all during the audit of historical financial statements.
137. Constraints on the availability of capital and credit: A. Do create business risks, but have no financial consequences. B. Do not create business risks, but do have financial consequences. C. Do create business risks, and have financial consequences. D. Do not create business risks, and have no financial consequences. 138. The risk of material misstatement refers to the risk that the financial statements are materially misstated: A. After the audit engagement has been completed. B. Prior to the audit engagement C. And the misstatements are not detected by the external auditor’s procedures D. And the misstatements are not detected or corrected by the company’s internal control system 139. Which of the following is an example of the concept of inherent risk? A. Humans make more errors than computers, therefore a manual accounting system is riskier than a computerized system. B. Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on the financial statements is reduced. C. Loans receivable for a finance company are less likely to be collectible than those of a bank. D. Audits with larger sample sizes are less risky than those with smaller sample sizes. 140. This refers to a risk that requires special audit consideration. A. Audit risk. C. Business risk. B. Significant risk. D. Risk of material misstatement. 141. To maximize independence, report to the A. Audit committee.
the
director
of
internal
auditing
should
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam B. C. D.
Controller. Chief financial officer. Director of information systems.
142. Internal auditing often extends beyond examinations leading to the expression of an opinion on the fairness of financial presentation and includes audits of efficiency, effectiveness, and A. Internal control. C. Accuracy. B. Evaluation. D. Compliance. 143. The best description of the scope of internal auditing is that it encompasses: A. Primarily operational auditing. B. Both financial and operational auditing. C. Primarily the safeguarding of assets and verifying the existence of such assets. D. Primarily financial auditing. 144. Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt on an entity’s ability to continue as a going concern? A. Inspecting title documents to verify whether any assets are pledged as collateral. B. Confirming with third parties the details of arrangements to maintain financial support. C. Reconciling cash balance per books with the cut-off bank statement and the bank confirmation. D. Comparing the entity’s depreciation and asset capitalization policies to other entities in the industry. 145. There are two phases of professional competence: attainment and maintenance. Which of these two describes maintenance of competence? A. A high standard of general education followed by specific education, training and examination in professionally relevant subjects, and whether prescribed or not, a period of work experience. B. A continuing awareness and an understanding of relevant technical professional and business developments. C. The responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis D. Making clients, employers or other users of the professional services aware of limitations inherent in the services to avoid the misinterpretation of an expression of opinion as an assertion of fact 146. Which of the following statements best describes why the CPA profession has deemed it essential to promulgate a code of professional ethics and to establish a mechanism for enforcing observation of the Code? A. A distinguishing mark of a profession is its acceptance of responsibility to the public. B. A pre-requisite to success is the establishment of an ethical code that primarily defines the professional’s responsibility to clients and colleagues. C. A requirement of most state laws calls for the profession to establish a code of ethics. D. An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 147. S1 Professional accountants refer to persons who are registered in the PRC as CPAs and who hold a valid certificate issued by the BOA, whether they be in any sector of practice of accountancy. S2 The Code of Ethics for Professional Accountants in the Philippines is mandatory for all CPAs. A. True, false B. False, true C. True, true D. False, false 148. The Code of Ethics for Professional Accountants in the Philippines is applicable to professional services performed in the Philippines on or after A. 1/1/2004 B. 6/30/2008 C. 12/31/2008 D. 12/31/2009 149. In the few instances where the domestic laws are in conflict with the IFAC Code, A. Both are applied simultaneously. B. The IFAC Code requirement prevails C. The local law prevails D. There will be no ruling for that particular requirement. 150.
The 2008 Code comes in how many parts? A. Two parts B. Three parts C.
Four parts
D.
Five parts
151. The fundamental principle of integrity requires a CPA to A. Be straightforward and honest in performing professional services. B. Be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity. C. Perform professional services with due care, competence and diligence. D. Act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession. 152. This fundamental principle requires a CPA not to use or disclose information acquired during the course of performing professional services without proper and specific authority: A. Objectivity C. Professional Behavior B. Professional Competence and due D. Confidentiality Care 153. The following steps are part of the conceptual framework approach to the Code of Ethics. Set the steps in proper order. I. Address threats which are other than clearly insignificant through the application of safeguards. II. Evaluate the significance of threats to compliance with fundamental principles. III. Identify threats to compliance with the fundamental principles. A.
I, II, III
B.
II, III, I
C.
III, I, II
D.
