Auditing Theory Finals

Questionnaire Ryan Flores Caña, cpa Final Examination SY 2014-2015 Father Saturnino Urios Univeristy

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Acctg 407 – Assurance Principles, Professional Ethics and Good Governance

Set b

INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. FULLY SHADE ONLY ONE

BOX FOR EACH ITEM. STRICTLY NO ERASURES ALLOWED.

1. Which of the following statements ordinarily is not included among the written client representation made

by the client chief executive officer and their chief financial officer? a. “There are no unasserted claims or assessments that our lawyer has advised us are probable of

assertion and must be disclosed.”

b. “We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.”

c. “No events have occurred subsequent to the balance sheet date that would require adjustment to, or

disclose in, financial statements.” d. “Sufficient evidential mater has been available to the auditor to permit the issuance of an unmodified

opinion.”

2. When an auditor test the internal controls of a computerized accounting system, which of the following is

true of the test data approach? a. Test data are coded to a dummy subsidiary so they can be extracted from the system under actual

operating conditions.

b. Test data programs need not be tailor-made by the auditor for each client’s computer application. c. Test data programs usually consist of all possible valid and invalid conditions regarding compliance

with internal controls.

d. Test data are processed with the client’s computer and the result are compared with the auditor’s predetermined results.

3. Which of the following is most likely to be a response to the auditor’s assessment that the risk of material

misstatement due to fraud for the existence of inventory is high? a. Perform analytical procedures rather than taking test counts.

b. Request that inventories be counted prior to year-end.

c. Request that inventory counts at the various locations be counted on different dates so as to allow the

same auditor to be present at every count. d. Observe test counts of inventory at certain locations on an unannounced basis.

4. The adverse effects of events causing an auditor to believe there is substantial doubt about an entity’s

ability to continue as a going concern would most likely be mitigated by evidence relating to the a. Ability to expand operations into new product lines in the future.

b. Feasibility of plans to purchase leased equipment at less than market value.

c. Marketability of assets that management plan to sell. d. Committed arrangements to convert preference shares to long-term debt.

5. VGR Corporation has numerous customers. A customer file is kept on disk. Each customer file contains

name, address, client limit, and account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to

a. Develop test data that would cause some account balances to exceed the credit limit and determine if

the system properly detect such situation. b. Develop program to compare credit limits with account balances and print out the details of any

account with a balance exceeding its credit limit.

c. Request a printout of all account balances so they can be manually checked against the credit limits.

d. Request a printout of a sample account balances so they can be individually checked against the credit limits.

6. All registered CPAs shall obtain and use a seal which shall be circular in form with a smaller circle within

bearing the registrant’s name, registration number and title. Which of the following is correct? a. Engraved in the lower portion of the space between the circles is the CPA’s name.

b. Engraved in the middle of the smaller circle are the letters “CPA”.

c. Engraved in the middle of the smaller circle are the CPA’s name and registration number. d. Engraved in the middle of the smaller circle is the CPA’s name.

7. Which of the following statements best describes why the auditor’s examination cannot reasonably be

expected to bring all acts of noncompliance with existing laws and regulations by the client to the auditor’s attention?

a. Acts of noncompliance by clients often relates to accounting aspect rather than operating aspect.

b. Noncompliance may involve conduct designed to conceal it, such as collusion, forgery, deliberate

failure to record transactions, senior management override of controls, or intentional misrepresentations being made to the auditor.

c. Noncompliance may be perpetrated by the only person in the client’s organization with access to both

assets and the accounting records. d. The client’s internal control may be so strong that the auditor performs only minimal substantive

testing.

8. All CPAs who are considered in the practice of accountancy shall abide by the requirements, rules and regulations on continuing professional education. For this purpose, it is required that all registered CPAs

must complete a minimum of

a. 60 credit units in 3 years b. 30 credit units in 3 years

c. 45 credit units in 3 years


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d. 15 credit units in 3 years 9. A client is defendant in a patent infringement lawsuit against a major competitor. Which of the following

items would least likely be included in the attorney’s response to the auditor’s letter of inquiry?

a. A description of potential litigation in other matters or related to an unfavorable verdict in the patent infringement lawsuit.

b. A discussion of case progress and the strategy currently in place by client management to resolve the

lawsuit. c. An evaluation of the probability of loss and a statement of the amount or range of loss if an

unfavorable outcome is reasonably possible.

d. An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and

maximum damages are awarded. 10. Indicated which changes require an emphasis of matter paragraph in the audit report.

The CPA concludes there is substantial The CPA makes reference to the work of an

doubt about the entity’s ability to expert to indicate shared responsibility in an continue as a going concern unmodified opinion

a. Yes Yes

b. No Yes c. Yes No

d. No No

11. Which of the following statement is not correct? a. It is possible to vary the sample size from one unit to 100% of the items in the population.

b. The decision of how many items to test should not be influenced by the increased costs of performing

the additional tests.

c. The decision of how many items to test must be made by the auditor for each audit procedures. d. The sample size for any given procedure is likely to vary from audit to audit.

