Auditing Theory 01

AUDITING THEORY ATPW: PREWEEK QUESTIONS Professional Standard 1. In the International arena, this body oversees the IFAC’s standard setting activities in the areas of auditing and assurance, ethics and education. A. Monitoring Group (MG) B. Public Interest Oversight Board (PIOB) C. IFAC Regulatory Liaison Group (IRLG) D. International Auditing and Assurance Standards Board (IAASB) 2. One of the government auditing standards which is not observed by independent CPAs in the private sector is: A. The audit is to be adequately planned and assistants are to be properly supervised. B. A review shall be made of compliance with legal and statutory requirements. C. An evaluation shall be made of the system of internal control. D. Sufficient component evidential matter shall be obtains through inspection, observation, inquiries and confirmations. 3. The Auditing and Assurance Standards Council has __ representatives from PICPA (public practice sector), __ representatives from BSP, and __ representatives from the COA: A. Six, one, one C. Nine, zero, one B. Eight, one, one D. Seven, zero, one 4. A requirement of the application of PSAs is for the auditor: A. Not to obtain clients by solicitation. B. To undertake a proper study and evaluation of the existing internal control. C. To charge fees fairly and in relation to time and cost of the engagement. D. To inspect all fixed assets acquired during the year. 5. The Core Competencies of CPAs include: A. Assurance and information integrity B. Objectivity

C.

Strategic and critical thinking Skills D. Pursuit of life-long learning and Excellence

RULES ON ADVERTISING 1. Any advertising by professional accountants beyond their name, address, telephone number and membership in professional organizations has been traditionally considered unethical in the Accountancy Profession, due to the following reason, except : A. Advertising could lead to undue competition between and among practitioners, causing a decline in quality of service. B. Advertising would encourage a more personal approach to clients. C. The cost of advertising would outweigh any savings that might result from competition. D. Small or new practitioners would be unlikely to have the financial resources to match the advertising of larger or more established practices A. B. C. D.

2. Which of the following is allowed under the revised rules on advertising? Self-laudatory statements Discrediting, disparaging, or attacking other firms or CPA practitioners Referring to, using or citing actual or purported testimonials by third parties None of these are allowed forms of advertising. Page 1 of 30

3.

Before advertisements are disseminated, they must be subject to the review of: A. Those charged with governance of the clients of the CPA B. Managing partner and Quality Control partner of the firm C. Board of Accountancy and Professional Regulation Commission D. Risk Management partner and Managing partner of the firm

4.

Which of the following cannot be mentioned by an author in publicizing a book in accounting? A. Name C. Membership in professional Organization B. Qualification D. Services that the author’s firm Provides 5. A professional accountants may invite the following to attend training courses and seminars conducted for the assistance of staff (select the exception) : A. Clients C. Other professional accountants B. Staff of the firm D. Potential clients

6.

May a CPA give a brochure to a non-client? A. No, because this is a violation of the revised rules on advertising B. Yes, since this is acceptable under the revised rules on advertising C. No, unless the non-client becomes a client within 10 days from receipt of the brochure D. Yes, if the non-client has made an unsolicited request

7.

Regarding anniversaries, a firm may undertake press releases or other media releases to commemorate their anniversaries in the public practice only every: A. Year C. Five years B. Three years D. Ten years

8.

Which of the following partner profile information may be posted in a firm’s website? A. Name B. Educational attainment and brief listing of services C. Postal address, telephone, fax and email-address D. All of these may be posted in a firm’s website

Accreditation of Accounting Teachers 1. This act provides that only licensed Professional may teach licensure subjects, and provides for the triennial renewal of the Professional identification card: A. RA No. 9298 C. IRR of RA 9298 B. PRC Modernization Act D. PD 1081

2.

The policy for accreditation covers CPAs involved in teaching of accounting and related subjects in the: A. Primary level only C. Secondary and tertiary levels only B. Primary and secondary levels only D. Primary, secondary, tertiary and Graduate level 3. The following are the requirements for accreditation of Accounting Teachers (select the exception): A. Possession of relevant Master’s Degree B. Completion of 12 units of relevant education subjects from CHED recognized schools C. A total of three years’ meaningful in actual accounting work

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D. Proof that the CPA has undergone continuing professional education, totalling 75 units 4.

The accreditation granted for accounting teachers is valid for: A. One year C. Three years B. Two years D. Four years

Code of Ethics 1. Which of the following describes most completely how the profession defines independence? A. Performing an audit from the public’s point of view B. Avoiding the appearance of a significant interest in an audit client’s interest C. Resisting a client’s reluctance to reveal evidence D. Accepting responsibility to act professionally and in accordance with the professional Code of Conduct 2.

What kinds of threats are created by virtue of a close business relationship with assurance clients? A. Self-interest threat C. Self-interest and self-review threat B. Self-review threat intimidation threat D. No threats are created

3.

Family and personal relationships between a member of the assurance team and a director, an officer or certain employees, depending on their role, of the assurance client, least likely create A. Self-interest threat C. Intimidation threat B. Self-review threat D. Familiarity threat

4.

IF firm, or network firm, personnel providing such assistance make management decisions, the self-review threat created could not be reduce to an acceptable level by any safeguards. Examples of such managerial decisions include the following, except A. Determining or changing journal entries or the classifications for accounts or transactions or other accounting records without obtaining the approval of the audit clients. B. Authorizing or approving transactions. C. Preparing source documents or obtaining data (including decisions on evaluation assumptions), or making changes to such documents or data. D. Assisting an audit client in resolving account reconciliation problems.

5.

The provision of accounting and bookkeeping services to audit clients in emergency or other unusual situations, when it is impractical for the audit client to make other arrangements, would not be considered to pose an unacceptable threat to independence provided: A. The firm or network firm does not assume any managerial role or make any managerial decisions. B. The audit client accepts responsibility for the result of the work C. Personnel providing the services are not members of the assurance team. D. All of the above.

6.

If the valuation services involves the valuation of matters to the financial statements and the valuation involves a significant degree of subjectivity, the self-review threat created (choose the incorrect one) A. Could not be reduced to an acceptable level by the application of any safeguard. B. Could be reduced to an acceptable level by the application of safeguards. C. Such valuation services should not be provided. D. The assurance team should withdraw from the audit engagement, if the team opted to perform the valuation services. Page 3 of 30

7.

Waste Management and Enron are classic cases wherein the media critical that auditor: A. Were ignorant of the existing audit and assurance standards. B. Have failed to plan the audit engagement properly. C. Overlooked suspicions of earnings management reported in the Wall Street Journal. D. Received significant consulting fees relative to audit fees.

8.

A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA’s minor child. The trust securities were not material to the CPA but were material to the child’s personal and worth. Would the independence of the CPA be considered to be 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 the CPA’s 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 the client.

9.

