-AT Reviewer Part III (Questions and Answer).pdf

8/21/2019 -AT Reviewer Part III (Questions and Answer).pdf

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DE LA SALLE UNIVERSITY MANILA

RVRCOB DEPARTMENT OF ACCOUNTANCY

REVDEVT 2nd Term AY 14-15

Auditing Theory Prof. Francis H.Villamin

REVIEWERPART III

Code of Ethics for Professional Accountantsin the Philippines

1. The Revised Code of Ethics for Professional Accountants in the Philippines independencerequirements suggest that a CPA should evaluate whether a particular threat to independence wouldlead a reasonable person, aware of all the relevant facts to conclude thata. A questioning mind reveals doubt as to independence.b. An unacceptable risk of non-independence exists.c. The accountant is definitely not independent.d. There is substantial cause for a legal finding on non-independence.

2. ABC & Company CPAs has one office. Which of the following is least likely to impair independencewith respect to an audit client?a. The client owes the firm for two prior year years audit fees.b. A partner in the CPA firm is the son the president of the client.c. The wife of a partner in the firm has an immaterial direct financial interest in the client.d. A partner in the firm has an investment in a mutual fund that a has a direct interest in the client

3. The Revised Code of Ethics for Professional Accountants in the Philippines allows an auditor to

perform which of the following services for an audit client:a. Performance of bookkeeping services for the client.b. Authorization of transactions for the client.c. Preparation of client source documents.d. Preparation and posting of journal entries without clients approval.

4. A small CPA firm provides audit services to a large local company. Almost eighty percent of the CPAfirms revenues come from this client. Which statement is most likely to be true?a. Appearance of independence may be lacking.b. The small CPA firm is satisfactory if the auditor exercises due skeptical negative assurance care

in the audit.c. The small CPA firm does not have the proficiency to perform larger audit.d. The auditor should provide an emphasis of a matter paragraph to his/her audit report

adequately disclosing this information and then it may issue an unqualified opinion.

5. Which of the following statements is correct?a. Client prepared records (e.g. the general ledger) may be retained by the CPA until fees due to

the CPA are received.b. CPA working papers are the joint property of the CPA and the clientc. Supporting records not reflected in the clients records (e.g. proposed adjusting entries) may be

withheld by the CPA if the fees for the engagement remain unpaid.d. CPA working papers that include copies of clients records are not available to third parties

under any circumstances.

6. Independence is required of a CPA performinga. 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.

7. A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as aneducational fund for the CPAs minor child. The trust securities were not material to the CPA butwere material to the childs personal net worth. Would the independence of the CPA considered tobe impaired with respect to the client?a. Yes, because the stock would be considered a direct financial interest and consequently

materiality is not a factor.b. Yes, because the stock would be considered an indirect financial interest that is material to

CPAs child.c. No, because the CPA would not be considered to have a direct financial interest in the client.

d. No, because the CPA would not be considered to have a material indirect financial interest in theclient.


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AT Reviewer Part III Page 2

8. On August 20, 2014, Benedict Diaz, CPA and partner was offered and accepted the engagement toaudit the annual financial statements of Alive Corporation for the fiscal and calendar years endedDecember 31, 2014. The audit began September 15, 2014 and ended on March 17, 2015. AliveCorporation is regulated by the SEC. Diaz served as controller of Alive Corporation from November5, 2007 until January 12, 2014, at which time he terminated his employment with Alive.

Diaz owned a material amount of Alives ordinary shares from Novemb er 5, 2004 until August 15,2014, at which time he sold the shares. Is Benedict Diaz in violation of the Code of Ethics due toimpairment of independence?a. Yes, because Benedict Diaz owned Alive shares at the start of the audit for December 31, 2014.b. Yes, because Benedict Diaz served as controller for Alive Corporation in previous years.c. Yes, because Benedict Diaz had an employment relationship with the client during part of the

period covered by the financial statements.d. Yes, because it is still less than a year since Benedict Diaz has owned shares in Alive

Corporation.

9. CPA, Carmelie Henson performs audit of the local ballet society. Because of her good work, shewas elected as honorary member of the board of directors. Carmelie will not be consideredindependent unless:

a b c d- The position is in fact purely honorary Yes Yes Yes Yes- Listings of directors show she is an honorary member. 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

10. Justine, CPA is in charge of the staff of Twins Resort, Inc. Four young members of the audit firmsprofessional staff are working with Justine on this engagement, all of which are avid divers. TwinsResort owns two condominiums in Anilao Batangas, which it uses to primarily to entertain clients.The controller of Twins Resort, Inc. has told Mr. Justine that his whole team is welcome to use thecondominiums at no charge any time that are not already in use. How should Justine, CPA respond

to this offer?a. Justine should withdraw from the engagement due to a significant threat to independence.

b. Justine alone may accept the offer, but his staff may not use the condominiums.c. Justine should decline the offer, both for himself and his staff.d. Justine may accept the offer, but only in favor of his staff, he cannot use the condominiums

because as partner, Justine will sign the report.

11. All forms of advertisements must have prior review and approval by thea. Lead engagement partnerb. Risk management partnerc. Board of Accountancyd. Quality Control reviewer

12. Which of the following is not a broad category of safeguards that mitigate or eliminate threats toindependence?

a. Safeguards created by the profession, legislation or regulation.b. Safeguards created to assure proper training within both the client and attest environment.c. Safeguards implemented by the attest client.d. Safeguards implemented by the firm, including policies and procedures to implement

professional and regulatory requirements.

13. Offer of gifts or undue hospitality from a client may create threats to objectivity. In evaluating thesignificance of threat created by such offer, the professional accountant should consider the:

Nature of the offer Value of the offer Intent behind the offera. Yes Yes Yesb. Yes No Yesc. No No Nod. No Yes Yes

14. The Code of Professional Ethics would most likely be violated if an auditora. Owns a building and leases floor space to an assurance client.b. Has an insured account with a brokerage firm audit client.c. Is engaged by an audit client to identify potential acquisitions.d. Screens candidates for an audit clients vacant controllership position.

15. An audit independence issue might be raised by the auditors participation in consulting servicesengagements. Which of the following statements is most consistent with the professions attitudetoward this issue?a. Information obtained as a result of a consulting 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 on the facts of the

particular case.c. The auditor should not make management decisions for an audit client.


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d. The auditor who is asked to review management decisions, is also competent to make thesedecisions and can do so without loss of independence.

16. Contingency fee based pricing of accounting services isa. Always strictly prohibited in public accounting practice.b. Never restricted in public accounting practice.

c. Prohibited for clients for whom attestation services are prohibited.d. Considered an act discreditable to the profession.

17. If Revised Code of Ethics for Professional Accountants in the Philippines does not specificallyaddress a threat to auditors independence, the auditor shoulda. Conclude that the threat is not significant unless proven so.b. Conclude that the threat results in a lack of independence unless it can be shown that no

impairment of independence occurs.c. Consider the threat from the perspective of a reasonable informed third party who has

knowledge of all the relevant information.d. Consult the PSA for guidance.

18. In which of the following circumstances would an auditor be considered independent when

performing the audit of a new client for the year ended December 31, 2011?a. The auditor resigned on January 17, 2012 from the board of directors of the client, prior to

accepting the new audit engagement.b. The auditor continues to hold an immaterial indirect financial interest in the client.c. The auditor continues to serve as a trustee for the clients pension plan and has the authority to

make investment decisions.d. The auditors spouse owns an immaterial amount of shares of ordinary shares in the client.

19. The Code of Ethics for Professional Accountants in the Phils. states that when a financial statementaudit client becomes a listed entity, the length of time the engagement partner or the individualresponsible for the engagement quality control review has served the audit client in that capacity

should be considered in determining when the individual should be rotated. Before rotating off theengagement, the person is allowed to continue to serve as the engagement partner or as the

individual responsible for the engagement quality review fora. 3 additional years c. 2 additional yearsb. 1 additional year d. 4 additional years

20. Which of the following statements concerning commissions is incorrect?a. A professional accountant in public practice should not pay a commission to obtain a client nor

should a commission be accepted for referral of a client to a third party. b. A professional accountant in public practice should not accept a commission for the referral of

the products or services of others.c. Payment and receipt of referral fees between professional accountants in public practice when

no services are performed by the referring accountant are not regarded as commissions.d. A professional accountant in public practice may enter into an arrangement for the purchase of

whole or part of an accounting practice requiring payments to individuals formerly engaged in the

practice or payments to their heirs or estates.