12. When discussing control risk (CR) and the audit risk model, which of the following is false?

a. CR is a measure of the auditor’s assessment of the likelihood that misstatement will not be prevented or detected by internal control.

b. If the auditor concludes that internal control is completely ineffective to prevent or detect errors,

he/she would assign a low value (e.g., 0%) to CR c. The relationship between control risk and detection risk is inverse.

d. The relationship between control risk and evidence needed to support account balances is direct.

13. Professional skepticism requires that an auditor assume that management is a. Honest, in the absence of fraud risk factors

b. Dishonest until completion of audit tests

c. Neither honest nor dishonest

d. Offering reasonable assurance of honesty 14. An auditor expressed a qualified opinion on the prior year’s financial statement because of a lack of

adequate disclosure. These financial statements are properly restated in the current year and presented in

comparative form with the current year’s financial statements. The auditor’s updated report on the prior year’s financial statement should

a. Be accompanied by the auditor’s original report on the prior year’s financial statements.

b. Continue to express a qualified opinion on the prior year’s financial statements. c. Make no reference to the type of opinion expressed on the prior year’s financial statements.

d. Express an unmodified opinion on the restated financial statements of the prior year.

15. Assuming the tolerable deviation rate is 5 percent, the expected population deviation rate is 3 percent, and the allowance for sampling risk is 2 percent. What should an auditor conclude if test of 100 random

chosen documents reveal 4 deviations?

a. Accept the sample result as support for assessing control risk below the maximum level because the

tolerable deviation rate less the allowance for sampling risk equals the expected population deviation rate.

b. Assess control risk at the maximum level because the sample deviation rate plus the allowance for

sampling risk exceeds the tolerable deviation rate. c. Assess control risk at the maximum level because the tolerable deviation rate plus the allowance for

sampling risk exceeds the expected population deviation rate.

d. Accept the sample result as support for assessing control risk below maximum because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

16. The trait that distinguishes auditors from accountants is the:

a. Auditor’s ability to interpret accounting principles generally accepted. b. Auditor’s education beyond the Bachelor’s degree.

c. Auditor’s ability to interpret FRSC Statements.

d. Auditor’s accumulation and interpretation of evidence related to a company’s financial statements.

17. Which of the following statements accurately describes the impact that automation has on the controls normally present in a manual system?

a. Transaction trails are more extensive in a computer-based system than in a manual system because

there is always a one-for-one correspondence between date entry and output. b. Responsibility for custody of information assets is more concentrated in user departments in a

computer-based system than it is in a manual system.

c. Controls must be more explicit in a computer-based system because many processing points that present opportunities for human judgment in a manual system are eliminated.

d. The quality of documentation becomes less critical in a computer-based system than it is in a manual

system because data records are stored in machine-readable files.


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18. The auditor look for an indication on duplicate sales invoices to see if the invoices have been verified. This is an example of

a. A test of details of balances.

b. A test of control. c. A substantive test of transactions.

d. Both test of control and a substantive test of transactions.

19. Which of the following statements concerning the auditor’s responsibility regarding subsequent events is incorrect?

a. The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence

that all events up to the date of the auditor’s report that may require adjustment of, or disclosure in,

the financial statements have been identified. b. The audit procedures to identify events that may require adjustment of, or disclosure in, the financial

statement should be performed as near as practicable to the date of issuance of the audited financial

statements. c. When the auditor becomes aware of events which materially affect the financial statements, the

auditor should consider whether such events are properly accounted for and adequately disclosed in

the financial statements. d. The auditor does not have any responsibility to perform audit procedures or make inquiry regarding

the financial statements after the date of the auditor’s report.

20. The communication between an external auditor and a client is confidential. Ordinarily, a. The client is not required to answer an external auditor’s question in certain circumstances.

b. An external auditor is not permitted to testify in a court of law without the permission of the client.

c. An external auditor is not required to divulge client information even if demanded by a subpoena.

d. An external auditor should not disclose information obtain in the course of the engagement without the client’s permission.

21. The steps that an audit firm should take prior to accepting an audit engagement include all of the

following except a. Obtaining a thorough understanding of the client’s business.

b. Evaluating independence.

c. Assessing the firm’s competence to perform the audit. d. Determining the firm’s ability to use due professional care.

22. The following statements relate to the International Standards and Practice Statements issued by the

IAASB and the Philippine Standard and Practice Statements issued by the AASC. Which is correct? a. The International Standards and Practice Statements issued by the IAASB automatically become the

applicable standard and practice statements in the Philippines.

b. The International Standards and Practice Statements issued by the IAASB are made Philippine-

specific by the AASC and are described as Philippine Standard and Practice Statements. c. There are currently fundamental differences between the IAASB International pronouncements and

the equivalent AASC Philippine pronouncements.

d. There are currently no fundamental differences between the IAASB International pronouncements and the equivalent AASC Philippine pronouncements but such differences are expected in the future.