The Code of Professional Ethics would most likely be violated if an auditor: A. 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 client’s vacant controllership position.

10. Pupung, CPA, is an audit manager of the Dom, Day and Jordan, CPAs, accounting firm. He has just been assigned to the audit of the Lugao Money Market Fund. Pupung has maintained a money market account with LMMF since it opened in 2005. All his savings, amounting to 75% of his total assets, are in this account, which pays the highest interest available in money market funds. However, his account constitutes only 0.00001 percent of the fund’s assets. Is the firm’s independence impaired in this situation? A. Yes, Pupung is considered a member of the assurance team, since he is a manager and will provide audit services to LMMF. The firm’s independence is impaired since Pupung holds a material indirect financial interest. B. Yes, Pupung is considered a member of the assurance team, since he is a manager and will provide audit services to LMMF. The firm’s independence is impaired since Pupung holds a direct financial interest. C. No, Pupung, despite being a “member of the assurance team” holds only 0.00001 percent of the fund’s assets. His financial interest in LMMF is irrelevant to the question on independemce. D. No, Pupung, despite being a “member of the assurance team” holds only 0.00001 percent of the fund’s assets. It is the audit partner in charge of the LMMF engagement (and not pupung) who should be checked for any direct or material indirect financial interest in the audit client (Number 11 to 13 follow) CPA Dagul’s wife owns 20 percent of the ordinary shares of Pugad Company, which wants Dagul to perform the audit for the calendar year end December 31, 2009.

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11. May Dagul , perform the audit of Pugad Company for the Calendar year ended December 31, 2009? A. Yes, since it is Dagul;s wife who owns the shares and not Dagul. B. Yes, because the interest is less than 50 percent and therefore Dagul is considered independent. C. No, since Dagul’s wife’s interest is attributed to him, and he would not be independent. D. No, since Dagul’s wife’s interest constitutes significant influence and gives rise to an intimidation threat. 12. Assume that Dagul’s wife gave her shares to their dependent 10-year-old daughter, Tiny, on July 1, 2009. May Dagul now perform the audit of Pugad Company for the calendar year ended December 31, 2009? A. No, for as long as Tiny is a dependent child. The financial interest is considered direct B. Yes, because Dagul is now considered independent since it is his daughter who now owns the shares. C. No, for as long as Tiny is a dependent child. The financial interest is considered indirect. D. Yes, because under the Code of Ethics, the interest in the Pugad Company is no longer relevant to Dagul’s decision whether to accept or decline the audit engagement. 13. Assumes further that Tiny, acting through an appropriate custodian, sold the shares to her grandfather Lolo Dom on August 1, 2009. His purchase, as an accommodation, took two-thirds of his retirement savings. May Dagul now perform the audit of Pugad Company for the year ended December 31, 2009? A. Yes, but only if Lolo Dom is not Dagul’s father (i.e., Lolo Dom is Dagul’s father-in-law). B. No, the appearance of independence is impaired. Moreover, the grandfather’s investment is material (66.67 percent) in relation to his close relatives. C. Yes, Dagul may now accept the engagement since there is no impairment of independence. Lolo Dom is considered a non-dependent close relative. D. No, the independence in mental attitude is impaired. Moreover, the grandfather’s investment is material (66.67 percent) in relation to his net financial resources. 14. On August 20, 2009, Mar Bonafe, CPA and partner, was offered and accepted the engagement to audit the annual financial statement of ABC Corporation for the fiscal and calendar years ended December 31, 2009. The audit began on September 15, 2009, and ended on March 17, 2010. ABC Corporation is regulated by the SEC. Bonafe served as controller of ABC Corporation from November 5, 2002 until January 5, 2009, at which time he terminated his employment with ABC. Mar Bonafe owned a material amount of ABC Corporation’s ordinary shares from November 5, 2002 until August 15, 2009, at which time he sold the shares. Is Mar Bonafe in violation of the Code of Ethics due to impairment of independence? A. Yes, because Mar Bonafe owned ABC shares at the start of the audit for December 31, 2009. B. Yes, because Mar Bonafe served as a controller for ABC Corporation in previous years. C. Yes, because Mar Bonafe 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 Mar Bonafe has owned shares in ABC Corporation.

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15. The provision of services by a firm or network firm to an audit client that involve the design and implementation of the financial information technology system that are used to generate information forming part of a client’s financial statements may most likely create A. Self-interest threat C. Intimidation threat B. Self-review threat D. Familiarity threat 16. The lending of staff by a firm, or network firm, to an audit client may create a _____ threat when the individual is in a position to influence the preparation of a client’s accounts or financial statements. A. Self-interest threat C. Intimidation threat B. Self-review threat D. Familiarity threat 17. These services may include such activities as acting as an expert witness, calculating estimated damages or other amounts that might become receivable or payable as the result of litigation or other legal dispute, and assistance with document management and retrieval in relation to a dispute or litigation. A. Paralegal services C. Client representation services B. Litigation support services D. Corporate finance and similar activity 18. Legal services are defined as A. The making of assumptions with regard to future developments, the application of certain methodologies and techniques, and the combination of both in order to compute a certain value, or range of values, for an asset, liability or for a business as a whole. B. A broad range of services, including compliance, planning, provision of formal taxation opinions and assistance in the resolution of tax disputes. C. May include such activities as acting as an expert witness, calculating estimated damages or other amounts that might become receivable or payable as the result of litigation or other legal dispute, and assistance with documents management and retrieval in relation to a dispute or litigation. D. Any services for which the person providing the services must either be admitted to practice before the Courts of the Jurisdiction in which services are to be provided or have the required legal training to practice law. 19. The recruitment of senior management for an assurance client, such as those in a position to affect the subject of the assurance engagement may least likely create A. Self-interest threat C. Intimidation threat B. Advocacy threat D. Familiarity threat 20. CPA Ela Santos performs the audit of the local symphony society. Because of her good work, she was elected an honorary member of the board of directors. Ela will not independent unless: A B C D - The position is in fact purely honorary Yes Yes Yes Yes - Listing of directors show she is an honorary director No Yes Yes Yes - 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 21. Rita, CPA is in charge of the audit of Mabuhay Resort, Inc. seven young members of the audit firm’s professional staff are working with Rita on this engagement, all of which are avid divers. Page 6 of 30

Mabuhay Resort owns two condominiums in Boracay, which it uses primarily to entertain clients. The controller of Mabuhay Resort has told Ms. Rita that her whole team is welcome to use the condominiums at no charge any time that they are not already in use. How should Rita, CPA, respond to this offer? A. Rita should withdraw from the engagement due to a significant threat to independence. B. Rita alone may accept the offer, but her staff may not use the condominiums. C. Rita should decline the offer, both for herself and her staff. D. Rita may accept the offer, but only in favour of her staff; she cannot use the condominiums because as partner, Rita will sign the report. Quality Controls 1. PSQC No. 1 requires complaints and allegations against the firm to be dealt with appropriately. Complaints and allegations may come from: A B C D  Firm personnel Yes No Yes Yes  Clients Yes Yes No Yes  Other third parties No Yes No Yes 2.