21. Which of the following is not an appropriate safeguard against client issues?a. Understanding the clients business activitiesb. Obtaining knowledge of the client, its owners, managers and those responsible for its

governancec. Preparing an engagement letter to document terms of engagementd. Securing the clients commitment to improve corporate governance practices or internal controls

22. A client company has not paid its 2011 audit fees. According to the Revised Code of Ethics forProfessional Accountants in the Philippines, for the auditor to be considered independent withrespect to the 2012 audit, the 2011 audit fees must be paid before thea. 2011 report is issued. c. 2012 report is issued

b. 2012 fieldwork is started. d 2013 fieldwork is started.

23. A CPA in public practice should nota. Use the term accredited c. Indicate membership in foreign firm.b. Publish services in billboards d. Maintain website in the Internet

24. Professional accountants press and other media releases undertaken to commemorate anniversariesin public practice by informing the public of their achievements or contributions towards nationbuilding are:a. Considered violation of the rules on advertisingb. Forms of solicitationc. Not permitted in the Philippinesd. Allowed provided such undertaking is done only once every 5 years


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25. Any advertising by professional accountants beyond their name, address, telephone number andmembership in professional organizations has been traditionally considered unethical in the

Accountancy Profession, due to the following reasons, except:a. Advertising could lead to undue competition between and among practitioners, causing a decline

in quality of serviceb. Advertising would encourage a more personal approach to clients

c. The cost of advertising would outweigh any savings that might result from competitiond. Small or new practitioners would be unlikely to have the financial resources to match theadvertising of larger or more established practices

26. Which of the following cannot be mentioned by an auditor in publicizing a book in accounting?a. Name c. Membership in professional organizationb. Qualifications d. Services that the authors firm provides.

27. Under the Revised Code of Ethics for Professional Accountants in the Philippines, which of thefollowing may a practicing CPA do in connection with educational seminars?a. Send announcements to non-clients about his appearance on a dominant program or invite them

to attend.b. Sponsor a seminar and send them invitations to non-clients.

c. Allow himself to be listed as a tax expert on the seminar announcement.d. Distribute firm literature on relevant topics being discussed at the seminar to non-clients

attending the seminar.

28. Francis, CPA, performs accounting services for Twin Corporation. Norton wishes to offer shares tothe public and asks Francis to audit the financial statements. Francis refers Norton to Ronald, CPA,who is more competent in the area of registration statements. Ronald performs the audit of Twin'sfinancial statements and subsequently thank Francis for the referral by giving Francis a portion of theaudit fee. Francis accepts the fee. Who, if anyone, has violated professional ethics?a. Only Francis. c. Only Ronald.b. Both Francis and Ronald. d. Neither Francis nor Ronald

29. A CPAs retention of a clients records to enforce payment of overdue fees would be considered

a. An impairment of professional competency.b. A discreditable act.c. Acceptable under professional standards.d. A violation of commercial law.

30. In which of the following instances would the independence of the CPA not be considered to beimpaired? The CPA has been retained as the auditor of a brokerage firma. Which owes the CPA audit fees for more than one year.b. In which the CPA has a large active margin account.c. In which the CPA's brother is the controller.d. Which owes the CPA audit fees for services in the current year and has just filed a petition for

bankruptcy.

Philippine Accountancy Act of 2004 (RA 9298) and its IRR

31. What is the effectivity date of the BOA Resolution No. 88 (Series of 2008) prescribing the rules andregulations for the accreditation of accounting teachers?a. June 4, 2008 c. December 31, 2008b. June 20, 2008 d. June 30, 2008

32. The Certificate of Accreditation issued by the PRC to an accounting teacher shalla. Be valid for 2 years and renewable every 2 yearsb. Be valid initially for 3 years and renewable annuallyc. Remain in full force and effect unless revoked, cancelled or withdrawnd. Be valid for 3 years and renewable every 3 years

33. According to the Transitory Provisions of the BOA Resolution No. 88, any tenured/full time/full loadfaculty member who does not meet the accreditation requirements as of the effectivity date of theRules and Regulations may be issued a Provisional Accreditation. Choose the correct statement.I. The Provisional Accreditation will be valid for a period not exceeding 3 years unless earlier

withdrawn, revoked, or cancelled for cause by the BOAII. The Provisional Accreditation may be issued only once and is not renewableIII. The transitory provision shall also apply to returning teachers who have not been teaching for

the last 5 years

a. I only c. II and III onlyb. I and II only d. I, II and III


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34. Which of the following statements is correct?a. Any candidate who fails in two (2) complete CPA board examinations who will no longer be

allowed to take another set of examinationsb. Any candidate who fails in two (2) complete CPA board examinations shall be disqualified from

taking another set of examinations unless he/she submits evidence to the satisfaction of theBoard that he/she enrolled in and completed at least twenty-four (24) units of subjects given in

the licensure examinationc. The examination in which the candidate was conditioned and the removal examination on thesubject in which he/she failed shall be counted as two (2) complete examinations

d. The refresher course should be completed within two (2) years from the preceding examination

Glossary of Terms (December, 2007)

35. The date on which those with recognized authority assert that they have prepared the entityscomplete set of financial statements, including the related notes, and that they have takenresponsibility for thema. Date of the financial statements c. Date of the auditors reportb. Date of approval of financial statements d. Date the financial statements are issued.

36. The date of the end of the latest period covered by the financial statements, which is normally thedate the most recent balance sheet in the financial statements subject to audit.a. Date of the financial statements c. Date of the auditors reportb. Date of approval of financial statements d. Date the financial statements are issued.

37. Exists in other information when such information, not related to matters appearing in the auditedfinancial statements, is incorrectly stated or presented.

a. Material inconsistency c. Material misstatement of factb. Material weakness d. Significant deficiency

38. Manual or automated procedures that typically operate at a business process level. These controls

can be preventative or detective in nature and are designed to ensure the integrity of the accountingrecords.

a. General IT controls c. Access controlsb. Application controls d. Internal controls

39. A combination of hardware and software that protects a WAN, LAN or PC from unauthorized accessthrough the Internet and from the introduction of unauthorized or harmful software, data or othermaterial in electronic form.a. Cryptography c. Firewallb. Anti-virus software d. Access control

40. An auditor who is asked to replace an existing auditor.a. Incoming auditor c. Proposed auditorb. Successor auditor d. Other auditor

41. A process comprising an ongoing consideration and evaluation of the firms system of quality control.a. Coordination c. Directionb. Supervision d. Monitoring

42. A risk that requires special audit consideration.a. Audit risk c. Business riskb. Significant risk d. Engagement risk

43 A matter whose outcome depends on future actions or events not under the direct control of theentity but that may affect the financial statementsa. Uncertainty c. Provisionb. Inconsistency d. Significant risk

44. Subsequent events refer to events that occur after the date of the financial statements and are:a. Favorable to the entity being auditedb. Unfavorable to the entity being auditedc. Either favorable or unfavorable to the entity being auditedd. Neither favorable nor unfavorable to the entity being audited

45. It is used to categorize a wide variety of financial instruments whose value depends on an underlyingrate or price, such as interest rates, exchange rates, equity prices or commodity prices.

a. Asset/liability management c. Derivativesb. Commodity d. Hedge


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Preface to Philippine Standards on Auditing and Related Services / PSA 120, Framework of

Philippine Standards on Auditing/ PSA 200 Revised and Redrafted Overall Objective of the

Independent Auditor and the Conduct of an Audit in Accordance with PSA/PSRE 2400

Engagements to Review FS/PSAE 3000 Rev Assurance Engagements Other than Audits or

Review of Historical FS/PSRS 4400 Engagements to Perform Agreed-Upon Procedures/PSRS 4410

Engagements to Compile Financial Information

46. Which of the following statements about independent financial statement audit is incorrect?a. The risk that the auditor will fail to uncover material misstatement is eliminated when the auditor

complies with PSA.b. The auditors opinion enhances the credibility of the financial statements. c. The phrase used to express the auditors opinion is present fairly, in all material respects.. d. The term scope of audit refers to audit procedures deemed necessary in the circumstances to

achieve the objective of the audit.