23. When an auditor believes that an understanding with the client has not been established, he or she

should not ordinarily a. Perform the audit with increased professional skepticism.

b. Decline to accept or perform the audit.

c. Assess control risk at the maximum level and perform a primarily substantive audit. d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud.

24. An audit client’s description that its financial statements are prepared in accordance with a particular

applicable financial reporting framework is appropriate only if

a. The financial statements comply with all the requirements of that framework that are effective during the period covered by the financial statements.

b. The financial statements are in substantial compliance with that framework.

c. The financial statements adequately disclose the significant accounting policies selected and applied. d. The terminology used in the financial statements, including the title of each financial statement, is

appropriate.

For each of the following types of misstatements (Question 25-28), select the control that should have prevented the misstatement.

25. A manufacturing company received a substantial sales return in the last month of the year, but the credit

memorandum for the return was not prepared until after the auditors had completed their field work. The returned merchandise was included in the physical inventory

a. Aged trial balance of accounts receivable is prepared.

b. Credit memoranda are prenumbered and all numbers are accounted for.

c. A reconciliation of the trial balance of customers’ account with the general ledger control is prepared periodically.

d. Receiving reports are prepared for all materials received and such reports are accounted for on a

regular basis. 26. The sales manager credited a salesman, Juniver, with sales that were actually “house account” sales.

Later, Juniver divided his excess sales commission with the sales manager.

a. The summary sales entries are checked periodically by persons independent of sales functions. b. Sales order are reviewed and approval by persons independent of the sales department.

c. The internal auditor compares the sales commission statement with the cash disbursement records.

d. Sales orders are prenumbered, and all numbers are accounted for.


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27. A sales invoice for P52,000 was computed correctly but, by mistake, was key entered as P25,000 to the sales journal and to the accounts receivable master file. The customer remitted only P25,000, the amount

on his monthly statement.

a. Prelistings and predetermined totals are used to control postings. b. Sales invoice serial numbers, prices, discounts, extensions and footings are independently checked.

c. The customers’ monthly statements are verified and mailed by a responsible person other than the

bookkeeper who prepared them. d. Unauthorized remittance deductions made by customer or other matters in dispute are investigated

promptly by a person independent of the accounts receivable function.

28. Copies of sales invoice show different unit prices for apparently identical items.

a. All sales invoices are checked as to all details after their preparation. b. Differences reported by customer are satisfactorily investigated.

c. Statistical sales data are compiled and reconciled with recorded sales.

d. All sales invoices are compared with the customers’ purchase orders. 29. The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting

process. In regard to minimizing this risk, the auditor relies primarily on

a. Substantive tests. b. Test of controls.

c. Internal control.

d. Statistical analysis. 30. Which of the following quality control procedures is a monitoring activity?

a. Evaluates the firm’s independence and its ability to serve the prospective client

b. Reviews and tests compliance with the firm’s general quality control policies and procedures.

c. Designates individuals as specialists to serve as authoritative sources and define their authority in consultative situations.

d. Monitors continuing professional education programs and maintain appropriate records, both on a

firm and an individual audit engagement basis. 31. An external auditor will use internal auditors to assist in the audit of accounts receivable. Of the following

procedures, the one that would be most appropriate for the internal auditors to perform is the

a. Assessment of control risk for accounts receivable. b. Determination of the number of positive confirmation request to be mailed to substantiate the

existence of accounts receivable.

c. Preparation of an aged trial balance of accounts receivable. d. Establishment of the amount of accounts receivable that is considered material.

32. The AASC was established by the

a. Professional Regulation Commission (PRC) upon the recommendation of the Board of Accountancy

(BOA) b. Philippine Institute of Certified Public Accountants (PICPA)

c. PICPA and the Association of CPAs in Public Practice (ACPAPP)

d. International Federation of Accountants (IFAC) 33. Which of the following fraudulent activities most likely could be perpetrated due to lack of effective

internal controls in the revenue cycle?

a. Fictitious transactions may be recorded that cause an understatement of revenues and overstatement of receivables.

b. Claims received from customers for goods returned may be intentionally recorded in other customers’

accounts. c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of

cash.

d. The failure to prepare shipping documents may cause an overstatement of inventory balances.

34. When the financial statements contain material but not pervasive misstatements because the accounting policies selected are not consistent with the applicable financial reporting framework, the auditor should

a. Express a qualified opinion and describe the matter giving rise to the modification in a separate

paragraph. b. Express a qualified opinion and describe the matter giving rise to the modification within the opinion

paragraph.

c. Disclaim an opinion and describe the matter giving rise to the modification in a separate paragraph. d. Disclaim an opinion and describe the matter giving rise to the modification within the opinion

paragraph.

35. Judgments about the risk of material misstatements resulting from fraud may affect the audit in the following ways, except

a. The application of professional skepticism may include increased sensitivity in the selection of

the nature and extent of documentation to be examined in support of material transactions.

b. The knowledge, skill and ability of members of the audit team assigned significant audit responsibilities need to be commensurate with the auditor’s assessment of the level of risk for the

engagement.

c. The auditor may decide to consider further management’s selection and application of significant accounting policies, particularly those related to revenue recognition, asset valuation or capitalizing

versus expensing.

d. The auditor’s ability to assess control risk at high level may be reduced. 36. Which of the following is least likely an example of fraud risk factors relating to management’s

characteristics and influence over the control environment?

a. There is motivation for management to engage in fraudulent financial reporting.