Which of the following is most likely a quality control procedure on client acceptance and continuance? A. Designate individuals as specialists to serve as authoritative sources. B. Periodically counsel personnel as to their progress and career opportunities. C. Evaluate clients upon the occurrence of specified events to determine whether the relationships ought to be continued. D. Provide adequate supervision at all organizational levels, considering training, ability and experience of personnel assigned in engagements.

3.

This is the date selected by the practitioner to date the report. A. Dual date C. B. Date of signing D.

4.

A network is:  

5.

Date of report Last day of field work

That is aimed at cooperation That is clearly aimed at profit or cost-sharing or shares Common ownership, control or management, common Quality control policies and procedures, common business Strategy, the use of a common brand name, or a significant part of professional resources.

A Yes Yes

B No Yes

C Yes No

D No No

The firm shall establish policies and procedures designed to provide it with reasonable assurance that engagements are performed in accordance with professional standards and regulatory and legal requirements, and that the firm or the engagements partner issue reports that are appropriate in the circumstances. Such policies and procedures shall include: A. Matters relevant to promoting consistency in the quality of engagement performance. B. Supervision responsibilities C. Review responsibilities D. All of the choices

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6. A. B. C. D. 7.

In reviewing the audit work performed, the engagement: Must review all audit documentation. Need not review all audit documentation, but may do so. Need not review all audit documentation. Must ask the staff performing the audit work to sign the audit report. Under the Redrafted PSQC1, the retention period for engagement documents documentation is mentioned as no shorter than: A. Three years C. Seven years B. Five years B. Ten years

Pre-Engagement procedures (Client acceptance and continuance) 1. Before accepting an engagement to audit a new client, an auditor is required to: A. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client. B. Obtain the prospective client’s signature to the engagement letter. C. Prepare a memo setting forth the staffing requirements and documenting the preliminary audit plan. D. Discuss the management representation letter with the prospective client’s audit committee. 2. The incoming auditor is also known as the ________________ auditor: A. Successor B. Principal C. Other D. Proposed 3.

B. C. D. 4. A. B.

One of the major of audit planning is pre-planning. Which of the following is NOT involved during the pre-planning phase? A. Deciding whether to accept or continue this client. Obtaining information about client’s legal obligations Selecting staff for the engagement. Obtaining an engagement letter. In making arrangements for an audit, there should be a clear understanding between the auditor and the client as to the following, except: The type of audit to be performed C. Assurance of the auditor’s independence Terms of the settlement for audit services D. Addressee of the audit report

5.

Which of the following matters is least likely to be discussed in an engagement letter? A.The fact that financial statements are the responsibility of management. B.The fact that an auditor does not plan to detect material irregularities. C.Assistance to be provided by client personnel. D.Timing of the performance of the examination.

6.

Which of the following statements best describes the auditor’s responsibility to detect conditions relating to financial stress of employees or adverse relationships between a company and its employees? A. The auditor is required to plan the audit to detect these conditions on all audits. B. These conditions relate to fraudulent financial reporting, and an auditor is required to plan the audit to detect these conditions whenever they may result in misstatements. C. The auditor is not required to plan the audit to discover these conditions, but should consider them if he or she becomes aware of them during the audit.

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D. The auditor is required to plan the audit to detect these conditions whenever they may result in misstatements. Planning 1. A basic tool used by the auditor to control the work and review the progress of the audit: A. Audit program C. Engagement letter B. Progress flowchart D. Time and expense summary 2.

During the initial planning for an audit, a CPA obtains a level knowledge of the client’s business to help him evaluate: A. The reasonableness of estimates, such as valuation of inventories and allowances for bad debts. B. Whether to accept the engagement or not. C. The nature of the audit report he will issue. D. The profitability of the business.

3.

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods: A. Influence the design of internal control. B. Affect the auditor’s preliminary judgement about materiality levels. C. Assist in evaluating the planned audit objectives. D. Determine the auditor’s acceptable level of audit risk.

4.

To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would: A. Perform test of details of transactions and balances. B. Review prior-year working papers and the permanent file for the client. C. Read specialized industry journals. D. Re-evaluate client’s internal control environment. A CPA may reduce the audit work on a first time audit by reviewing the working papers of the predecessor auditor. The predecessor should permit the successor to review working papers relating to matters of continuing significance such as those that relate to A. Extent of reliance on the work of specialists. B. Fee arrangements and summaries of payments. C. Analysis of contingencies. D. Staff hours required to complete the engagement.

5.

6.

The following statements relate to audit programs. Which statement is true? A. The ASC publishes a standard audit program and encourages the adoption for general use. B. The estimate provides a basis for evaluating likely misstatements C. An audit program would not contain documentation of the system being reviewed. D. The audit plan related program should no longer be changed once the audit is started.

7.

Which of the following stamens best describes why an auditor makes a preliminary estimate of materiality? A. An estimate is required by generally accepted auditing standards. 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.

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8.

Which of the following discoveries by the auditor would NOT raise the red flag of increased inherent risk? A. Management bonuses are based on a percentage of net income. B. A bond indenture requires a current ratio of at least three to one. C. Client makes extensive use of notes receivable and payable rather than buying and selling on open-account basis. D. Client is a parent company with subsidiary.

9.

While performing an audit, Conrad, 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%

Internal controls 1. The system approach to an audit is likely to be appropriate for: A. Clients with weak internal control. C. Clients in specialized industries B. Clients that are large in size. D. Clients that are publicly listed. 2.

One of the auditor’s major concern is to ascertain whether the internal control structure is designed to provide reasonable assurance that A. Profit margins are maximized, and operational efficiency is optimized. B. The chief accounting officer reviews all accounting transactions. C. Corporate morale problems are addressed immediately and effectively. D. Transactions are executed in accordance with management’s general or specific authorization.

3.

Which of the following is not one of the detailed objectives that an internal control structure must meet to prevent errors in the journals and records? A. Validity B. Materiality C. Authorization D. Posting

4.

Which of the following would be least likely to be considered an objective of the internal control structure? A. Checking the accuracy and reliability of accounting data. B. Detecting management fraud. C. Encouraging adherence to managerial policies. D. Safeguarding assets.

5.

Which of the following comes CLOSEST to outlining the auditor’s responsibility for internal control on all financial statement audits? A. An understanding of the control environment and the accounting system is necessary; an understanding of the control procedures is necessary for areas in which the auditor is performing test of controls. B. The auditor must obtain an understanding of each of the five internal control elements sufficient to plan the audit. C. When tests of controls have been performed, control risk must be assessed at a level less than the maximum. D. An understanding of the control environment is necessary, but not of the accounting system or control procedures unless control risk is to be assessed at a level less than the maximum. Page 10 of 30

6.