III, II, I
154. If a CPA cannot implement appropriate safeguards, the professional accountant should do the following, except: A. Decline the specific professional service involved. B. Discontinue the specific professional service involved. C. Resign from the client or the employing organization, as necessary. D. Issue an adverse opinion on the subject matter of the engagement.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 155. An inadvertent violation of the Code of Ethics, depending on the nature and significance of the matter, may not compromise compliance with the fundamental principles provided, once the violation is discovered, A. The CPA withdraws from the specific professional service involved. B. A disclaimer of opinion is issued to the client as a result of the violation. C. The violation is corrected promptly and any necessary safeguards are applied. D. The engagement is promptly transferred to another, non-violating professional accountant. 156. Compliance with fundamental principles may potentially be threatened by a broad range of circumstances. These are known as: A. Fraud risk factors. C. Threats to independence. B. Threats to fundamental principles D. Safeguards to threats. 157. Which of the following best describes self-interest threat? A. May occur as a result of the financial or other interests of a professional accountant or of an immediate or close family member. B. May occur when a previous judgment needs to be re-evaluated by the professional accountant responsible for that judgment. C. May occur when a professional accountant promotes a position or opinion to the point that subsequent objectivity may be compromised. D. May occur when, because of a close relationship, a professional accountant becomes too sympathetic to the interests of others. E. May occur when a professional accountant may be deterred from acting objectively by threats, actual or perceived. 158. These are policies and procedures designed to eliminate or to reduce threats to fundamental principles to an acceptable level. A. Internal controls C. Safeguards B. Control activities D. Segregation of duties 159. Certain safeguards may increase the likelihood of identifying or deterring unethical behavior. Such safeguards, which may be created by the accounting profession, legislation, regulation or an employing organization, include, but are not restricted to: I. Effective, well publicized complaints systems operated by the employing organization, the profession or a regulator, which enable colleagues, employers and members of the public to draw attention to unprofessional or unethical behavior. II. An explicitly stated duty to report breaches of ethical requirements. A.
I only
B.
II only
C.
I and II
D.
Neither nor II
I
160. When initiating either a formal or informal conflict resolution process, a CPA should consider the following, either individually or together with others, as part of the resolution process: I. Relevant facts II. Ethical issues involved III. Fundamental principles related to the matter in question IV. Established internal procedures V. Alternative courses of action A.
I, II, III, and V.
C.
I, II, V.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam B.
I, III, IV, and V.
D.
I, II, III, IV, V.
161. In ethical conflict resolution, if the matter remains unresolved, the CPA should A. Consult with other appropriate persons within the firm or employing organization for help in obtaining resolution. B. Consider consulting with those charged with governance of the organization, such as the board of directors or the audit committee. C. Document the substance of the issue and details of any discussions held or decisions taken, concerning that issue, as necessary. D. All of the above. 162. Under the Revised Code, which fundamental principle is explicitly mentioned to be safeguarded even as the CPA consults with relevant professional bodies and legal advisors? A. Technicality B. Confidentiality C. Integrity D. Objectivity 163. Tisha, CPA, has exhausted all relevant possibilities in an ethical conflict which she is trying to resolve. The conflict remains unresolved. Accordingly, the revised Code allows which of the following steps to be taken by Tisha? I. Refuse to remain associated with the matter creating the conflict. II. Withdraw from the engagement team or specific assignment. III. Resign from the engagement IV. Resign from the firm or the employing organization A. B.
I and II III and IV
C. D.
II, III and IV I, II, III and IV
164. A CPA should not be associated with reports, returns, communications or other information where they believe that the information: A. Contains a materially false or misleading statement. B. Contains statements or information furnished recklessly. C. Omits or obscures information required to be included where such omission or obscurity would be misleading. D. All of these. 165. Objectivity in the Code refers to a CPA’s ability: A. To maintain an impartial attitude on all matters which come under the CPA’s review. B. To independently distinguish between accounting practices that are acceptable and those that are not. C. To be unyielding in all matters dealing with auditing procedures. D. To independently choose between alternate accounting principles and auditing standards. 166. A CPA should maintain objectivity and free of conflicts of interest when performing: A. Audits, but not any other professional services. B. All attestation services, but not other professional services. C. All attestation and tax services, but not other professional services. D. All professional services. 167. Which of these phrases describe attainment of professional competence? A. A high standard of general education followed by specific education, training and examination in professionally relevant subjects, and
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam B. C. D.