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b. New accounting, statutory or regulatory requirements that could impair the financial stability or profitability of the entity.

c. There is a failure by management to display and communicate an appropriate attitude

regarding internal control and the financial reporting process. d. Non-financial management participates excessively in, or is preoccupied with, the selection of

accounting principles or the determination of significant estimates.

37. Which one of the following statements concerning sampling risk and nonsampling risk is correct? a. Neither sampling risk nor nonsampling risk can be reduced by the auditor

b. Sampling risk, but not nonsampling risk, can be reduced by the auditor.

c. Nonsampling risk, but not sampling risk, can be reduced by the auditor.

d. Both sampling risk and nonsampling risk can be reduced by the auditor. 38. The Philippine Standard on Assurance Engagement (PSAEs) are to be applied in

a. Assurance engagement dealing with subject matter other than historical financial information.

b. Compilation engagements and agreements to apply agreed-upon procedures to information. c. The audit or review of historical financial information.

d. Assurance engagements dealing with historical financial information.

39. If permission from client to discuss its affairs with the proposed auditor is denied by the client, the predecessor auditor should:

a. Keep silent of the denial.

b. Disclose the fact that the permission to disclose is denied by the client. c. Disclose adequately to proposed auditor all noncompliance made by the client.

d. Seek legal advice before responding to the proposed auditor

40. Which of the following constitutes the most significant risk within the purchasing cycle?

a. Receiving department personnel sign receiving documents without inspecting or counting the goods. b. Large quantities of relatively inexpensive parts are stored in open area near work stations to reduce

production slow-downs.

c. Poor records of transfer between warehouses often result in unnecessary purchase and excess inventories.

d. Warehouse personnel do not compare quantities received to quantities shown on transfer tickets.

41. An auditor decides to increase the assessed level of control risk from that originally planned on the basis of audit evidence gathered and evaluated. To achieve an overall audit risk level that is substantially

the same as the planned audit risk level, the auditor would

a. Decrease substantive testing. b. Increase inherent risk.

c. Increase materiality levels.

d. Decrease detection risk.

42. In performing an audit of financial statement, the auditor should obtain a sufficient knowledge of a client’s business and industry to

a. Develop an attitude of professional skepticism concerning management’s financial statement

assertions. b. Make constructive suggestions concerning improvements to the client’s internal control.

c. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a

whole to be materially misstated. d. Understand the events and transactions that may have an effect on the client’s financial statements.

43. All of the following are examples of substantive tests to verify the valuation of net accounts receivable

except the a. Recomputation of the allowance for bad debts

b. Inspection of accounts for current versus noncurrent status in the statement of financial position.

c. Inspection of the accounts receivable aging schedule.

d. Comparison of the allowance for bad debts with past periods. 44. As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk

higher than appropriate. The most likely explanation for this situation is that:

a. The deviation rate in the auditor’s sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.

b. The deviation rate in the auditor’s sample exceeds the tolerable rate, but the deviation rate in the

population is less than the tolerable rate. c. The deviation rates of both the auditor’s sample and the population exceed the tolerable rate.

d. The deviation rates both the auditor’s sample and the population are less than the tolerable rate.

45. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

a. Inquiring of the client’s legal counsel concerning pending litigation.

b. Comparing the financial statements to anticipated results.

c. Examining computer generated exception reports to verify the effectiveness of internal controls. d. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

46. PSA 620 considers the following individuals as “expert”, except

a. An individual with expertise in applying methods of accounting for deferred income tax. b. An expert in taxation law.

c. An individual with expertise in complex modeling for the purpose of valuing financial instruments.

d. An individual with expertise in the valuation of assets acquired and liabilities assumed in business combinations.

47. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?


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a. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.

b. Reconciling vendor’s statements to the file of receiving reports to identify items received just prior to

the balance sheet date. c. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether

the related payables apply to the prior period.

d. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.

48. Which of the following most completely describes how independence has been defined by the accountancy

profession?

a. Possessing the ability to act with integrity, and exercise objectivity and professional skepticism. b. Accepting responsibility to act professionally and in accordance with laws and regulations.

c. Avoiding the appearance of significant interest in the affairs of an assurance client.

d. Performing an assurance services from the viewpoint of the public. 49. A major customer of an audit client suffers a fire just prior to completion of year-end field work. The audit

client believes that this event could have a significant direct effect on the financial statement. The auditor

should a. Advise management to disclose the event in notes to the financial statements.

b. Disclose the event in the auditor’s report.

c. Withhold submission of the auditor’s report until the extent of the direct effect on the financial statements is known.

d. Advise management to adjust the financial statements.