Which of the following is TRUE about the auditor’s consideration of internal control? A. The auditor must assess control risk at a level lower than the maximum. B. The auditors must prepare a flowchart description of internal control for their working papers. C. The auditors must obtain an understanding of the steps in processing major types of transactions. D. The auditors must perform test of controls.

7.

An objective of a walk-through is to: A. Verify that the structure has been placed in operation. B. Replace test of controls C. Evaluate the major strengths and weaknesses in the client’s structure. D. The auditors must perform test of controls.

8.

Which of the following is an advantage of describing internal control through the use of a standardized questionnaire? A. Questionnaires highlight weaknesses in the system. B. Questionnaires are more flexible than other methods of describing internal control. C. Questionnaires usually identify situations in which internal control weaknesses are compensated for by other strengths in the system. D. Questionnaires provide a clearer and more specific portrayal of a client’s system than other methods of describing internal control.

9.

Which of the following statement is not correct? A. It would be unusual to use both a narrative and a flowchart to describe the same system. B. The use of the both questionnaire and flowchart on the same engagement is highly desirable for understanding the client’s system. C. The advantage of the narrative description is the ease of describing the details of the internal control structure. D. When reliable and understandable narratives, flowcharts, and questionnaire are available from the client, it is desirable to use them rather than have the auditor prepare his/her own documents.

10. The overall attitude and awareness of an entity’s board of directors concerning the importance of the internal control structure usually is reflected in its: A. Computer-based controls. B. System of segregation of duties. C. Control environment. D. Safeguards over access to assets. 11. The four functions that are common to all accounting system regardless of complexity are: A. Journalizing, posting, trial balance and reports. B. Data preparation, data entry, transaction processing and master file update, and document and report generation. C. Data preparation, journalizing, posting and reports. D. Data entry, transaction processing and master file update, report generation, and document generation functions. Page 11 of 30

12. Internal control is a function of management, and effective control is based upon the concept of charge and discharge of responsibility or duty. Which of the following is one of the overriding principles of internal control? A. Responsibility for accounting and financial duties should be assigned to one responsible officer. B. Responsibility for the performance of each duty must be fixed. C. Responsibility for the accounting duties must be borne by the audit committee of the company. D. Responsibility for the accounting activities and duties must be assigned only to employees who are bonded. 13. Which of the following is not a valid concept of internal control? A. When one person is responsible for all phases of a transaction, there should be a clear designation of that person’s responsibility. B. The recorded accountability for asset should be compared with the existing assets at reasonable intervals and appropriate action should be taken it there are differences. C. Accounting control procedures may appropriately be applied on a test basis in some circumstances. D. Procedures designed to detect errors and irregularities should be performed by persons other than those in a position to perpetuate irregularities.

14. Control procedures do not encompass: A. Comparison of assets with recorded accountability. B. Design and use of documents. C. Proper safeguards over access to assets. D. An internal audit function. 15. Which one of the following is not inherent limitation of controls? A. Segregation of duties is not possible when there are only a few employees. B. Internal controls are generally only instituted for recurring transactions. C. Management generally has the authority to override internal controls. D. Control procedures can frequently be circumvented through collusion. 16. This terms means “to analyze identified risk to conclude on their significance”: A. Estimate B. Assess C. Measure D. Analyze 17. Which of the following is not a valid sequence of steps in the audit process? A. Performing certain analytical procedures, assessing inherent risk, assessing control risk. B. Choosing audit risk, assessing control risk, determining detection risk C. Choosing audit risk, performing certain analytical procedures, assessing inherent risk D. Determining detection risk, assessing inherent risk, performing certain analytical procedures. 18. Which of the following actions is an auditor is an auditor most likely to take as the acceptable level of detection risk increases? A. Increase audit to compensate for the change. B. Perform substance tests closer to the balance sheet date. C. Seek to obtain higher quality evidence. Page 12 of 30

D. Decrease sample sizes for substantive testing. 19. A deficiency in internal control exists when: A. A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the financial statements on a timely basis. B. A control necessary to prevent, or detect and correct, misstatements in the financial statements on a timely basis is not missing. C. There is a deficiency or combination of deficiencies in internal control that, in the auditor’s professional judgement, is of sufficient importance to merit the attention of those charged with governance. D. All of these choices describe a deficiency in internal control. 20. The auditor shall communicate significant deficiencies in internal control identified during the audit to those charged with governance on a timely basis. Such communication: A. May be done orally or in writing. B. Must be done orally. C. Must be in writing. D. Is not required by Philippine Standards in Auditing.

Transaction cycles and Tests of controls 1. In order to ensure unbiased information, record-keeping is typically included in a separate department under the: A. VP-operations B. Treasurer C. Controller D. Internal auditor 2.

Transaction cycles begin and end: A. At the beginning and end of the fiscal period. B. At the balance sheet date. C. At January 1 and December 31. D. At the origin and final disposition of the company.

3.

The use of pre-numbered documents is meant to prevent: A. The failure to bill or record sales B. Duplicate billings and recording of sales. C. All of the answers. D. None of the answers.

4.

The authority to accept incoming goods in receiving should be based on a(n): A. Vendor’s invoice. B. Material requisition. C. Bill of lading D. Approved purchase order.

5.

Input documents are typically the responsibility of the: A. User department that transmit the documents to accounting before processing. B. Accounting department which prepares and records them. Page 13 of 30

C. Production and quality control department to see that they are prepared properly. D. Computer department since they will have to be responsible for inputting them. 6.

“Control activities” include procedures that pertain to physical controls over access to and use of assets and records. A departure from the purpose o such procedure is that: A. Access to the safe-deposit box requires two officers. B. Only storeroom personnel and line supervisors have access to the raw materials storeroom. C. The mail clerk compiles a list of the checks received in the incoming mail. D. Only salespersons and sales supervisors use sales department vehicles.

7.

Effective internal control requires organizational independence of departments. Organizational independence would be impaired in which of the following situations? A. The internal auditors report to the audit committee of the board of directors. B. The controller reports to the vice president for production. C. The payroll accounting department reports to the chief accountant. D. The cashier reports to the treasurer.

8.

Which of the following statements is true? A. Accounting for the sequence of pre-numbered documents is a control procedure intended to achieve specific control objectives related to validity. B. Incompatible functions are those that place any person in a position to perpetuate errors or irregularities. C. If comparison reveals that the assets do not agree with the recorded accountability, it provided evidence of unrecorded or improperly recorded transactions. D. A chart of accounts is generally prepared in details to enable the controller to pinpoint budget variance and trace it to a specific department or area of responsibility.

9.