47. Which of the following best describes the benefit of having an annual financial statement audit?a. Meet the requirements of the government agencies.b. Provide assurance that errors and fraud, if any exist, will be brought to light.c. Enable officers and directors to avoid personal responsibility for any misstatements in the

financial statements.d. Provide assurance to investors and other outsiders that the financial statements are dependable.

48. Which of the following factors are essential to an effective internal auditing organization?I. Operating responsibility III. ObjectivityII. Organizational status IV. Authority over operationsa. I and II. c. III and IVb. II and III. d. I and IV.

49. To operate effectively, internal auditor must be independent ofa. The line functions of the organization.b. The employer-employee relationship which exists for other employees in the organization.c. The entity.

d. All of the following.

50. The overall objective of internal auditing is toa. Attest to the efficiency with which resources are employed.b. Provide assurance that financial data have been accurately recorded.c. Assist members of the organization in the effective discharge of their responsibilities.d. Ascertain that controls are cost justified.

51. The work of internal auditors may affect the independent auditors I. Procedures performed in obtaining an understanding of internal controlII. Procedures performed in assessing the risk of material misstatementIII. Substantive procedures performed in gathering direct evidencea. I and II only c. II and IIII only.

b. I and III only d. I. II and III.

52. For which of the following judgments may an independent auditor share responsibility with an entitysinternal auditor who is assessed to be both competent and objective?

Assessment of inherent risk Assessment of control risk

a. Yes Yesb. Yes Noc. No Yesd. No No

53. During an audit an internal auditor may provide direct assistance to an independent CPA inObtaining understanding Performing tests Performing

of internal control of controls substantive tests

a. No No Nob. Yes No Noc. Yes Yes Nod. Yes Yes Yes

54. The primary difference between operational auditing and financial auditing is that in operationalauditinga. The auditor is not concerned with whether the audited activity is generating information in

compliance with financial accounting standards.b. The auditor is seeking to help management use resources in the most effective manner possible.c. The auditor starts with the financial statements of an activity being audited and works backward

to the basic processes involved in producing them.d. The auditor can use analytical skills and tools that are not necessary in financial auditing.


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55. Which of the following is not a distinction between a compilation and a review?a. The CPA must be independent as a prerequisite to performing a review engagement, but need

not be independent to perform a compilation.b. In conducting a review, the CPA must obtain an understanding of the client's internal control

system; but this is not necessary for a compilation engagement.c. Analytical procedures are applied in a review engagement, but are not required in a compilation.

d. A compilation offers no assurance, whereas a review provides limited assurance.

56. Which of the following is not an example of the application of professional skepticism?a. Designing additional auditing procedures to obtain more reliable evidence in support of a

particular financial statement assertion.b. Obtaining corroboration of management's explanations through consultation with a specialist.c. Inquiring of prior year engagement personnel regarding their assessment of management's

honesty and integrity.d. Using third party confirmations to provide support for management's representations.

57. An auditor has been asked to report on the statement of financial position of Kane Company but noton the other basic financial statements. The auditor will have access to all information underlying thebasic financial statements. Under these circumstances, the auditor:

a. May accept the engagement because such engagements merely involve limited reportingobjectives.

b. May accept the engagement but should disclaim an opinion because of an inability to apply theprocedures considered necessary.

c. Should refuse the engagement because there is a client-imposed scope limitation.d. Should refuse the engagement in accordance with PSAs.

58. The objective of a review of interim financial information for a non-issuer is to provide the accountantwith a basis for communicating whethera. A reasonable basis exists for expressing an updated opinion regarding the financial statements

that were previously audited

b. Material modifications should be made to conform with the applicable financial reportingframework

c. The financial statements are presented fairly in accordance with standards of interim reportingd. The financial statements are presented fairly in conformity with the applicable financial reporting

framework

59. A practitioner has been engaged to apply agreed-upon procedures in accordance with PhilippineStandards on Related Services (PSRS) to prospective financial statements. Which of the followingconditions must be met for the practitioner to perform the engagement?a. The prospective financial statement includes a summary of significant accounting policies.b. The practitioner takes responsibility for the sufficiency of the agreed-upon procedures.c. The practitioner and specified parties agreed upon the procedures to be performed by the

practitioner.d. The practitioner reports on the criteria to be used in the determination of findings.

60. An agreed-upon procedures engagement may involve the accountant in performing certainprocedures concerningI. Individual items of financial data.II. A financial statement.III. A complete set of financial statements.a. I and II only. c. I and III only.b. II and III only. d. I, II and III.

61. Accepting an engagement to compile an entitys financial projection most likely would beinappropriate if the projection is to be included in a(an)a. Mortgage application for the purpose of expanding the entitys facilities .b. Offering statement of the entitys initial public offering of ordinary shares.c. Comprehensive document to be used in negotiating a new labor contract

d. Report to the audit committee that is not sent to the stockholders.

62. Which of the following procedures is an accountant required to perform when reviewing the financialstatements of a nonpublic entity in accordance with Philippine Standards on Review Engagement?a. Assess control risk.b. Obtain a management representation letter.c. Confirm account balances.d. Perform a physical inventory observation.

63. An accountant agrees to the clients request to change an engagement from a review to a compilationof financial statements. The compilation report should includea. No reference to the original engagement.b. Reference to a departure from GAAS.

c. Scope limitations that may have resulted in the change of engagement.d. Information about review procedures already performed.


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64. Which of the following statements is correct regarding a review of a non-public entitys financialstatements in accordance with Philippine Standards on Review Engagement (PSRE)?a. The accountant is required to assess the risk of fraud.

b. It is not necessary for the accountant to obtain a management representation letter.

c. An opinion is expressed in the review report.d. The accountant must be independent to issue the review report.

65. An accountant has been engaged to compile the financial statements of a non-public entity. Thefinancial statements contain many departures from GAAP because of inadequacies in the accountingrecords. The accountant believes that modification of the compilation report is not adequate toindicate the deficiencies. Under these circumstances, the accountant shoulda. Inform management that the engagement can proceed only if distribution of the accountants

report is restricted to internal use.

b. Withdraw from the engagement and provide no further service concerning these financial

statements.c. Quantify the effects of the departures from GAAP and describe the departures from GAAP in a

special report.d. Obtain written representations from management that the financial statements will not be used to

obtain credit from financial institutions.

66. Which of the following actions should an accountant take when engaged to compile a companysfinancial statements in accordance with Philippine Standards on Related Services (PSRS)?a. Perform analytical procedures.b. Express negative assurance on the financial statements.c. Make management inquiries and examine internal controls.d. Perform the engagement even though independence is compromised.

67. Which of the following procedures would a CPA most likely perform when reviewing the financialstatements of a non-issuer?a. Verify that the accounting estimates that could be material to the financial statements have been

developed.b. Obtain an understanding of the entitys internal control components.

c. Assess the entitys ability to continue as a going concern for a reasonable period of time.d. Make inquiries about actions taken at the board of directors meetings .

68. Which of the following procedures is ordinarily performed by an accountant during an engagement tocompile the financial statements of a non-issuer?a. Make inquiries of the employees and senior management regarding transactions with related

parties.b. Determine whether there is substantial doubt about the entitys ability to continue as a going

concern.c. Scan the entitys records for the period just after the balance sheet date to identify subsequent

events requiring disclosure.d. Consider whether the financial statements are free from obvious material mistakes in the

application of accounting principles.

69. Which of the following statements is correct regarding a compilation report on financial statementsissued in accordance with Philippine Standards on Related Services (PSRS)?

a. The report should not be issued if the accountant is not independent from the entity.

b. The report should include a statement indicating that the information is the representation of theaccountant.

c. The report should include a description of other procedures performed during the compilation.d. The date of the report should be the date of completion of the compilation.

