Preweek Auditing Theory 2014

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CPA REVIEW SCHOOL OF TH£ PHILIPPINES

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AUDITING THEORY

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ATPW-7501 CPA Review

1. The Philippine Framework for Assurance Engagc!ments identifies two types of assurance engagements a practitioner ts pern�ittec to pe rfc rm: a reasonable assurance engagement and a limited assurance engagement. Which ot the follo"'!ing is the objective of a limited assurance engagementi A. A reduction in assurance engagement risk tc a very low level in the circu01stances of the engagement as a basis for a di�claimer ot the practitioner's conclusion. B. A reduction in assurance engagement r!�.k to an acceptably low level in the circumstances of the engagement as a basi� for a positive form of expression of the

practitioner's conclusion.

C. A reduction in assurance engagement nst. to a leve! that is acceptable in the circumstances of the en agement: as a .basis •fvr ct negative form of expression of the

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practitioner's conclusion. D. A reduction in assurance engagement ris1: to. a level that is acceptable in the circumstances of the engagement �s a basi� for a modified form of expression of the practitioner's conclusion. •

2. The subject matter of an assurance eng2gemen1: can take the following forms, except • A. Historical or prospective financial statemel'lts. B. Performance of an entity that could indic•te effi,iency and effectiveness. • C. The entity's internal control. D. Evaluation of a capital investment proposal. 3.

This refer�; to the audit procedures that, in tile cuditor's judgment and based on the PSAs are deemed appropriate in the circumstanc� to Khieve the objective of an audit. C. Audit sampling. A. Analytical procedures. B. Scope of an audit. D. Dccumentation.

4. A firm of CPAs may use policies and procedure� such as notifying professional personnel as to the names of audit clients having publicly '1eld securities and confirming periodically with such personnel that prohibited ii:l a tio ns do not exist. This is done to achieve ! ••:• effective quality control in which of the tollo'l'.!ing 9reas?· A. Acceptance and continuance of clients. B. Human resources. C. Ethical requirements. D. Leadership responsibilities for quality within tne firm. • •

5 . The decision as to whether the criteria are s11itable involves considering whether the subject matter of the assurance engagement is capable of reasonably consistent evaluation or measurement using such criteria. Which of the following characteristics is not considered necessary in determinin�! whethe ·the criteria are suitable? A. Relevance. C. Reliability. B. Neutrality. D. Sufficiency. 6. Which of the following conditions most i1kei·y w< 1U1d pose ·the greatest risk in accepting a new audit engagement> A. Staff will need to be rescheduled to rnver thi0; new client. B. There will be a client-imposed scope limitatio1. C. The firm will have to hire an expert in one acdi;: area. D. The client's financial reporting s1stem has be::n in place for 10 years. 7.

As a condition of obtaining a Joan from Metro Ma n i !:3 Be l.:, Maasim Corp. is �quired to submit . ated statements of income, changes •an audited statement of financial position but not t�e in equity, or cash flows. Maasim would like to e-1qa·,;e ,j CPA to audit only its statement of financial position. Under these circumstances. rl1e :PA It May not audit only Maaslm's statement: �f fir ,'. i ncia l position if the amount of tlie loan is material to the financial statements t;e off cer and the chief financial officer? A. "Sufficient evidential matter has been ma,je available to the auditor to permit the •

issuance of an unqualified opinion." B. "There are no unasserted claims or assessments that our lawyer has advised us are

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probable of assertion and must be disclosed."

"We have no plans or intentions that msed adjustments that collectively are not material, and wants the auditor to issue the r �port based on the unadjusted numbers. Which of the following statements is correct regarding the financial · statement presentation? A. The financial statements are free from material misbtatement, and rlo disclosure is 1 required in the notes to the financial statemmts.

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B. The financial statements do not conform witri PFRS. C. The financial statements contain· unadjustE:d misstatements that should result in ·a

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qualified opinion. D. The financial statements are free f.-om ma0:erial misstatement, but disclosure of the proposed adjustments is requi red in the notE·S to the financial statements. .