The frequency of the comparison of recorded accountability with assets (for the purpose of safeguarding assets) should be determined by: A. The amount of assets without references to the cost of the comparison. B. The nature and amount of the asset and the cost of making the comparison. C. The cost of the comparison and whether the susceptibility to loss results from unintentional errors or intentional irregularities and/or defalcations. D. The auditor in consultation with client management.

10. Competence of personnel is necessary to proper recording of transactions and supports financial statements that are fairly presented. In reviewing the organization for necessary competence, which of the following job types would be of least interest to the auditor? A. Corporate controller. B. Vice-president for marketing, C. Manager of electronic data processing. D. Chief accountant. (Numbers 11 and 12) Geline Hardware Wholesaler sells hardware and small appliances to selected retailers throughout the Philippines. Terms are 2/10, n/30. In addition to customer accounts, Geline’s accounts receivable includes employee receivables, customer credit balances, and other non-trade receivables, such as returnable container deposits, utility deposits, and amounts receivable from sale

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of assets other than inventory. These other amounts are considered material, but no effort is made to identify them separately for either interim or annual financial statement purposes. 11. Identify any internal control weakness present in Geline Hardware Wholesalers. It’s the internal control weakness relevant to the audit? A. Yes, because it affects the completeness and cut-off assertions related to the revenuereceivables-cash receipts cycle. B. No, since the weakness in the internal control affects only the classification of accounts in the trial balance and the financial statements. C. Yes, because it affects the presentation and disclosure assertion related to the revenue-receivables-cash receipts cycle. D. Cannot be answer without additional information. 12. Which of the following substantive audit procedures would most likely address the internal control weakness identified in number 11? A. Reviewing transactions at and near year-and to ascertain the propriety of cut-off procedures by the client. B. Tracing entries in the sales journal to the related invoices and shipping documents. C. Selecting sample sales invoices and shipping documents and checking them against entries in the sales journal and the accounts receivable account. D. Checking the propriety of classification of items in accounts receivable and reclassification entries as necessary. 13. The use of fidelity bonds protects a company from embezzlement losses and also: A. Allows the company to substitute the fidelity bonds for various parts of internal control. B. Reduces the company’s need to obtain expensive business interruption insurance. C. Minimizes the possibility of employing person with dubious records in positions of trust. D. Protects employees who made unintentional errors from possible monetary damages resulting from such errors. 14. Which one of these is not a type of evidence that would be used for both obtaining an understanding of the control structure and testing the controls? A. Inquiries B. Inspection C. Observation D. Reperformance 15. An error in which an item is posted to the wrong personal account, or the incorrect calculation of an amount consulting an original entry is a(n): A. Error of omission B. Error of commission C. Error of principle D. Counterbalancing error 16. A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner? A. Footing the purchases journal B. Tracing totals from the purchases journal to the ledger accounts. C. Sending written quarterly confirmations to all vendors. Page 15 of 30

D. Recording vendors’ monthly statements with subsidiary payable ledger accounts. 17. In the consideration of internal control, the effectiveness of the design of controls is tested by: A. Flowcharts B. Test of controls C. Substantive tests. D. Decision tables 18. Test of controls, for efficiency, are frequently done at the same time as: A. Analytical procedures B. Compliance test C. Substantive tests of transactions. D. Substantive test of balances.

19. The test for recorded sales for which there were no actual shipments, the auditor traces from the A. Bill of lading to the sales journal B. Sales journal to the bill of lading C. Sales journal to the accounts receivable subsidiary ledger D. Bill of lading to the to the supporting customer order and sales order 20. To test the possibility of a shipment to a fictitious customer, the auditor traces from the A. Bill of lading to the credit authorization B. Credit authorization to the bill of lading C. Accounts receivable ledger to the bill of lading D. Sales journal to the accounts receivable ledger 21. An effective procedure to test for unbilled shipments is to trace from the A. Sales journal to the shipping documents B. Shipping documents to the sales journal C. Sales journal to the accounts receivable ledger D. Sales journal to the general ledger sales account 22. A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA’s best direction of test is from the A. Meter department recorded to the billing (sales) register B. Billing (sales) register to the meter department records C. Accounts receivable ledger to the billing (sales) register D. Billing (sales) register to the accounts receivable ledger 23. The Smith Corporation uses prenumbered receiving reports that released in numerical order from. Two days before the count all receiving reports are stamped “before inventory”, and for two days after the count all receiving reports are stamped “after inventory”. The least efficient method for checking the accuracy of cut-off: A. Is to list the number of the last receiving report for items included in the physical inventory count. B. Is to observe that the receiving clerk is stamping the receiving reports properly. C. Is to test trace receiving reports issued before the receiving report to the physical items to see that they have been included in the physical count. Page 16 of 30

D. Is to test trace receiving reports issued after the last receiving report to the physical items to see that they not been included in the physical count. 24. An auditor concludes during the planning and internal control phase that client is not auditable because of deficient accounting records. Under such circumstances, the auditor must NOT: A. Withdraw from the engagement without issuing a report. B. Issue a disclaimer of opinion. C. Issue an adverse opinion. D. Send the client a bill for services rendered. Information technology 1. According to PAPS 1013, this is a shared public network that enables communication with other entities and individuals around the world. A. B. C. D.

Wide-area network World wide web Internet Broadband connection

2.

The program flowcharting symbol representing a decision is a: A. Triangle B. Circle C. Rectangle D. Diamond

3.

When evaluating IT controls, the auditor is faced with the auditing around the computer or auditing through the computer. When auditing around the computer, the processing of computer applications is not investigated. This is appropriate when: A. Inherent risk is assessed to be high B. The processing logic of the program used is complex C. The computer system is simple or uses proven commercial software D. Most of the controls reside within the computer application itself

4.

This refers to the way various IT system are integrated with one another and thus operate, in effect, as one system. A. Data integrity B. Synergy principle C. Process alignment D. Network configuration

5.

It is a state implying data has certain attributes: completeness, soundness, purity, and veracity. A. Data integration B. Data integrity C. Data verification D. Data statement

6.

Which of the following are characteristic of a CIS organizational structure? A. B.  Concentration of functions and knowledge yes no  Concentration of programs and data no yes

C. yes yes

D. no no

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7.

In a CIS environment, which of the following is not a control objective, associated with processing controls? A. Transactions are authorized B. Processing is complete C. All changes to computer records are accurate D. Access to computer files is limited to authorized personnel

8.