70. Which of the following statements would be appropriate in an accountants report on compiledfinancial statements of a non-issuer prepared in accordance with Philippine Standards on RelatedServices (PSRS)?

a. We are not aware of any material modifications that should be made to the accompanying

financial statements.b. A compilation is substantially less in scope than an audit in accordance with generally accepted

auditing standards (GAAS).c. A compilation is limited to presenting in the form of financial statements information that is a

representation of management.d. A compilation is performed to obtain reasonable assurance about whether the financial

statements are free from material misstatement.

71. Which of the following statements is correct concerning both an engagement to compile and anengagement to review a nonpublic entitys financial statements?a. The accountant should obtain a written management representation letterb. The accountant must be independent in fact and appearancec. The accountant expresses no assurance on the financial statements

d. The accountant does not contemplate obtaining an understanding of internal control


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72. Which of the following procedures is not usually performed by the accountant during a reviewengagement of a nonissuer?a. Inquiring about actions taken at meetings of the board of directors that may affect the financial

statementsb. Issuing a report stating that the review was performed in accordance with standards established

by the PICPA.

c. Reading the financial statements to consider whether they conform with generally acceptedaccounting principlesd. Communicating any material weaknesses discovered during the consideration of internal control

73. Which of the following procedures is usually performed by the accountant in a review engagement ofa nonpublic entity?a. Sending a letter of inquiry to the entitys lawyerb. Comparing the financial statements with statements for comparable prior periodsc. Confirming a significant percentage of receivables by direct communication with debtorsd. Communicating significant deficiencies discovered during the study of internal control

74. Which of the following inquiry or analytical procedures ordinarily is performed in an engagement toreview a nonpublic entitys financial statements?

a. Analytical procedures designed to test the accounting records by obtaining corroboratingevidential matter

b. Inquiries concerning the entitys procedures for recording and summarizing transactions c. Analytical procedures designed to test managements assertions regarding continued existence d. Inquiries of the entitys attorney concerning contingent liabilities

75. Which of the following should be the first step in reviewing the financial statements of an entity?a. Comparing the financial statements with statements for comparable prior periods and with

anticipated results.b. Completing a series of inquiries concerning the entity's procedures for recording, classifying, and

summarizing transactions.

c. Obtaining a general understanding of the entity's organization, its operating characteristics, andits products or services.

d. Applying analytical procedures designed to identify relationships and individual items thatappear to be unusual.

76. When an accountant examines projected financial statements, the accountants report should includea separate paragraph thata. Describes the limitations on the usefulness of the presentationb. Provides an explanation of the differences between an examination and an auditc. States that the accountant is responsible for events and circumstances up to one year after the

reports dated. Disclaims an opinion on whether the assumptions provide a reasonable basis for the projection

77. Which of the following professional services is considered an attest engagement?a. A consulting service engagement to provide computer advice to a client.

b. An engagement to report on compliance with statutory requirements.c. An income tax engagement to prepare national tax returns.d. The compilation of financial statements from a clients accounting records.

78. Philippine Standards on Related Services (PSRSs) require an accountant to report when theaccountant hasa. Typed client-prepared financial statements, without modification, as an accommodation to the

client.b. Provided a client with a financial statement format that does not include peso amounts, to be

used by the client in preparing financial statements.c. Proposed correcting journal entries to be recorded by the client that change client-prepared

financial statements.d. Prepared, through the use of computer software, financial statements to be used by third parties.

79. An accountant is required to comply with the provisions of Philippine Standards on Related ServiceswhenI. Reproducing client-prepared financial statements, without modification, as an accommodation to

a clientII. Preparing standard monthly journal entries for depreciation and expiration of prepaid expensesa. I only c. Both I and IIb. II only d. Neither I nor II


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80. How does an accountant make the following representations when issuing the standard report for thecompilation of a nonpublic entitys financial statements?The financial statements The accountant has compiled thehave not been audited financial statementsa. Implicitly Implicitlyb. Explicitly Explicitly

c. Implicitly Explicitlyd. Explicitly Implicitly

81. An accountant may compile a nonpublic entitys financial statements intended for third-party use thatomit all of the disclosures required by PAS only if the omission isI. Clearly indicated in the accountants reportII. Not undertaken with the intention of misleading the financial statement usersa. I only c. Both I and IIb. II only d. Either I or II

82. Which of the following representations does an accountant make implicitly when issuing the standardreport for the compilation of a nonpublic entitys financial statements? a. The accountant is independent with respect to the entity

b. The financial statements have not been auditedc. A compilation consists principally of inquiries and analytical proceduresd. The accountant does not express any assurance on the financial statements

83. When an accountant compiles a financial forecast, the accountant's report should include a(an):a. Explanation of the differences between a financial forecast and a financial projection.b. Caveat that the prospective results of the financial forecast may not be achieved.c. Statement that the accountant's responsibility to update the report is limited to one year.d. Disclaimer of opinion on the reliability of the entity's internal controls.

84 Which of the following is a professional engagement that a CPA may perform to provide assurance on a

system's reliability?a. MAS AssurAbility. c. MAS AttestSure

b. CPA WebMaster. d. CPA SysTrust

85. An accountant's standard report on a compilation of a projection should not include a statement that:a. There will usually be differences between the forecasted and actual results.b. The hypothetical assumptions used in the projection are reasonable in the circumstances.c. The accountant has no responsibility to update the report for future events and circumstances.d. The compilation of a projection is limited in scope.

86. A practitioner's report on agreed-upon procedures that is in the form of procedures and findings shouldcontain:a. Negative assurance that the procedures did not necessarily disclose all significant deficiencies in

internal control.b. An acknowledgment of the practitioner's responsibility for the sufficiency of the procedures.

c. A statement of restrictions on the use of the report.d. A disclaimer of opinion on the entity's financial statements.

87. In reviewing the financial statements of a nonpublic entity, an accountant is required to modify thestandard review report for which of the following matters?

Inability to Assess the Risk of Material Discovery of Significant DeficienciesMisstatement Due to Fraud in the Design of the Internal Control


88. Each page of a nonpublic entitys financial statements reviewed by an accountant should include the

following reference:a. See Accountants Review Report.b. Reviewed. No Accountants Assurance Expressed.c. See Accompanying Accountants Notes.d. Reviewed. No Material Modifications Required.

89. An accountant began an audit of the financial statements of a nonpublic entity and was asked tochange the engagement to a review because of a restriction on the scope of the audit. If there isreasonable justification for the change, the review report should include reference to the

Original Engagement Scope Limitation that caused theThat was Agreed to Changed Engagement

a. Yes Yesb. Yes No

c. No Yesd. No No


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90. Ronald, CPA, accepted an engagement to audit the financial statements of Queen Resources, anonpublic entity. Before the completion of the audit, Queen Resources requested Ronald to changethe engagement to a compilation of financial statements. Before Ronald agrees to change theengagement, Ronald is required to consider the

Additional Audit Effort Necessary Reason Given forto Complete the Audit Queens Request

a. No Nob. Yes Yesc. Yes Nod. No Yes

91. An auditors report is designated a special report when it is issued in connection witha. Interim financial information of a publicly held company that is subject to a limited reviewb. Compliance with aspects of regulatory requirements related to audited financial statementsc. Application of accounting principles to specified transactionsd. Limited use prospective financial statements such as financial projection

92. An auditors report issued in connection with which of the following is generally not considered to bea special report?

a. Compliance with aspects of contractual agreements unrelated to audited financial statementsb. Specified elements, accounts, or items of a financial statement presented in a documentc. Financial statements prepared in accordance with an entitys income tax basisd. Financial information presented in a prescribed schedule that requires a prescribed form of

auditors report93. Financial information is presented in a printed form that prescribes the wording of the independent

auditors report. The form isnot acceptable to the auditor because the form calls for statements thatare inconsistent with the auditors responsibility. Under these circumstances, the auditor most likelywoulda. Withdraw from the engagementb. Reword the form or attach a separate report

c. Express a qualified opinion with an explanationd. Limit use of the report to the party who designed the form

94. An accountant has compiled the financial statements of a nonpublic entity in accordance withPhilippine Standards on Related Services (PSRSs). Do the PSRSs require that the compilationreport be printed on the accountants letterhead and that the report be manually signed by theaccountant?