50. An entity installed antivirus software on all its personal computers. The software was designed to prevent

initial infections, stop replication attempts, detect infections after their occurrence, mark affected system components, and remove viruses from infected components. The major risk in relying on antivirus

software is that it may

a. Consume too many system resources. b. Interfere with system operations

c. Not detect certain viruses.

d. Make software installation too complex. 51. The audited financial statements to be files with the SEC shall be accompanied by a

a. Management Report.

b. Registration Statement. c. Statement of Management’s Responsibility for Financial Statements.

d. Statement of the Board of Director’s Responsibility for Financial Statements.

52. If the objective of a test of details of transactions is to detect overstatement of sales, the auditor’s direction

of testing should be from the a. Cash receipts journal to the sales journal

b. Accounting records to the source documents

c. Source documents to the accounting records. d. Sales journal to the cash receipts journal

53. Which of the following statements is correct about the sample size in statistical sampling when testing

internal controls? a. The auditor should consider the tolerable rate of deviation from the controls being tested in

determining sample size.

b. As the likely rate of deviation decreases, the auditor should increase the planned sample size. c. The allowable risk of assessing control risk too low has no effect on the planned sample size.

d. Of all the factors to be considered, the population size has the greatest effect on the sample size.

54. The report on an agreed-upon procedures engagement should contain

a. Identification of the purpose for which the agreed-upon procedures were performed. b. An expression of positive assurance based on the specific procedures performed.

c. A statement that the auditor is independent of the entity.

d. A general description of the procedures performed. 55. To test for unsupported entries in the journals, the direction of audit testing should be to the:

a. Ledger entries.

b. Journal entries. c. Original source documents.

d. Financial statements.

56. In certain circumstances, an auditor’s report may be modified by adding a paragraph, preferably after the opinion paragraph, to highlight a matter affecting the financial statements which is included in a note to

the financial statements that more extensively discusses the matter. This paragraph is called a/an

a. Reference to the note paragraph

b. Emphasis of matter paragraph c. Explanatory paragraph

d. Unmodified opinion explanatory paragraph

57. A CPA, in performing an independent audit, would most likely use recalculation as a substantive test for which of the following expense-related accounts?

a. Purchases of supplies.

b. Interest expense. c. Advertising expense.

d. Repairs and maintenance expense.

58. Which of the following is an analytical procedure that should be applied to the income statement?


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a. Select sales and expense items and trace amounts to related supporting documents. b. Ascertain that the net income amount in the statement of cash flows agrees with the net income

amount in the income statement.

c. Obtain from the proper client representatives, the beginning and ending inventory amounts that were used to determine costs of sales.

d. Compare the actual revenues and expenses with the corresponding figures of the previous year

and investigate significant differences. 59. The auditor is required to obtain reasonable assurance about whether the financial statements are free of

material misstatement, whether due to fraud or error. In all cases when reasonable assurance cannot be

obtain, the auditor’s report should contain a/an

a. Unqualified opinion b. Qualified or adverse opinion

c. Qualified or disclaimer of opinion

d. Disclaimer of opinion 60. Which of the following statements concerning the assessment of control risk in a client’s computer

environment is true?

a. The auditor’s objectives with respect to the assessment of control risk are the same as in a manual system.

b. The auditor must obtain an understanding of the internal control and test controls in computer

environments. c. If the general controls are ineffective, the auditor ordinarily can assess control risk at a low level if the

application controls are effective.

d. The auditor usually can ignore the computer system if he or she can obtain an understanding of the

controls outside the computer system. 61. The following statements relate to the auditor’s consideration of the work internal auditing. Which is

incorrect?

a. The role of internal auditing is determined by management, and its objectives differ from those of the external auditor who is appointed to report independently on the financial statements.

b. The external auditor should obtain a sufficient understanding of internal audit activities to assist in

planning the audit and developing an effective audit approach. c. During the course of planning the audit, the external auditor should perform a preliminary

assessment of the internal audit function when it appears that internal audit is relevant to the

external audit of the financial statements in specific audit areas. d. Internal auditing activities do not include review of the economy, efficiency and effectiveness of the

entity’s operations.

62. The following statements relate to the auditor’s inquiry regarding litigation and claims. Which is correct?

a. When litigation or claims have been identified or when the auditor believes they may exist, the auditor should seek direct communication with entity’s lawyers.

b. The auditor considers the status of legal matters up to the balance sheet date.

c. If the management refuses to give the auditor permission to communicate with the entity’s lawyers, this would be a scope limitation and should ordinarily lead to a qualified or adverse opinion.

d. The letter of audit inquiry, which should be prepared by the auditor and sent by management, should

request the lawyer to communicate directly with the auditor. 63. Prior to commencing field work, an auditor usually discusses the general audit strategy with the client’s

management. Which of the following details do management and the auditor usually agree at this time?

a. The specific matters to be included in the communication with the audit committee. b. The minimum amount of misstatement that may be considered to be reportable conditions.

c. The schedule and analyses that the client’s staff should prepare.

d. The effects that inadequate controls may have over the safeguarding of assets.