whether prescribed or not, a period of work experience. A continuing awareness and an understanding of relevant technical professional and business developments. The responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis Making clients, employers or other users of the professional services aware of limitations inherent in the services to avoid the misinterpretation of an expression of opinion as an assertion of fact
168. Competence as a CPA includes all of the following, except: A. Having the technical qualifications to perform an engagement. B. Possessing the ability to supervise and evaluate the quality of staff work. C. Warranting the infallibility of the work performed. D. Consulting others if additional technical information is needed. 169. After beginning an audit of a new client, Sydney, CPA, discovers that the professional competence necessary for the engagement is lacking. Sydney informs management of the situation and recommends another CPA, and management engages the other CPA. Under these circumstances: A. Sydney’s lack of competence should be considered to be a violation of generally accepted auditing standards. B. Sydney may request compensation from the client for any professional services rendered to it in connection with the audit. C. Sydney’s request for a commission from the other CPA is permitted because a more competent audit can now be performed. D. Sydney may be indebted to the other CPA since the other CPA can collect from the client only the amount the client originally agreed to pay Sydney. 170. Samuel Commercial Inc. engages the services of Rita Ube, 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. Rita, however, has primarily auditing expertise and only in general merchandising operations. Ms. Ube may properly: A. Accept the engagement and carry it out consistent with GAAS. 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. 171. S1 A CPA should maintain confidentiality even in a social environment. S2 A CPA should also maintain confidentiality of information disclosed by a prospective client or employer. A. True, false B. False, true C. True, true D. False, false 172. A CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule should be understood to preclude a CPA from responding from an inquiry made by: A. The trial board of the Code of Professional Ethics. B. An investigative body of a CPA society. C. A CPA-shareholder of the client corporation.
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam D.
A Code of Professional Conduct voluntary quality review body.
173. In which of the situations given below would disclosure by a CPA be in violation of the Code? A. Disclosing confidential information in order to properly discharge the CPA’s responsibilities in accordance with his profession’s standards. B. Disclosing confidential information in compliance with a subpoena issued by a court. C. Disclosing confidential information to another accountant interested in purchasing the CPA’s practice. D. Disclosing confidential information in a review of the CPA’s professional practice by the PICPA Quality Review Committee. 174. In deciding whether to disclose confidential information, professional accountants should consider the following points: A. Effect of the disclosure on the interests of the client, the CPA, and third parties, even if consent of the client was given. B. Knowledge and substantiation of all relevant information, to the extent practicable. C. Type of communication that is expected and to whom it is addressed. D. All of the above are considered. 175. In marketing and promoting themselves and their work, CPAs should NOT A. Bring the profession into disrepute. B. Make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained. C. Make disparaging references or unsubstantiated comparisons to the work of others. D. All of the above. 176. A CPA in public practice should NOT: A. Engage in any business, occupation or activity aside from his/her public accounting practice. B. Engage in any business, occupation or activity that impairs or might impair integrity, objectivity or the good reputation of the profession C. Engage in teaching or provision of accounting instruction while still in public practice, since this would cause a division of time and effort, resulting to impairment of the quality of service provided to clients. D. Engage in non-accounting related activities which also involve members of the companies that comprise his/her audit clients. 177. In which of the following types of clients would the Revised Code provide the strictest set of requirements regarding independence? A. A financial statement audit client. B. A non-financial statement audit assurance client. C. A non-assurance client. D. A non-client. 178. Client issues that, if known, could threaten compliance with the fundamental principles include the following, except: A. Client involvement in illegal activities (such as money laundering) B. Dishonesty C. Questionable financial reporting practices D. Conservative basis in determining accounting estimates
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam 179. Appropriate safeguards during client acceptance may include: A. Obtaining knowledge and understanding of the client B. Obtaining knowledge and understanding about the client’s owners, managers and those responsible for its governance and business activities C. Securing the client’s commitment to improve corporate governance practices or internal controls. D. All of these. 180. S1 A CPA in public practice should agree to provide only those services that the CPA in public practice is competent to perform. S2 Acceptance decisions need not be periodically reviewed for recurring client engagements. A. True, false B. False, true C. True, true D. False, false 181. S1 An existing accountant is bound by confidentiality. S2 Written client permission is required when initiating with an existing accountant. A. True, false B. False, true C. True, true D.
communication False, false
182. Regarding conflicts of interest, the following safeguards are applicable (select the exception): A. Notifying the client of the firm’s business interest or activities that may represent a conflict of interest, and obtaining their consent to act in such circumstances. B. Notifying all known relevant parties that the CPA in public practice is acting for two or more parties in respect of a matter where their respective interests are in conflict, and obtaining their consent to so act. C. Notifying the client that the CPA in public practice does not act exclusively for any one client in the provision of proposed services and obtaining their consent to so act D. Clear guidelines for members of the client personnel on issues of security and confidentiality. 183. Which fundamental principle may be threatened when the CPA in public practice is asked to provide a second opinion on the application of professional standards or principles to specific circumstances or transactions by, or on behalf of a company or entity that is not an existing client? A. Integrity C. Confidentiality B. Professional competence and due D. Professional behavior care 184. A client seeking a second opinion does not permit the CPA to communicate with the existing accountant. In such cases, the CPA should: A. Issue a disclaimer of opinion due to a significant client-imposed scope limitation. B. Consider whether, taking all the circumstances into account, it is appropriate to provide the opinion sought. C. Consider whether to issue a qualified opinion or disclaimer of opinion due to a significant client-imposed scope limitation. D. Communicate the client’s refusal directly to the existing accountant. 185. In which of the following situations would a CPA be in violation of the rules of professional ethics in determining professional fees?