Printed in the Manually SignedAccountants Letterhead by the Accountant


95. When engaged to compile the financial statements of a nonpublic entity, an accountant is required to

possess a level of knowledge of the entitys accounting principles and practices. This requirementmost likely will include obtaining a general understanding of thea. Stated qualifications of the entitys accounting personnel b. Design of the entitys internal controls placed in operationc. Risk factors relating to misstatements arising from illegal actsd. Internal control awareness of the entitys senior management

96. Which of the following inquiry or analytical procedures ordinarily is performed in an engagement toreview a nonpublic entitys financial statements?a. Analytical procedures designed to test the accounting records by obtaining corroborating

evidential matter.b. Inquiries concerning the entitys procedures for recording and summarizing transactions .c. Analytical procedures designed to test managements assertions regarding continued existence.

d. Inquiries of the entitys attorney concerning contingent liabilities..

97. Which of the following presents what the effects on historical financial data might have been if aconsummated transaction had occurred at an earlier date?a. Prospective financial statements c. Interim financial informationb. Pro forma financial information d. A financial projection

98. A practitioner may report on an examination of pro forma financial information if the related historicalfinancial statements have beena. Audited c. Audited, reviewed or compiled.b. Audited or reviewed d. Reviewed or compiled.


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99. A financial forecast consists of prospective financial statements that present an entitys expectedfinancial position, results of operations, and cash flows. A forecasta. Is based on the most conservative estimates.b. Presents estimates given one or more hypothetical assumptions.c. Unlike a projection, may contain a range.d. Is based on assumptions reflecting conditions expected to exist and courses of action expected

to be taken.

100. An examination of a financial forecast is a professional service that involvesa. Compiling or assembling a financial forecast that is based on managements assumptionsb. Restricting the use of the practitioners report to management and the board of directors c. Assuming responsibility to update management on key events for one year after the reports date d. Evaluating the preparation of a financial forecast and the support underlying managements

assumptions

101. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of itsknowledge and belief, an entitys expected financial position, results of operations, and cash flows.Such prospective financial statements are known asa. Pro forma financial statements. c. Partial presentations

b. Financial projections. d. Financial forecasts.

102. Which of the following is a prospective financial statement for general use upon which a practitionermay appropriately report?a. Financial projection. c. Pro forma financial

statementb. Partial presentation. d. Financial forecast.

PSA 210 (Redrafted), Agreeing the Terms of Audit Engagements

103. Which of the following circumstances would permit an independent auditor to accept an engagementafter the close of the fiscal year?

a. Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by

generally accepted auditing standards due to the timing of acceptance of the engagementb. Assessment of control risk below the maximum levelc. Receipt of an assertion from the preceding auditor that the entity will be able to continue as a

going concernd. Remedy of limitations resulting from accepting the engagement after the close of the end of the

year, such as those relating to the existence of physical inventory

104. Which of the following is not normally performed in the pre-engagement phase?a. Assessing control risk.b. Deciding whether to accept or reject an audit engagement.c. Inquiring from predecessor auditor.d. Preparing an engagement letter.

105. An incoming auditor plans to consult the predecessor auditor and review certain portion of thepredecessor auditors working papers. This procedure is acceptable ofa. The predecessor auditor and the client consent.b. The client consents.c. The incoming auditor consents.d. The predecessor auditor consents.

106. Engagement lettersa. Are mandated for audit engagements.b. Are recommended for all professional engagements.c. Are signed by members of the audit committee.d. Include an analysis of the results of the audit.

PSA 230`Redrafted, Audit Documentation

107 Per PSA, audit documentation (working papers)

a. Must be completed within 60 days after the auditors fieldwork has completed.b. Includes peer review reports for the audit firm.c. Must be sent to the SEC for its review.d. Is to be retained for five years from the date of issue of the report.

108 Audit documentation (working papers)a. Facilitates the planning, performance, and supervision of the engagement.b. Becomes the property of the client once the opinion is issued.c. Is required for public company audits and recommended, but not required, for non-public

company audits.

d. Does not need to contain evidence that an understanding of internal control was obtained.


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109. Which of the following is required documentation in an audit in accordance with PSA?a. A flowchart or narrative of the information system relevant to financial reporting describing the

recording and classification of transactions for financial reporting.b. An audit plan setting forth in detail the procedures necessary to accomplish the engagement's

objectives.c. A planning memorandum establishing the timing of the audit procedures and coordinating the

assistance of entity personnel.d. An internal control questionnaire identifying controls that assure specific objectives will beachieved.

110. If working papers are to have the characteristics that will ensure that they achieve their primarypurposes, which of the following is the most important?a. Working papers must be of standard format and standard content.b. Working papers must be properly indexed and cross- referenced to the draft audit report.c. Working papers must provide sufficient, competent, and useful information to support the audit

report.d. Working papers must be arranged in logical order following the audit program sequence.

111. Which of the following does not describe one of the functions of audit working papers?

a. Facilitates third-party reviews.b. Aids in the planning, performance, and review of audits.c. Provides the principal evidential support for the auditor's report.d. Aids in the professional development of the operating staff.

112. Audit documentation should be prepared in enough detail so that:a. An experienced auditor who has worked with the client in the past can understand the

procedures performed and the evidence obtained.b. A reader of the financial statements who has no previous connection with the audit can

understand the procedures performed and the evidence obtained.c. A reader of the financial statements who has a background in financial analysis can understand

the procedures performed and the evidence obtained.d. An experienced auditor who has no previous connection with the audit can understand the

procedures performed and the evidence obtained.

113 Which of the following is a true statement regarding documentation requirements for analyticalprocedures?a. When an analytical procedure is used as the principal substantive test of a significant financial

statement assertion, the auditor is required to document the reasons analytical procedures wereperformed instead of tests of details.

b. When an analytical procedure is used as the principal substantive test of a significant financialstatement assertion, the auditor is required to document his or her expectation andmanagement's concurrence with that expectation.

c. When an analytical procedure is used during the overall review stage of the audit, the auditor isrequired to document the auditor's expectation and any additional procedures performed toinvestigate significant unexplained differences.

d. When an analytical procedure is used as the principal substantive test of a significant financialstatement assertion, the auditor is required to document both the auditor's expectation and thefactors considered in developing that expectation.

PSA 240 Redrafted, The Auditors Responsibilities Relating to Fraud in an Audit of Financial

Statements

114. Which of the following statements best describes the auditors responsibility regarding the detectionof material errors and fraud?a. The auditor is responsible for the failure to detect material errors and fraud only when such

failure results from the non-application of generally accepted accounting principlesb. Extended auditing procedures are required to detect material errors and fraud if the audit

indicates that they may exist

c. The auditor is responsible for the failure to detect material errors and fraud only when the auditorfails to confirm receivables or observe inventories

d. Extended auditing procedures are required to detect unrecorded transactions even if there is noevidence that material errors and fraud may exist

115. Which of the following statements best describes the auditor's responsibility regarding the detectionof material fraud?a. Because of the inherent limitations of an audit, the auditor is not responsible for the failure to

detect material fraud.

b. The auditor is responsible for the failure to detect material fraud when such failure results fromnonperformance of audit procedures specifically described in the engagement letter.

c. The auditor should design audit programs that will provide reasonable assurance that materialerrors and fraud will be detected in the ordinary course of the examination.

d. The auditor is responsible for the failure to detect material fraud when the auditor's evaluation ofinternal control procedures indicates that they are ineffective.


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116. Early in an audit, the auditor discovered several fraud risk factors. Which of the following is leastlikely response of the auditor?a. Substantive test procedures are moved away from the end of the clients accounting period so

that differences can be more easily resolved.b. The auditor should attempt to gather more audit evidence through physical inspection,

c. The auditor should attempt to incorporate in the audit more elements of unpredictability.d. Analytical procedures should be still applied but a more disaggregated level.