An auditor most likely would test for the presence of unauthorized CIS program change by running a A. Program with test data B. Check digit verification program C. Source code comparison program D. Program that computes control totals

9. A manufacturer of complex electronic equipment such as oscilloscopes and microscopes has been shipping its products with paper manuals but wants to reduce the cost of producing and shipping this documentation. Of the following, the best medium for the manufacturer to use to accomplish this is ________________________ technology. A. Write once, read many B. Digital audio tape C. Compact disc/read-only memory D. Computer output-to-microfilm 10. Which of the following statement is correct regarding the internet as a commercially viable network? A. Organizations must use firewalls if they wish to maintain security over internal data. B. Companies must apply to the Internet to gain permission to create a homepage to engage in electronic commerce. C. Companies that wish to engage in electronic commerce on the Internet must meet required security standards establish by the coalition of Internet providers. D. All of the above 11. Which of the following represents a type of applications software that a large client is most likely to use? A. Enterprise resource planning B. Operating system C. General IT controls over the service organization D. End-user license agreement controls 12. Controls that the organization which assumes, in the design of its service, will be implemented by user entities, and, if necessary to achieve control objectives, are identified in the description of its system. A. Complimentary user entity controls B. Service auditor controls C. General IT controls over the service organization D. End-user agreement controls 13. A type II report that comprises the following:

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A. A description, prepared by management of the service organization, of the service organization’s system, control objectives and related controls, their design and implementation as at a specified date or throughout a specified period and, in some cases, their operating effectiveness throughout a specific period. B. A report by the service auditor with the objective of conveying reasonable assurance that includes the service auditor’s opinion on the description of the service organization’s system, control objectives and related controls, the suitability of the design of the controls to achieve the specified control objectives, and the operating effectiveness of the controls. C. A description of the service auditor’s test of the controls and the results therof. D. All of these 14. An auditor who, at the request of the service organization, provides an assurance report on the controls of a service organization. A. Requested auditor B. Subservice auditor C. Service auditor D. Practitioner 15. An auditor who audits and reports on the financial statements of a user entity. A. Requested auditor B. User auditor C. Service auditor D. Practitioner 16. Which of the following phrases best describe a service organization? A. A third-party organization (or segment of a third-party organization) that provides services to user entities that are part of those entities information system relevant to the financial reporting. B. The policies and procedures designed, implemented and maintained by the service organization to provide user entities with the service covered by the service auditor’s report. C. A service organization used by another service organization to perform some of the service provided to user entities that are part of those user entities information system relevant to financial reporting. D. An entity that uses a service organization and whose financial statements are being audited. 17. Many clients now have their data processed at an independent computer service center rather than have their own computer. The difficulty the independent auditor faces when a computer service center is used is: A. Gaining the permission of the service center to review their work. B. Finding compatible programs that will analyze the service center programs. C. In trying to abide the code of ethics to maintain the security and confidentiality of the client’s data. D. In determining the adequacy of the service center’s internal controls. 18. Which of the following best describe encryption? A. The electronic transmission of the documents between organizations in a machine-readable form.

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B. The process of transforming programs and information into a form that cannot be understood without access to specific decoding algorithms. C. A combination of hardware and software that protects a WAN, LAN or PC from unauthorized access through the internet and from the introduction of unauthorized or harmful software, data or other material in electronic form. D. A communication network that servers users within a confined geographical area. Audit evidence and Substantive Testing 1. A document which the auditor receives from the client, but which was prepared by someone outside the client’s organization, is a(n): A. Confirmation B. Internal document C. External document D. Inquiry 2.

These generally include the records of initial entries and supporting records, such as checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers; journal entries and other adjustments to the financial statements that are not reflected in formal journal entries, and records such as work sheets and spreadsheets supporting cost allocations, computations, reconciliations and disclosures A. Accounting system B. Source documents C. Accounting records D. Audit evidence

3.

Amounts and other disclosures relating to the current period. A. Notes to the financial statements B. Current period figures C. Existing disclosures D. Financial statement ancillaries

4.

Which one of the following statements is true? In deciding on substantive tests of transactions, A. Some procedures are commonly employed on every audit regardless of the circumstances B. All procedures are dependent on the adequacy of the controls and the results of the test of controls C. Results obtained in the prior year’s audit will not affect the procedures used this year D. The materiality of the item will not influence the choice of procedures used

5.

The general audit objectives of validity and completeness emphasize opposite audit concerns: A. 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 only.

6.

The following statements were made in a discussion of audit evidence between two CPAs. Which statement is not valid concerning evidential matter?

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A. “I am seldom convinced beyond all doubt with respect to all aspects of the statements being examined.” B. “I would not undertake that procedure because the best result would only be persuasive and i am looking for convincing evidence.” C. “I evaluate the degree of risk involved in deciding the kind of evidence I will gather.” D. “I evaluate the usefulness of the evidence I can obtain against the cost to obtain it.”

7.

The strongest criticism of the reliability of audit evidence that the auditor physically observes is that A. The client may conceal items from the auditor. B. The auditor may not be qualified to evaluate the items which he or she is observing. C. Such evidence is too costly in relation to its reliability. D. The observation must occur at a specific time, which is often difficult to arrange

8.

According to the PSA Glossary of Terms, this means to inquire into matters arising from other procedures to resolve them. A. Confirm B. Validate C. Verify D. Investigate

9.

Which of the following is one of the better auditing techniques that might be used by an auditor to detect kiting between intercompany banks? A. Review composition of authenticated deposit slips. B. Review subsequent bank statements C. Prepare a schedule of the bank transfers. D. Prepare a year- and bank reconciliation.

10. The most reliable form of evidence, than test of subsequent cash receipts, concerning the validity of a note receivable balance is a(n): A. Bill of lading B. External confirmation reply. C. Customer purchase order D. Sales invoice 11. An auditor should be able to collect and evaluate documentary evidence. When evaluating and interpreting evidence, the auditor must be on guard against the possibility of drawing unwarranted conclusions. An example of a valid conclusion is: A. Correct inventory valuation as determined from observation of the physical count. B. Client ownership determined from third-party inquires about consigned goods. C. Existence of a company travel vehicle determined from the examination of the paid invoice for the said vehicle. D. Proper accounts payable cut-off of reporting date as determined by a review of raw materials requisitions. 12. To determine the sales transactions have been recorded in the proper accounting period, the auditor performs a cut-off review. Which of the following best describe the overall approach used when performing a cut-off review?