64. Which of the following sampling plans would be designed to estimate a numerical measurement of a population, such as a peso value?

a. Numerical sampling.

b. Discovery sampling. c. Sampling for attributes.

d. Sampling for variables.

65. The development of a general strategy and a detailed approach for the expected nature, timing, and extent of audit refers to :

a. Supervision

b. Audit procedures c. Directing

d. Planning

66. An auditor refers to significant related party transactions in a separate paragraph of the report. If the

ensuring opinion paragraph contains the words “with the foregoing explanation”, the auditor is considered to have

a. Expressed an unmodified opinion with appropriate reference to the separate paragraph.

b. Expressed an adverse opinion. c. Expressed a negative assurance opinion.

d. Reported inappropriately.

67. The other information in a published report containing audited financial statements may be relevant to an independent auditor. With respect to other information,

a. The auditor’s responsibility does not extend beyond the financial information identified in the report.


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b. The auditor is obligated to perform auditing procedures to corroborate other information contain in a document.

c. The auditor need not be concerned with the other information.

d. The auditor must include the other information in the report. 68. Modern computer technology makes it possible to perform paperless audits. For example, in an audit of

computer-processed customer accounts receivable balances, an auditor might use a personal computer to

access the accounts receivable files directly and copy selected customer records into the computer for audit analysis. Which of the following is an advantage of this type of paperless audit of accounts

receivable balances?

a. It reduces the amount of substantive testing required.

b. It allows immediate processing of audit data on a spreadsheet working paper. c. It increases the amount of technical skill required of the auditor.

d. It allows direct confirmation of customers account balances.

69. An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the best

evidence on operating effectiveness?

a. Select and examine receiving reports and test whether the related canceled checks are dated no earlier than the receiving reports.

b. Select and examine receiving reports and test whether the related canceled checks are dated no later

than the receiving reports. c. Select and examine canceled checks and test whether the related receiving reports are dated no earlier

than the checks.

d. Select and examine canceled checks and test whether the related receiving reports are dated no later

than the checks. 70. Assistants to whom work is delegated need appropriate direction. Direction involves

a. Informing assistants of their responsibility and objectives of the procedures they are to perform.

b. Informing assistants of matters, such as the nature of the entity’s business and possible accounting or auditing problems that may affect the nature, timing and extent of audit procedures with which they

are involved.

c. Both A or B. d. Neither A nor B.

71. Documentary evidence is one of the principal types of corroborating information used by an auditor to

substantiate an opinion. Which one of the following examples of documentary evidence would be the most reliable?

a. Time tickets.

b. Material requisition slips.

c. Copies of sales invoices. d. Bank statements.

72. A “proof of cash” used by an auditor

a. Proves that the client’s year-end balance of cash is fairly stated. b. Confirms that the client has properly separated the custody function from the recording functions with

respect to cash.

c. Validates that client’s bank did not make an error during the period being examined. d. Determines if there were any unauthorized disbursements or unrecorded deposits for the given period.

73. When the auditor performs substantive test of balances, the primary concern is

a. Assessing control risk too high b. Assessing control risk too low

c. Incorrect rejection of an account balance

d. Incorrect acceptance of an account balance

74. An auditor would use variables sampling to a. Determine the total estimated value of ending merchandise inventory

b. Determine the number of inventory items improperly costed.

c. Determine how often credit sales of a certain magnitude were not approved. d. Estimate how often sales invoices were not verified for mathematical accuracy.

75. The following statements relate to the fundamental principles of professional ethics:

A. B. C. D. Integrity implies fair dealing and truthfulness. True True False False

The principles of objectivity imposes an obligation on

all professional accountants to maintain professional knowledge and skill at the level required. True False True False

The principle of professional behavior requires all

professional accountants to act diligently in

accordance with applicable technical and professional standards when rendering professional services. False False True True

76. An entity’s accounting record generally include the records of initial entries and supporting records

including a. Confirmations from third parties.

b. Information obtained by the auditor from such audit procedures as inquiry, observation, and

inspection. c. Worksheets and spreadsheets supporting cost allocations

d. Other information developed by, or available to, auditor to permit him/her to reach conclusions

through valid reasoning.


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77. The auditor is required by the standard to consider CIS environment in designing audit procedures to reduce risk to an acceptably low level. Which of the following statements is incorrect?

a. The auditor’s specific audit objectives do not change whether financial information is processed

manually or by computer. b. The methods of applying audit procedures to gather audit evidence are not influenced by the methods

of computer processing.

c. The auditor may use either manual audit procedures, computer-assisted audit techniques (CAATs), or a combination of both to obtain sufficient appropriate evidence.

d. In some CIS environment, it may be difficult or impossible for the auditor to obtain certain data for

inspection, inquiry, or confirmation without the aid of a computer.

78. Which of the following statements does not properly describe a limitation of an audit? a. Many audit conclusions are made on the basis of examining a sample of evidence

b. Some evidence supporting peso representation in the financial statements must be obtained by oral or

written representation of management c. Fatigue can cause auditors to overlook pertinent evidence

d. Many financial statement assertions cannot be audited

79. Which of the following procedures should an auditor ordinarily perform regarding subsequent events? a. Review the cutoff bank statements for several months after the year-end.

b. Compare the latest available interim financial statements with the financial statements being audited.

c. Send second request to the client’s customer who failed to respond to initial accounts receivable confirmation requests.

d. Communicate material weakness in internal control to the client’s audit committee.