117. As a result of analytical procedures, the independent auditor determines that the gross profitpercentage has declined from 30 percent in the preceding year to 20 percent in the current year.The auditor shoulda. Express a qualified opinion due to inability of the client to continue as a going concern.b. Evaluate managements performance in causing this decline. c. Require note disclosure.d. Consider the possibility of a misstatement in the financial statements.

118. The management responsibility to detect and prevent fraud and error is accomplished bya. Having an annual audit of financial statements.

b. Establishing a control environment and implementing adequate internal control policies andprocedures.

c. Signing the management representation letter.d. Implementing adequate quality control system.

119. Which of the following relatively small misstatements most likely could have a material effect on anentitys financial statements?a. An illegal payment to a foreign official that was not recordedb. A piece of obsolete office equipment that was not retiredc. A petty cash fund disbursement that was not properly authorizedd. An uncollectible account receivable that was not written off

105. Which of the following situations represents a risk factor that relates to misstatements arising from

misappropriation of assets?a. A high turnover of senior managementb. A lack of independent checksc. A strained relationship between management and the predecessor auditor

An inability to generate cash flow from operations

106 Which of the following procedures would an auditor most likely perform during the overall reviewstage of an audit of an entitys financial statements? a. Obtain assurance from the entitys attorney that all material litigation has been disclosed in the

financial statements.b. Verify the clerical accuracy of the entitys proof of cash and its bank cutoff statement. c. Determine whether inadequate provisions for the safeguarding of assets have been corrected.d. Consider whether the results of audit procedures affect the assessment of the risk of material

misstatement due to fraud.

107. Which of the following statements is correct concerning an auditors responsibility to report fraud?a. The auditor is required to communicate to the clients audit committee all minor fraudulent acts

perpetrated by low-level employees, even if the amounts involved are inconsequential.b. The disclosure of material management fraud to principal stockholders is required when both

senior management and the board of directors fail to acknowledge the fraudulent activities.c. Fraudulent activities involving senior management of which the auditor becomes aware should

be reported directly to the SEC.d. The disclosure of fraudulent activities to parties other than the clients senior management and

its audit committee is not ordinarily part of the auditors responsibility.

108. Which of the following circumstances most likely would cause an auditor to suspect that there are

material misstatements in an entitys financial statements?a. The entitys management places no emphasison meeting publicized earnings projectionsb. Significant differences between the physical inventory count and the accounting records are not

investigatedc. Monthly bank reconciliations ordinarily include several large outstanding checksd. Cash transactions are electronically processed and recorded, leaving no paper audit trail

109. If the business environment is experiencing a recession, the auditor most likely would focusincreased attention on which of the following accounts?a. Purchase returns and allowances.b. Allowance for doubtful accounts.c. Ordinary shares.d. Noncontrolling interest of a subsidiary purchased during the year.


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110. Which of the following circumstances would an auditor most likely consider a risk factor relating tomisstatements arising from fraudulent financial reporting?a. Several members of management have recently purchased additional shares of the entitys

stock.b. Several members of the board of directors have recently sold shares of the entitys stock. c. The entity distributes financial forecasts to financial analysts that predict conservative operating

results.d. Management is interested in maintaining the entitys earnings trend by using aggressiveaccounting practices.

111. When assessing the risk of material misstatement, an auditor is required to documentI. The basis for the assessmentII. Significant risks identified and the related controls that were evaluateda. I onlyb. II onlyc. Both I and IId. Neither I nor II

112. Which of the following characteristics most likely would heighten an auditorsconcern about the risk

of material misstatement arising from fraudulent financial reporting?a. There is a lack of interest by management in maintaining an earnings trend.b. Computer hardware is usually sold at a loss before being fully depreciated.c. Management had frequent disputes with the auditor on accounting matters.d. Monthly bank reconciliations usually include several large checks outstanding.

113. Which of the following factors or conditions is an auditor least likely to plan an audit to discover?a. Financial pressures affecting employees.b. High turnover of senior management.c. Inadequate monitoring of significant controls.d. Inability to generate positive cash flows from operations.

114. At which stage (s) of the audit may fraud risk factors be identified?

Obtaining an understanding ofPlanning Internal control Conducting fieldwork

a. Yes Yes Yesb. Yes Yes Noc. Yes No Nod. No Yes Yes

PSA 250 Redrafted , Consideration of Laws and Regulations in Audit of Financial Statements

115. Which of the following information discovered during an audit most likely would raise a questionconcerning possible noncompliance?a. Related party transactions, although properly disclosed, were pervasive during the year.

b. The entity prepared several large checks payable to cash during the year.c. Material internal control weaknesses previously reported to management were not corrected.d. The entity was a campaign contributor to several local political candidates during the year.

116. Which of the following procedures would least likely result in the discovery of possiblenoncompliance?a. Reading the minutes of the board of director meetings.b. Making inquiries of the clients management.c. Performing tests of details of transactions.d. Reviewing an internal control questionnaire.

117. When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain anunderstanding of the nature of the act to

a. Evaluate the effect on the financial statements.b. Determine the reliability of managements representations. c. Consider whether other similar acts may have occurred.d. Recommend remedial actions to the audit committee.

118. If information comes to an auditors attention that implies the existence of possible noncompliancethat could have a material, but indirect effect on the financial statements, the auditor should nexta. Apply audit procedures specifically directed to ascertaining whether an illegal act has occurred.b. Seek the advice of an informed expert qualified to practice law as to possible contingent

liabilities.c. Discuss the evidence with the clients audit committee, or others with equivalent authority and

responsibility.d. Report the matter to an appropriate level of management at least one level Above those

involved.


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PSA 260 Revised and Redrafted ,Communication with Those Charged with Governance

119. Which of the following matters would an auditor most likely communicate to an entitys auditcommittee?a. A list of negative trends that may lead to working capital deficiencies and adverse financial

ratios.

b. The level of responsibility assumed by management for the preparation of the financialstatements.c. Difficulties encountered in achieving a satisfactory response rate from the entitys customers in

confirming accounts receivables.d. The effects of significant accounting policies adopted by management in emerging areas for

which there is no authoritative guidance.

120. An auditors communication with the audit committee is required to include thea. Basis for the auditors prel iminary judgmentAbout materiality.b. Justification for the auditors selection of sampling methods.c. Discussion of disagreements with management about matters that significantly impact the

entitys financial statements.d. Assessment of the quality of the entitys earnings as compared to the previous year.

121. An auditor would least likely initiate a discussion with a clients audit committee concerninga. The methods used to account for significant unusual transactions.b. The maximum peso amount of misstatements that could exist without causing the financial

statements to be materially misstated.c. Indications of fraud and illegal acts committed by a corporate officer that were discovered by the

auditor.d. Disagreements with management as to accounting principles that were resolved during the

current years audit.

122. In identifying matters for communication with an entitys audit committee, an auditor most likely would

ask management whethera. The turnover in the accounting department was unusually high.

b. It consulted with another CPA firm about accounting matters.c. There were any subsequent events of which the auditor was unaware.d. It agreed with the auditors assessed level of control risk.

123. Which of the following matters is an auditor not required to communicate to an entitys auditcommittee?a. Significant adjustments arising from the audit that were recorded by management.b. The basis for the auditors conclusions about the reasonableness of managements sensitive

accounting estimates.c. The level of responsibility assumed by the auditor under generally accepted auditing standards.d. The degree of reliance the auditor placed on the management representation letter.

PSA 300 Redrafted, Planning an Audit of Financial Statements

124. Which of the following procedures would an auditor most likely include in the initial planning of afinancial statement audit?a. Obtaining a written representation letter from the clients management.b. Examining documents to detect illegal acts having a material effect on the financial statements.c. Considering whether the clients accounting estimates are reasonable in the circumstances .d. Determining the extent of involvement of the clients internal auditors.