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An auditor concludes that there is a mate�ial in. :d11sistency in the other information in an annual repon: to shcireholders containing aL.dited financial statements. The auditor

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believes that the financial statements o not re � 1uire- revision, but the client is unwilling to revise or eliminate the material inconsistenc> in the ofher information. Under these

circumstances, what action would the auditor m•)st likely take' Consider the situation closed because the other information is not in the audited

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financial statements.

Issue a n "except for" qualified optt1ion "aft invoices. •

31. An auditor's tests of controls for con�pletene:;s for the revenue cycle usually include determining wnether: A. Each receivable is collected subsequent tei tl 1 2 year end. B. An invoice is prepared f�r each shippinQ doo 11Vent.

·c. Each invoice is supported by a customer purr:ha"se orde:. D. Each credit memo is properly approved.

32. An auditor is testing the reasonableness of div1c;end income from investments in publicly­ . .

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held companies. The auditor most likely would compute the amount that should have been received and recorded by the cliem by: A. Reading the details of the board of directors' meetings. Page � of

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iTAREVIEWSCHOOLOFTHE r HILIPP!NES(C:PAG,l '

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e. Confirming the details with the investee corr panies' registrars.

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C. Electronically accessing the details of divider;d records on the Internet. , D. Examining the details of the client's most recent cutoff bank statement.l

33: An auditor who uses the work of an ex'pert ma�' refer to the expert in the auditor's.report if the:

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Auditor bel ieves that the expert's findings ar� reasonable in the circumstances.

B. Expert's findings support the related assertirns in the financial statements.

C. Auditor modifies the report because of the difference between the client's and the expert's valuations of an asset. D . Expert's findings provide the auditor" wit1 greater assurance of reliability about management's representations.

34 . . In attri bute sampling, a 25% change in which of the fol lowing factors will have the smallest effect on the size of the sample? A. Tolerable rate of deviation . B. Number of items in the population. C. Degree of assurance desired.

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0. Planned assessed level of control risk.

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As a result of sampling procedu,es applied a�; tests of controls, an auditor i ncorrectly assesses control risk higher than a11propriate. l11e 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.

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B. The deviation rate in the auditor's samp!e e>:ceeds the tolerable rate, but the deviation . rate in the population is less than th� to:erable rate . C. The deviation rates of both the auditor's sample and the population �xceed the tolerable rate. ·

D. The deviation rates of both th� auditor's sample and the population are less than the tolerable rate.

36.

For which of the following audit tests would a CPA most likely use attribute sampling? A. Identifying entries posted to incorrect accow1ts. B. Estimating the amount in an expense accour1t. .

C. Evaluating the reasonableness of depreciaticn expense. D. Selecting receivables fo r confirmation of aw ;unt balances .

37 . • The blank form of acco unts receivab:e

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confirmations rnay . '

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be less efficient than the

positive form because: ft.. . Shipping documents need to be inspected. B. Recipients may sign the forms without: propEr investigation. c. More nonresponses to the requests are likely to occur. D. Subsequent cash receipts need to be verifiec . •

38.

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An accountant agrees r.o the client's request. to i:ha nge an engagement from a review to a . compilation of financial statements. Thfl compilation report should include: . A. No reference to the origin al engag ement:

Reference to a depa rture from PSP..s . . c. scope l i mitations that may have resulted in the change of engage ment. y perfor med. D. Inform ation about review procedures alread B.

prede,�essor auditor should include questions 39. A successor auditor's inquiries of the

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regarding: · 1·ty 1 . . · dgment a bo�t ma tena a n JU 1t n�k . A. The predecessor's evalu ation of au? , s audit rep rt wa issued. essor edec p ;:he � s1.nce � red occur that ts even B. Subs eque nt as to the r failing to settle their obligations because of economic, political and social factors oi' countenarty;s home country and external to the

customer or counterparty.

b.

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Country•risk

The risk of loss arising from future movements 1n the exchange rates applicable to foreign currency assets, liabilities, rights and obligation i.

Currency risk

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The risk of loss arising from factors s ch as 0fail· Jre to maintain safe custody or negligellce in the management or assets on behalf ?f ottler p3rties. Fiduciary risk

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The risk that a movement in interest rates wou d have an adverse effect on the value of assets and liabilities or would affect interest cash flow». Interest rate risk

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The risk that contracts are documented incorrectly or are not legally enforceable in the relevant jurisdiction in which the contracts are to be enfcrced or where the counterparties operate.