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A. Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period B. Confirm year-end transactions with regular customers C. Examine cash receipts in the subsequent period D. Analyze transactions occurring within a few days before and after year end 13. An entity’s financial statements were misstated over a period of years due to large amounts of revenue being recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this irregularity by A. Scanning the general journal for unusual entries. B. Performing a revenue cut-off test at year end. C. Tracing a sample of journal entries to the general ledger. D. Examining documentary evidence of sales returns and allowances recorded after year end. 14. An entity has leased an asset and appropriately recorded a finance lease because of the existence of a bargain purchase option. In addition, the entity expressed that it is certain to exercise the option. The auditor should determine: A. Whether the interest rate used in computing the present value of the minimum lease payments is the interest rate implicit in the lease. B. That recorded cost in the lessee’s books is the same as the carrying value of the property in the books of the lessor immediately before the lease. C. That the leased property is being depreciated over the lease term. D. That the minimum lease payments include contingent rent and executor costs. 15. For which of the following account balances are substantive test of details least likely to be performed unless analytical procedures indicate the need to extend detail testing? A. Payroll expense B. Marketable securities C. Research and development costs D. Legal expense 16. One payroll audit objective is to determine whether the employees pay in amounts recorded in the payroll journal. To achieve this objective, the auditor should: A. Determine whether a proper segregation of duties exists between recording payroll and reconciling the payroll bank account. B. Requesting that a company official distribute all pay checks. C. Reconcile the payroll bank account. D. Compare cancelled payroll checks with the payroll journal 17. Which of the following income statement accounts is likely to be verified in conjunction with the audit of a balance sheet account? A. Depreciation expense B. Interest revenue C. Travel and entertainment D. Uncollectible accounts expense. Fraud, error and Non-Compliance 1. The best and most widely accepted model for explaining why “good people” commit fraud is known as the: A. Trust violation theorem Page 22 of 30

B. Cressey model C. Fraud triangle D. Gloria Zamora model 2.

An intentional act by one or more individuals among management those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. A. Non-compliance B. Error C. Misstatement D. Fraud

3.

The following statements properly describe the pillars of the Fraud Triangle. Select the exception: A. Incentive or pressure to commit fraudulent financial reporting may exist when management is under pressure, from sources outside or inside the entity, to achieve an expected (and perhaps unrealistic) earnings target or financial outcome- particularly since the consequences to management for failing to meet financial goals can be significant. B. A perceived opportunity to commit fraud may exist when an individual believes internal control can be overridden, for example, because the individual is in a position of trust or has knowledge of specific weaknesses in internal control. C. Individuals may be able to rationalize committing a fraudulent act. Some individual possess an attitude, character or set of ethical values that allow them knowingly and intentionally to commit a dishonest act. D. Events or conditions indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud, but not necessarily confirm the presence of fraud.

4.

If there is fraud involving the collusion of several employees that includes the falsification of documents, the chance that such fraud would be uncovered in a normal audit is: A. Zero B. Unlikely C. 50-50 D. Very high

5.

This is a kind of fraud committed by making entries of fictitious payments or failure to enter receipts. A. Misappropriation of goods B. Misappropriation of cash C. Falsification of accounts D. Lapping

6.

Which of the following is an example of fraudulent financial reporting? A. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold. B. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses. C. An employee steals inventory and the “shrinkage” is recorded in cost of goods sold. D. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

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7.

Should the auditor uncover circumstances during the audit that may cause suspicions of management fraud, the auditor must: A. Issue an adverse opinion B. Issue a disclaimer C. Evaluate their implications and consider the need to modify audit evidence D. Withdraw from the engagement

8.

If an illegal act is discovered during the audit of a publicly held company, the auditor should A. Notify the regulatory authorities B. Determine who was responsible for the illegal act C. Intensify the examination to identify all illegal acts D. Report the act to high level personnel within the client’s organization and to the audit committee.

9.

What is the independent auditor’s responsibility prior to completion of field work when he believes that a material fraud may have occurred? A. Notify the appropriate law enforcement authority. B. Investigate the person involved, the nature of the fraud, and the amounts involved C. Reach an understanding with the appropriate client representative as to the desired nature and extent of subsequent audit work. D. Continue to perform normal audit procedures and write the audit report in such way as to disclose adequately the suspicions of material fraud.

Audit Sampling 1. If the auditors were responsible for making certain that the assertions of management in the statements were correct, A. Bankruptcies could no longer occur B. Bankruptcies would be reduced to a very small number C. Audits would be much easier to complete D. Audits would not be economically feasible. 2.

This refers to the mathematical complements of sampling risk. A. Assurance error B. Tolerable levels C. Expected error D. Confidence levels

3.

Which of the following statements is NOT correct? A. It is acceptable for auditors to use statistical sampling methods. B. It is acceptable for auditors to use non-statistical sampling methods C. The primary benefit of statistical sampling methods is the quantification of sampling risk. D. An advantage of using statistical sampling is that the cost/benefit ratio is always positive.

4.

Which of the following statements is a valid criticism of the use of non-statistical sampling methods? A. Many audits test, such as footing of journals, must be performed outside a statistical context. B. The cost of performing random selection of testing often exceeds the benefits. C. Non-statistical sampling does not differ substantially from statistical sampling method. Page 24 of 30

D. Conclusions may be drawn in more precise ways when using statistical sampling methods. 5.

Which of the following statements regarding documentation of the sample selection process is NOT true? A. Regardless of the method used in selecting a random sample, it is necessary to have proper documentation. B. When comparing statistical sampling to judgmental sampling, it is more important that statistical sampling be properly documented because of its mathematical nature. C. Minimum documentation would include sufficient information to permit the reproduction of the sample at a later date. D. For documentation, it is permissible for the auditor to include in the working papers a copy of the table sued, with the random numbers identified.

6.

Unless a precise statement of what constitutes an attribute is made in advance, the staff person who performs the audit procedure will have no guidelines: A. For identifying deviations B. To determine what documents to obtain and review for the observation test. C. To use when evaluating the results of analytical review procedures. D. For performing all three of the above.

7.

Which of the following statements regarding replacement and non-replacement sampling is NOT true? A. In replacement sampling, an element in the population can be included in the sample more than once. B. In non-replacement sampling, an element in the population can be included in the sample only once. C. If the random number corresponding to an element is selected more than once in nonreplacement sampling, it is treated as a discard the second time. D. Auditors rarely use replacement sampling.

8.

When the auditor intends to evaluate a sample statistically, the ONLY acceptable selection method is: A. Probabilistic selection B. Judgmental selection C. Haphazard selection D. Book selection

9.