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam A. B. C.
D.
A fee based on appropriate rates per hour or per day for the time of each person engaged in performing professional services. A fee which is lower compared to the fee charged in the prior year for similar services. A fee based on appropriate rates per hour, where the appropriate rate is based on the fundamental premise that the organization and conduct of the CPA and the services provided to clients are well planned, controlled and managed. A fee that is based on 10% of the client’s adjusted net income for the current year.
186. Professional fees should be a fair reflection of the value of the professional services performed for the client, taking into account: A. The skill and knowledge required for the type of professional services involved. B. The level of training and experience of the persons necessarily engaged in performing the professional services C. The time necessarily occupied by each person engaged in performing the professional services D. The degree of responsibility and urgency that performing those services entails E. All of the answers 187. Contingent fees are widely used for certain types of non-assurance engagements. They may, however, give rise to threats to compliance with the fundamental principles, especially the principle of: A. Objectivity C. Confidentiality B. Professional competence and due D. Professional behavior care 188. The Code of Ethics would be violated if a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the A. Actual fee would be substantially higher. B. Actual fee would be substantially lower than the fees charged by other professional accountants for comparable services. C. Fee was a competitive bid. D. CPA would not be independent. 189. A CPA in public practice should not pay or receive a referral fee or commission, unless the CPA in public practice has established: A. Internal controls designed to scientifically compute the referral fee or commission. B. That explicit approval to pay or receive commissions has been obtained from the Securities and Exchange Commission. C. Safeguards to eliminate or reduce threats to fundamental principles to an acceptable level. D. Another company as recipient, whose name does not include the name of the CPA in public practice. 190. The payment or receipt of referral fees threats to which fundamental principles? I. Integrity II. Objectivity III. Professional competence and due care IV. Professional behavior
or
commissions
may
create
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam A.
I and III
B.
I and IV
C.
II, IV
III
and
D.
II and III
191. The receipt of gifts and hospitality from a client may create threats to fundamental principles. Which of the following is a correct combination of threat and fundamental principle created by this situation? A. Self-interest threat – professional competence and due care. B. Intimidation threat – integrity C. Self-interest threat – objectivity D. Advocacy threat – objectivity 192. Which statement is incorrect regarding custody of clients’ assets? A. Client’s assets should not be held by the CPA if there is reason to believe that the assets were obtained from, or are to be used for, illegal activities. B. Custody of clients’ assets may create a self-interest threat to objectivity and professional behavior. C. No safeguards are applicable to reduce threats created by having custody of clients’ assets. D. Fees due from a client may be drawn from client’s monies, subject to client approval. 193. The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional judgment. A. Professional skepticism C. Objectivity B. Integrity D. Independence of mind 194. The avoidance of facts and circumstances that are so significant a reasonable and informed third party, having knowledge of all relevant information, including any safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised. A. Principle of segregation C. Functional integrity B. Independence in appearance D. Preemptive estoppels 195. If the firm had a material financial interest, whether direct or indirect, in the assurance client, the self-interest threat created: A. Can be reduced by the application of appropriate safeguards as mentioned in Section 290.32 of the Revised Code. B. Would be insignificant if the financial interests are disposed of within the most practicable time (i.e., within three months from the date of acceptance of the engagement). C. Must be eliminated by written disclosure to the BOA, the SEC, and the AASC of such material financial interest, provided such disclosure is made within sixty (60) days from the date of acceptance of the engagement. D. Would be so significant no safeguard could reduce the threat to an acceptable level. 196. Certain entities may be of significant public interest because, as a result of their business, their size or their corporate status they have a wide range of stakeholders. Examples of these entities include (select the exception):
FEU Cavite COMPREHENSIVE EXERCISES Auditing Theory Portion of the AUD CPA Exam A. B.
Non-listed companies Credit institutions
C. D.
Insurance companies Pension funds
197. A CPA in business may be: A. a salaried employee. B. a partner, director (whether executive or non-executive) or an owner manager. C. a volunteer or another working for one or more employing organization. D. Any of these. 198. S1 The legal form of the relationship with the employing organization, if any, has no bearing on the ethical responsibilities incumbent on the professional accountant in business. S2 A professional accountant in business has a responsibility to further all the business aims of their employing organization. A. True, false B. False, true C. True, true D. False, false 199. CPA in business should maintain information for which he/she is responsible in a manner: A. That describes clearly the true nature of business transactions, assets or liabilities. B. That classifies and records information in a timely and proper manner. C. That represents the facts accurately and completely in all material respects. D. All of these. 200. When a CPA in business is pressured to become associated with misleading information or to become associated with misleading information through the actions of others, what kinds of threats might arise? A. Self-interest and self-review C. Familiarity and self-review threats threats B. Self-interest and intimidation D. Self-review and advocacy threats threats -end-