80. The following statements are ordinarily included in a management representation letter, except

a. The completeness and availability of minutes of stockholders’ and directors’ meetings. b. Sufficient appropriate audit evidence has been made available to permit the expression of an

unqualified opinion.

c. There have been no irregularities involving management or employees who have a significant role in internal control or that could have a material effect on the financial statements.

d. The financial statements are free of materials misstatements, including omissions.

81. The standard states that the auditor may decide to select specific items from a population based on such factors as the auditor’s understanding of the entity, the assessed risk of material misstatement, and the

characteristics of the populations being tested. Specific items that may be selected for testing usually

include the following, except a. Items that are of high value

b. Items that suspicious, unusual, risk-prone, or have a history of error.

c. All items whose values do not exceed a certain amount so as to verify only a small proportion of the

total amount of class of transactions or account balance. d. Items that provide information about matters such as the nature of the entity, the nature of

transactions, and internal control.

82. Auditors have learned that increased computerization has created more opportunities for computer fraud but has also led to the development of computer audit techniques to detect frauds. A type of fraud that

has occurred in the banking industries is a programming fraud in which the programmer designs

a program to calculate daily interest on savings account to four decimal points. The programmer then truncates the last two digit and add is to his account balance. Which of the following Computer-

assisted Audit Techniques (CAATs) would most be effective in detecting this type of fraud?

a. Generalized audit software that selects account balances for confirmation with the depositor. b. Snapshot

c. Parallel simulation

d. SCARF (Systems Control and Audit Review File)

83. The auditor is required to complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor’s report. The time limit within which to complete the assembly of the

audit is ordinarily

a. Not more than 30 days after the date of the auditor’s report. b. Not more than 60 days after the date of the auditor’s report.

c. Not more than 90 days after the end of the entity’s reporting period.

d. Not more than 60 days after the date of the entity’s financial statements are authorized for issue. 84. If the fee quoted for a professional service is so low, it may be difficult for the CPA to perform the

engagement in accordance with applicable technical and professional standards for that price. This

situation create a self-interest threat to a. Professional competence and due care

b. Objectivity

c. Integrity

d. Professional behavior 85. Which statement is incorrect regarding the evaluation of general CIS controls and CIS application

controls?

a. The general CIS controls may have a pervasive effect on the processing of transactions in application system.

b. If general CIS controls are not effective, there may be a risk that misstatements might occur and go

undetected in the application systems. c. Manual procedures exercised by users may provide effective control at the application level.

d. Weakness in general CIS controls cannot preclude testing certain CIS application controls.

86. Which statement is incorrect regarding external confirmation?


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a. External confirmation is the process of obtaining and evaluating audit evidence through a direct communication from a third party in response to a request for information about a particularly item

affecting assertions made by management in the financial statements.

b. External confirmation of an account receivable provides strong evidence regarding the valuation of the account as at a certain date.

c. The auditor should tailor external confirmation requests to the specific audit objectives.

d. The auditor may use positive or negative external confirmation requests or a combination of both. 87. Analytical procedures enable the auditor to predict the balance or quantity of an item under audit.

Information to develop this estimate can be obtained from all of the following except

a. Comparison of financial data with data for comparable prior periods, anticipated results (e.g., budget

and forecast), and similar data for the industry in which the entity operates. b. Study of the relationships of elements of financial data that would be expected to conform to a

predictable pattern based upon the entity’s experience.

c. Study of the relationships of financial data with relevant nonfinancial data. d. Tracing transactions through the system to determine whether procedures are being applied as

prescribed.

88. An auditor established a P180,000 tolerable misstatement for an asset with an account balance of P3,000,000. The auditor selected a sample of every 20th item from the population that represented the

asset account balance and discovered a net overstatement of P10,500 (P11,100 overstatement minus P600

understatement). Under these circumstances, the auditor most likely would conclude that a. The asset account is fairly stated because the tolerable misstatement exceeds the net projected actual

overstatement und understatement.

b. The asset account is fairly stated because the total projected misstatement is less than the tolerable

misstatement. c. There is an unacceptably high risk that the actual misstatement in the population exceeds the

tolerable misstatement because the total projected misstatement exceeds the tolerable misstatement.

d. There is an unacceptably high risk that the tolerable misstatement is more than the sum of actual overstatements and understatement.

89. The report on an agreed-upon procedures engagement needs to describe the purpose and the agreed-upon

procedures of the engagement in sufficient detail to enable the reader to understand the nature and the extent of the work performed. The report of factual findings should not contain

a. Addressee (ordinarily the client who engaged the auditor to perform the agreed-upon procedures)

b. Identification of the purpose for which the agreed-upon procedures were performed. c. A description of the auditor’s factual findings including sufficient details of errors and exceptions

found.

d. Statement that the procedures performed constitutes an audit and, as such, an opinion is expressed.