125 When assessing the internal auditors' competence, the independent CPA should obtain informationabout the:a. Organizational level to which the internal auditors report.b. Educational background and professional certification of the internal auditors.c. Policies prohibiting the internal auditors from auditing areas where relatives are employed.

d. Internal auditors' access to records and information that is considered sensitive.

126. Of the following procedures, which is not considered part of obtaining an understanding of theclients environment?a. Examining trade publications to gain a better understanding of the client's industry.b. Confirming customer accounts receivable for existence and valuation.c. Touring the client's manufacturing and warehousing facilities to gain a clearer understanding of

operations.

d. Studying the internal controls over cash receipts and disbursements.


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127. An initial (first-time) audit requires more audit time to complete than a recurring audit. One of thereasons for this is thata. New auditors are usually assigned to an initial audit.b. Predecessor auditors need to be consulted.c. The client's business, industry, and internal control are unfamiliar to the auditor and need to be

carefully studied.

d. A larger proportion of customer accounts receivable need to be confirmed on an initial audit.

128. Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with theclients management. Which of the following details do management and the auditor usually agreeupon at this time?a. The specific matters to be included in the communication with the audit committee.b. The minimum amount of misstatements that may be considered to be significant deficiencies and

material weaknesses.c. The schedules and analyses that the clients staff should prepare .d. The effects that inadequate controls may have over the safeguarding of assets.

129. The in-charge auditor most likely would have a supervisory responsibility to explain to the staffassistants

a. That immaterial fraud is not to be reported to the cl ients audit committee.b. How the results of various auditing procedures performed by the assistants should be evaluated.c. Why certain documents are being transferred from the current file to the permanent file.d. What benefits may be attained by the assistants adherence to established time budgets .

130. The senior auditor responsible for coordinating the fieldwork usually schedules a pre-auditconference with the audit team primarily toa. Give guidance to the staff regarding both technical and personnel aspects of the audit.b. Provide an opportunity to document staff disagreements regarding technical issues.c. Establish the need for using the work of experts and internal auditors.d. Discuss staff suggestions concerning the establishment and maintenance of time budgets.

131. Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the

clients management. Which of the following matters does the auditor and management agree uponat this time?a. The appropriateness of the entitys plans for dealing with adverse economic conditions. b. The determination of the fraud risk factors that exist within the clients operations. c. The control weaknesses to be included in the communication with the audit committee.d. The coordination of the assistance of the clients personnel in data preparation.

132. If the business environment is experiencing a recession, the auditor most likely would focusincreased attention on which of the following accounts?a. Purchase returns and allowances.b. Allowance for doubtful accounts.c. Common stock.d. Noncontrolling interest of a subsidiary purchased during the year.

133. Which of the following factors would a CPA ordinarily consider in the planning stage of an auditengagement?I. Financial statement accounts likely to contain a misstatementII. Conditions that require extension of audit testsa. I only.b. II only.c. Both I and II.d. Neither I nor II.

134. 1stIn an entity with few, but large accounts receivable, the accounts individually are more importantand the possibi lity of material errors is greater than in another entity that has greater number of smallaccounts aggregating the same total

2nd

In industrial and merchandising enterprises, inventories are usually of greater importance toboth financial position and results of operations and accordingly may require relatively moreattention by the auditor than would inventories of a public utility companya. 1ststatement is true, 2ndstatement is falseb. 1ststatement is false, 2ndstatement is truec. Both statements are trued. Both statements are false


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PSA 315 Redrafted, Identifying and Assessing the Risks of Material Misstatements Through

Understanding the Entity and Its Environment/PSA 320, Materiality in Planning and Performing

an Audit/PSA 330 Redrafted, The Auditors Responses to Assessed Risks

135. Risk in auditing means that the auditor accepts some level of uncertainty in performing the auditfunction An effective audit

a. Design audit procedures to achieve the desired level of audit risk.b. Take any means available to reduce the risk to the lowest possible level.c. Set the risk level between 5% to 10%.d. Perform audit procedures first and quantitatively set the risk level before forming an opinion

and writing the report.

135. The concept of materiality would be least important to an auditor when considering thea. Decision whether to use positive or negative confirmation of accounts receivable.b. Adequacy of disclosure of a clients illegal act.c. Discovery of weaknesses in a clients internal control. d. Effects of a direct financial interest in the client upon the CPAs independence.

136. Which of the following statements best describes why an auditor makes a preliminary estimate of

materiality?a. An estimate is required by PSAs.b. The estimate provides a basis for evaluating likely misstatements.c. The estimate helps the auditor plan the appropriate evidence to accumulate.d. Estimating materiality early helps the auditor avoid legal liability.

136. Under which of the following conditions would you consider lowering individual item materialitythresholds.a. Study of the business and industry, together with the application of analytical procedures,

reveals that the client has enjoyed a surge in sales and gross profit during an industry downturn.b. Application of analytical procedures shows that the client's gross profit rate is significantly below

last year and also is materially lower than the industry average.c. Study of internal controls within the revenue cycle reveal material weaknesses.

d. Study of internal controls within the payroll cycle confirm the auditor's belief that few errors haveoccurred.

137. Which of the following would be least likely to be considered an objective of the internal controlstructure?a. Checking the accuracy and reliability of accounting data.b. Detecting management fraud.c. Encouraging adherence to managerial policies.d. Safeguarding assets.

137. When assessing the risk of material misstatement, an auditor is required to documentI. The basis for the assessmentII. Significant risks identified and the related controls that were evaluated

a. I only. c. Both I and IIb. II only. d. Neither I nor II

137. While performing an audit, Franz, CPA decides to restrict the risk of material misstatement to 3%.What must the acceptable level of detection risk be, if inherent risk is 25% and control risk is 40%?a. 0.3%. c. 30.0%.b. 12.0% d. 33.3%.

138. Which of the following comes closest to outlining the auditors responsibility for internal control on allfinancial statement audits?a. An understanding of the control environment and the accounting system is necessary, an

understanding of the control structures is necessary for areas in which the auditor is performingtests of controls.

b. The auditor must obtain an understanding of each of the five internal control elements sufficientto plan the audit.

c. When tests of controls have been performed, control risk must be assessed at a level less than

the minimum.d. An understanding of the control environment is necessary, but not of the accounting system or

control procedures unless control risk is to be assessed at a level less than the maximum.

138. Regardless of the assessed level of control risk, an auditor would perform somea. Tests of controls to determine the effectiveness of internal control policies.b. Analytical procedures to verify the design of internal control procedures.c. Substantive tests to restrict detection risk for significant transaction classes.d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control

risk.


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139. Which of the following is necessary in a financial statement audit?a. An understanding of internal control relevant to each of an entity's operating units.b. An understanding of internal control relevant to each of an entity's business functions.c. An understanding of internal control relevant to an entity's financial reporting objective.d. An understanding of internal control relevant to an entity's compliance objective.

140. Which of the following controls is least likely to be relevant to a financial statement audit?a. Procedures that prevent the excess use of materials in production.b. Policies that relate to compliance with income tax regulations.c. Use of computer passwords to limit access to data files.d. Generation of production statistics used to evaluate variances.

141. The auditor should obtain sufficient knowledge of the client's information and communication systemrelevant to financial reporting to understand all of the following, except:a. Classes of transactions in the entity's operations that are significant to the financial statements,

and how those transactions are processed, from initiation to inclusion in the financialstatements.

b. The financial reporting process, including development of significant accounting estimates andinclusion of appropriate disclosures.

c. The means the entity uses to communicate roles, responsibilities, and significant mattersrelating to financial reporting.

d. Control activities related to each account balance, transaction class, and disclosure componentin the financial statements or to every assertion relevant to them

142. For a nonissuer, a control deficiency would be considered a significant deficiency when thelikelihood and magnitude of potential financial statement misstatements are:

Likelihood Magnitudea. More than remote Materialb. Probable Materialc. More than remote More than inconsequential

d. Probable More than inconsequential

143. For a nonissuer, a control deficiency would be considered a material weakness when thelikelihood and magnitude of potential financial statement misstatements are:

Likelihood Magnitudea. More than remote Materialb. Probable Materialc. More than remote More than inconsequentiald. Probable More than inconsequential

144. After obtaining an understanding of the entity and its environment and assessing the risk of materialmisstatement, an auditor decided to perform tests of controls. The auditor most likely decided thata. It would be efficient to perform tests of controls that would result in a reduction in planned

substantive tests.b. Additional evidence to support a further reduction in control risk is not available.

c. An increase in the assessed level of control risk is justified for certain financial statementassertions.

d. There were many internal control weaknesses that could allow errors to enter the accountingsystem.