When using statistical sampling, which of the following need not to be known to evaluate the results of an attribute sample? A. Sample size B. Risk of assessing control risk too low C. Number of deviations in the population D. Number of deviations in the sample

10. The variables sampling method which generally results in smaller sample sizes than any other method is: A. Difference estimation B. Mean per unit estimation C. Ratio estimation Page 25 of 30

D. Peso-unit sampling 11. Which of the following actions should an auditor, who discovers a misstatement in a sample of items taken from a population, not take? A. Increase the sample size to obtain additional evidence B. Discard the sample and replace it with a new sample C. Project the sample error to the population as a whole D. Consider issuing a qualified opinion 12. Increase in the planned allowance for sampling risk have effect on required sample size? A. Increases B. Decreases C. No effect D. Indeterminate 13. The auditor’s failure to recognize an error in as amount or an error in an internal control data processing procedure is describe as: A. Statistical error B. Sampling error C. Standard error of the mean D. Non-sampling error 14. Non-sampling errors occur when the audit test do not uncover existing exceptions in the: A. Population B. Sample C. Planning stage D. Financial statements 15. If an auditor, without statistical sampling, selects a sample of one hundred items from a population and finds two exceptions, the auditor: A. Can conclude that the sample deviation rate is 2 percent B. Can conclude that the population deviation rate is 2 percent C. Can compute the highest deviation rate expected in the population D. Cannot make any conclusions about either the sample or the population. 16. If an auditor tested 50 transactions and found two deviations from an important control procedure, the auditor could conclude from this test that the: A. Tolerable rate is 0.04 B. Critical rate of occurrence is 0.04 C. sample had two deviations D. expected population deviation rate is 0.04 17. GQ, CPA audited the May company accounts receivable with a book value of P3,000,000 and 4,400 accounts. In a sample of 400 accounts, GQ found P13,200 understatement errors. The projected likely misstatement for the sample is: A. B. C. D.

P13,200 P145,200 P272,727 P435,600 Page 26 of 30

18. A misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population A. Value-weighted misstatement B. Non-sampling risk C. Sampling error D. Anomaly 19. A type of value-weighted selection in which sample size, selection and evaluation results in a conclusion in monetary amounts. A. Random sampling B. Monetary unit sampling C. Stratified sampling D. Financial sampling 20. Shane, CPA was considering the sample size needed for a selection of sale invoices for the test of controls audit of the Lay My Love Creamery Corporation’s internal controls. He presented the following information for two alternative cases: Case A Case B  Acceptable risk of under reliance on controls High Low  Acceptable risk of over reliance on controls High Low  Tolerate deviation rate High Low  Expected population deviation rate Low High Shane should expect the sample size for Case A to be: A. Larger than the sample size for Case B B. Smaller than the sample size for Case B C. The same as the sample size for Case B D. Not determined relative to the Case B sample size Using the Work of Internal Auditors 1. Which of the following is not a responsibility that should be assigned to a company’s internal audit department? A. Evaluating internal control B. Balancing subsidiary ledgers C. Reporting on the effectiveness of operating segments. D. Investigating potential merger candidates 2.

The independent auditors might consider the procedures performed by the internal auditors because: A. They are employees whose work must be reviewed during substantive testing. B. They are employees whose work might be considered. C. Their work impacts upon the cost/benefit trade-off in evaluating inherent limitations. D. Their degree of independence may be inferred by the nature of their work.

Considering the Work of Another Auditor (Audits of Group Financial Statements) 1. Morgan, CPA, is the principal auditor for a multi-national corporation. Another CPA has examined and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the other auditor, as

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well as the quality of the other auditor’s Audit. With respect to Morgan’s report on the consolidated financial statements, taken as a whole, Morgan: A. Must not refer to the audit of the other CPA B. Must refer to the audit of the other CPA C. May refer to the audit of the other CPA D. May refer to the audit of the other CPA, in which case Morgan must include in the audit report on the consolidated financial statements a qualified opinion with respect to the audit of the other CPA. 2.

Which of the following terms best describes component management? A. An auditor who, at the request of the group engagement team, performs wok on financial information related to a component for the group audit. B. An entity or business activity for which group or component management prepares financial information that should be included in the group financial statements. C. Management responsible for preparing the financial information of a component. D. The materiality level for a component determined by the group engagement team.

3.

All the components whose financial information is included in the group financial statements, are collectively known as: A. Group B. Consolidation C. Pooling D. Business combination

4.

In the context of PSA 600 (Revised Redrafted), a group: A. May have more than one component B. May consist entirely of one component C. Always has more than one component D. Cannot be determined without additional information

Audit Reports and Completing the Audit 1. A matter whose outcome depends on future actions or events not under the direct control of the entity but that may affect the financial statements. A. Uncertainty B. Inconsistency C. Provision D. Significant risk 2.

According to the PSA glossary of Terms, an auditor is associated with financial information when: A. The auditor attaches a report to that information B. The auditor consents to the use of that auditor’s name in a professional connection C. Both a and b D. Neither a and b

3.

The data on which those with the recognized authority assert that they have prepared the entity’s complete set of financial statements, including the related notes, and that they have taken responsibility for them. A. Date of the financial statements B. Date of approval of the financial statements Page 28 of 30

C. Date of the auditor’s report D. Date the financial statements are issued 4.

The date of the end of the latest period covered by the financial statements, which is normally the date of the most recent balance sheet in the financial statements subject to audit. A. Date of management approval B. Date of the financial statements C. Date of the audit report D. Date of the financial statement issuance

5.

Subsequent events refer to event that occur after the date of the financial statements and are: A. Favourable to the entity being audited B. Unfavourable to the entity being audited C. Either favourable or unfavourable to the entity being audited D. Neither favourable nor unfavourable to the entity being audited.

6.

Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustments or disclosure essential to a fair presentation of the financial statements in conformity with GAAP. Which of the following procedures would be least appropriate for this purpose? A. Confirm as of the completion of fieldwork accounts receivable which have increased significantly from the year-end date. B. Read the minutes of the board of directors C. Inquire of management concerning events, which may have occurred. D. Obtain a lawyer’s letter as of the completion of fieldwork.

7.

A major customer of an audit client suffers a fire prior to completion of year-ended field work. The audit client believes that this event could have a significant direct effect on the financial statements. 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

8.

Which of the following events occurring after the issuance of an auditor’s report most likely would cause the auditor to make further inquires about the previously issued financial statements? A. A technological development that could affect the entity’s future ability to continue as a going concern B. The discovery of information regarding a contingency that existed before the financial statements were issued. C. The entity’s sale of subsidiary that accounts for 30% of the entity’s consolidated sales D. The final resolution of a lawsuit explained in a separate paragraph of the auditor’s report.

9.

Soon after Boyd’s audit report was issued, Boyd learned of certain related party transactions that occurring during the year under audit. These transactions were disclosed in the notes to financial statements. Boyd should: A. Plan to audit the transaction during the next statements. B. Recall all copies of the audited financial statements Page 29 of 30

C. Determine whether the lack of disclosure would affect the auditor’s report D. Ask the client to disclosed the transactions in subsequent interim statements 10. An auditor concludes that the omission of a substantive procedure considered necessary at the time of the examination may impair the auditor’s present ability to support the previously expressed opinion. The auditor need not apply the omitted procedure if A. The risk of adverse publicity or litigation is low B. The results of other procedures that were applied tend to compensate for the omitted. C. The auditor’s opinion was qualified because of a departure from GAAP. D. The result of the subsequent period’s test of controls makes the omitted procedures less important. 11. On march 15, 2009, Kent CPA, issued an unqualified opinion on a client’s audited financial statements for the year ended December 31, 2008. On May 4, 2009, Kent internal

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