Question 90 – 92 are based on the following information: The following sales procedures were encountered during the annual audit of Barbell Wholesale

Distributing Company.

Customer orders are received by the sales order department. A clerk computes the approximate peso

amount of the order and sends it to the credit department for approval. Credit approval is stamped on the

order and sent to the accounting department. A computer is then used to generate two copies of sales invoice. The order is filed in the customer order file.

The customer copy of the sales invoice is held in the pending file while awaiting notification that order has been shipped. The shipping copy of the sales invoice is routed through the warehouse, and the shipping

department has authority for the respective department to release and ship the goods. Shipping

department personnel pack the order and manually prepare a three-copy bill of lading: the original copy is

mailed to the customer, the second copy is sent with the shipment and the other is filed in sequence in the bill of lading file. The sales invoice shipping copy is sent to the accounting department with any

changes resulting from lack of available merchandise.

The clerk matches the received sales invoice shipping copy with the sales invoice customer copy from the

pending file. Quantities on the two invoices are compared and prices are compared on an approved price

list. The customer copy is then mailed to the customer, and the shipping copy is sent to the data processing department.

The data processing department in accounting enters the sales invoice data onto the computer, which is use to prepare the sales journal and update the accounts receivable master file. She files the shipping

copy in the sales invoice file in numerical sequence.

90. In order to determine whether the internal controls operated effectively to minimize instances of failure to post invoices to customers’ account receivable master file, the auditor would select a sample of

transaction from the population represented by the

a. Customer order file. b. Bill of lading file.

c. Customers’ accounts receivable master file.

d. Sales invoice file. 91. In order to determine whether the internal controls operated effectively to minimize instances of failure to

invoice a shipment, the auditor would select a sample of transactions from the population represented by

the


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d. Sales invoice file. 92. In order to gather evidence that uncollected items in customers’ accounts represented existing trade

receivables, the auditor would select a sample of items from the population represented by the



d. Sales invoice file.

93. A CPA has been engage to perform review services for a client. Identify which of the following is a correct statement

a. The CPA must perform the basic audit procedures necessary to determine that the statements are in

conformity with the applicable financial reporting framework. b. The financial statements are primarily representations of the CPA.

c. The CPA may prepare the statements from the books but may not assist in adjusting and closing the

books. d. The CPA is performing an assurance engagement other than an audit of the financial statements.

94. Which of the following best describes a CPA’s engagement to report on an entity’s internal control?

a. An assurance engagement to examine and report on management’s written assertions about the effectiveness of its internal control.

b. An audit engagement to render an opinion on the entity’s internal control.

c. A prospective engagement to project, for a period of time not to exceed one year, and report on the

expected benefits of the entity’s internal control. d. A consulting engagement to provide constructive advice to the entity on its internal control.

95. When an auditor modifies an opinion because of inadequate disclosure, the auditor should describe the

nature of the omission in a separate “Basis for Modification” paragraph and modify the Auditor’s

Introductory Responsibility Opinion

Paragraph Paragraph Paragraph a. Yes No No

b. Yes Yes No

c. No Yes Yes d. No No Yes

96. The following are examples of circumstances that may create familiarity threats, except

a. Promoting shares in a listed entity when that entity is financial statement audit client.

b. Long association of senior personnel with the assurance client. c. A member of the engagement team having a close or immediate family relationship with a director or

officer of the client.

d. Former partner of the firm being a director or officer of the client or an employee in a position to exert direct and significant influence over the subject matter of the engagement.

97. Comparative financial statements include the prior year’s statements that were audited by a predecessor

auditor whose report is not presented. If the predecessor’s report was unmodified, the incoming auditor should

a. Express an opinion on the current year’s statements alone and make no reference to the prior year’s

statements. b. Indicate in the auditor’s report that the predecessor auditor expressed an unmodified opinion.

c. Obtain a letter of representations from the predecessor auditor concerning any matters that might

affect the incoming auditor’s opinion.

d. Request the predecessor auditor to reissue prior year’s report. 98. When the total fee generated by an assurance client represent a large proportion of a firm’s total fees, the

dependence on that client or client group and concern about the possibility of losing the client may create

a/an a. Self-interest threat c. Intimidation threat.

b. Self-review threat d. Advocacy threat.

99. The preliminary assessment of control risk is the process of evaluating the efficiency of an entity’s accounting and internal control systems in preventing or detecting and correcting material misstatements.

The auditor should document in the audit working papers the understanding obtained of the entity’s accounting and internal control systems and the assessment of control risk.

There will always be some control risk because of the inherent limitations of any accounting and internal

control systems. a. False; True; True c. False; False; True

b. True; True; False d. True; False True

100. The date of the CPA’s opinion on the financial statements of his or her clients should be the date of the a. Closing of the client’s books.

b. Receipt of the client’s letter of representation.

c. Completion of all important audit procedures. d. Submission of the report to the client.

--End of Examination--

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Auditing Theory Finals