145. Regardless of how the allocation of the preliminary judgment about materiality was done when theaudit is completed, the auditor must be confident that the combined errors in all accounts area. Less than the preliminary judgment.b. Equal to the preliminary judgment.c. More than the preliminary judgment.d. Less than or equal to the preliminary judgment

146. Which of the following statements is not correct?

a. Materiality is relative rather than an absolute concept.b. Normally, the most important base used as the criterion for deciding material ity is Net Income.c. Qualitative factors as well as quantitative factors affect materiality..d. Given equal peso amounts, irregularities are usually considered more important than errors.


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PSA 500 Redrafted Audit Evidence, PSA 501 Audit Evidence Specific Considerations for

Selected Items, PSA 505 Revised and Redrafted External Confirmations, PSA 520 Redrafted

Analytical Procedures, PSA 540 Revised and Redrafted Auditing Accounting Estimates including

Fair Value Accounting Estimates and Related Disclosures, PSA 550 Revised and Redrafted

Related Parties, PSA 560 Redrafted Subsequent Events, PSA 570Redrafted Going Concern,

PSA 580 Revised and Redrafted WrittenRepresentations

147. The general audit objectives of validity and completeness emphasize opposite audit concernsa. Validity deals with potential overstatement and completeness deals with understatement.b. Validity deals with potential understatement and completeness deals with overstatement.c. Validity and completeness may each deal with overstatements or understatements, but not in the

same transaction.d. Validity always deals with overstatements but completeness may deal with either over or

understatements.

148. Which of the following presumptions is correct about the reliability of audit evidence?a. Information obtained indirectly from outside sources is the most reliable evidential matter.b. To be reliable, audit evidence should be conclusive rather than persuasive.c. Reliability of audit evidence refers to the amount corroborative evidence obtained.

d. An effective internal control structure provides more assurance about the reliability of auditevidence.

149. Which of the following is not an example of analytical evidence?a. Compared inventory turnover by major class with the prior year on a monthly and quarterly basis.b. Compared gross profit percentages by major product classes with the prior year.c. Examined invoices for plant asset additions to determine whether the client had erroneously

recorded ordinary repairs as plant assets.d. Examined monthly performance reports and investigated significant variations from budgeted

amounts.

150. An auditor test counted a batch of inventory. This is an example of what kind of evidence?a. Analytical. c. Documentary.

b. Physical. d. Hearsay.

151. An auditor wants to develop an audit test to evaluate the reasonableness of the quantity of scrapmaterial resulting from a certain production process compared to industry standards. Whichwould be the most competent type of evidence available to satisfy this objective?a. Documentary. c. Hearsay.b. Physical. d. Analytical.

152. A letter to the auditor in response to an inquiry is an example ofa. Physical evidence. c. Documentary evidenceb. Confirmation evidence. d. Analytical evidence.

153. Which of the following would be least likely to be comparable between similar corporations in

the same industry line of business?a. Earnings per share. c. Accounts receivable turnover/b. Return on total assets before interest and taxes. d. Operating cycle

153. Transaction cycles begin and enda. At the beginning and end of the fiscal period. c. At January 1 and December 31.b. At the balance sheet date. d. At the origin and final disposition of the

entity

154. An objective of a walk-through is toa. Verify that the structure has been placed in operation.b. Replace tests of controls.c. Evaluate the major strengths and weaknesses in the clients structure.d. Identify weaknesses to be communicated to management in the written representation letter.

154. Generally, what source of evidence should most impact audit conclusions?a. External b. Inquiry.c. Oral. d. Informal.

155. Most of the independent auditor's work in formulating an opinion on the financial statementsconsists ofa. Studying and evaluating internal control.b. Obtaining and examining evidential matter.c. Examining cash transactions.d. Comparing recorded accountability with assets.


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156. Choose the best il lustration of objective audit evidence from the followinga. The paid invoice file containing invoices matched with receiving reports and purchase orders.a. Management's assertion that payment procedures require matching of invoice with

receiving report and purchase order.c. Clerical staff assurances that management policy regarding payment of invoices--matching of

invoice with receiving report and purchase order--is always followed.

d. The treasurer's statement of not remembering any exceptions in which an invoice wassubmitted for payment that was not accompanied by a matching receiving report andpurchase order.

157. Which of the following is a "Type I" subsequent event?a. The client's Long Island warehouse was destroyed by fire two weeks following the balance

sheet date. The warehouse and its contents were uninsured and represented 15% of theclient's total assets.

b. As the result of an uninsured flood loss, one of the client's major customers declaredbankruptcy. The client doesn't expect to recover more than 5% of the outstanding receivablewhich accounts for 30% of total accounts receivable. The flood and bankruptcy declarationboth occurred after the balance date but before the release of the audit report. No additionalprovision for loss had been made as of year end.

c. Three weeks after the balance sheet date, a major strike was called by the labor unionrepresenting 80% of the client's work force.

d. After the balance sheet date, but prior to release of the audit report, a product liability judgmentagainst the client was rendered by a judge. The judgment assessed damages and fines totaling30% of audited net income. The events giving rise to the judgment occurred prior to thebalance sheet date. The client does not plan to appeal the decision.

158. Which of the following is not a reason justifying the use of accounting estimates?a. The valuation or measurement of some accounts is uncertain pending the outcome of future

events.b. Data about past events cannot be accumulated in a cost-effective manner.

c. Data about future events cannot be accumulated in a cost-effective manner.d. Data about past events cannot be accumulated in a timely manner.

159. At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of thefinancial statements. With regard to the valuation of inventory, the auditor concludes that theevidence obtained is not sufficient to support management's representations. Which of the followingactions is the auditor most likely to take?a. Consult with the audit committee and issue a disclaimer of opinion.b. Consult with the audit committee and issue a qualified opinion.c. Obtain additional evidence regarding the valuation of inventory.d. Obtain a statement from management supporting their inventory valuation.

160. When an auditor concludes there is substantial doubt about a continuing audit client's ability tocontinue as a going concern for a reasonable period of time, the auditor's responsibility is to:a. Issue a qualified or adverse opinion, depending upon materiality, due to the possible effects on

the financial statements.b. Consider the adequacy of disclosure about the client's possible inability to continue as a going

concern.c. Report to the client's audit committee that management's accounting estimates may need to be

adjusted.d. Reissue the prior year's auditor's report and add an emphasis of a matter paragraph that

specifically refers to "substantial doubt" and "going concern."

161. An auditor includes a separate paragraph in an otherwise unmodified report to emphasizethat the entity being reported on had significant transactions with related parties. The inclusion ofthis separate paragraph:a. Is considered an "except for" qualification of the opinion.b. Violates PSAs if this information is already disclosed in footnotes to the financial statements.

c. Necessitates a revision of the opinion paragraph to include the phrase "with the foregoingexplanation."

d. Is appropriate and would not negate the unqualified opinion.

162. A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually resultwhen management:a. Is unable to obtain audited financial statements supporting the entity's investment in a foreign

subsidiary.b. Refuses to disclose in the notes to the financial statements related party transactions authorized

by the Board of Directors.c. Does not provide the auditor with an engagement letter specifying the responsibilities of both the

entity and the auditor.d. Fails to correct a significant deficiency in internal control communicated to those charged with

governance after the prior year's audit.


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163. In which of the following situations would an auditor ordinarily choose between expressing an"except for" qualified opinion or an adverse opinion?a. The auditor did not observe the entity's physical inventory and is unable to become satisfied as

to its balance by other auditing procedures.b. The f

Documents

-AT Reviewer Part III (Questions and Answer).pdf