Legal and documentary risk f.

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The risk of loss arising from the changes in the I >an k's ability to sell or dispose of an asset.

Liquidity risk

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The risk associated with the imperfections and subjectivity of valuation models used to determine the values of assets or liabilities. Modeling risk

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The risk of direct or indirect loss resulting from inadequate or failed internal proce�ses, people and systems or from external events. Operatic•nal risk

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The risk of loss arising from adverse changes i n market prites, including interest rates, foreign exchange rates, equity and commodity prices arid from movements in the market prices of •

investments. Price risk j.

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The risk o f loss arising from failure to comply with regulatory or legal requirements i n the relevant jurisdiction in which the bank operates. Regulatory risk

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The nsk of failure or a customer or counterpart} to perforrn the terms of a �ontract. This failure creates the need tb replace the failed tra�spction with another at the current market ' price. It is sometimes called performance risk. Replacement risk The risk of losing business because

of negative.public opinio.n and

consequential damage to the

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bank's reputation arising from failure to proper1•1 manage some of the above risks, or from

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involvement in improper or illegal activities by the bank or its senior management, such as money laundering or attempts to cover up lossEs. Reputational risk m. The risk that one side of a transaction'will be Sf'ttled without value being received from.the customer or counterparty. This will generally re suit in toss to the bank of the full principal amount. Settlement risk

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The

risk of loss arising

from the possi bility of th� bank not having sufficient funds to meet 11'$

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obligations, or from the bank's inability to acce�s capital markets to raise required funds. Solvency risk

The risk of loss arising when a counterparty's ohligation is not denominated In the counterparty's home currency. The counterpany may not obtain the currency of the obligation irrespective of the counterparty's particular fina,icial condition. Transfer risk

24. In the exercise of its power organized the

to conduct

O\'ersight into the quality of audits, the BOA

De pa rtme nt of t he an

Philippine Institute of Certified Public

Accountants (PICPA) co conduct an indepepderit study, appraisal; (tr. review of the quality of audit of financial statements. • A. Quality Assurance Review B. Quality Control Review c. Independent Qual ity AssurancEi Review D. Independent Qual ity Control Review ____

Review Department (QARD) of the PICPA shal � be 25. The operation of the Quality Assurance

C. Oversight Committee D. Acceiu ntab i l ity Board

supervised by a/an A. Executive Committee B. sup ervisory Board

is an incorrect statement concerning the term of office of the 26. Which of the following mb ers? Executive co mm ittee me rminus with their Chairman and me 11bers shall be co-te the of office A. The ter of by the Boaro or PICPA. r earlie ced repla t unles BOA or PICPA respective term in the l be more than 3 shal case no in bers mem 0f the Cha irma n and B. The term of office ·

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public years . e to be in active practice of men: bers may continu and man Chair d by the Boa rd. ose C. The certain restrictions imp . their te�m , su b·ect to g durin y ointees. app tanc accoun ll be from the Board'5" sha e itte J Comm ve the E.xecua ' . D. The Chairman of . •

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ATPW-750:J

27. The Head of the QARD who . will be appo.. nte9 by · :he Executive Committee is the A. Chief Inspector _ C. Cfuef � uditor . . . B. Chief of Adm inistration . . 0 . Chief l.luality Assu ra nce Reviewe r

28. Who i � responsible for the non-tec hnical aspect of the QAR program? A. Chief Inspector 8.

Chi ef of Administration

C. Assistant to the Chief I n spe cto r

Q. Chairman of the Executive Committee

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The QAR program covers all CPAs in A. Public Accou nting B. Government

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C. Comm =rce and Industry

D . Educat�on/Academe ·

in p u bl ic practice are required to reg1!;ter with the QAR program · under the prescribed category. Those whose clients are pu bl ic -in te rest entities (listed and no t-lis te.d but with pub lic accountability) should register un jer A. Category A C. Categ 1 iry C

CPAs

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B. Category B

c. Categilry D

Section 19 provides that CPA practitioners sho ul d b1! registered in accordance with the following

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Catego ry A - registration for CPA practitio1.1ers handling clients that use the full IFRS or their Philippine equivalents. These would c•iver CPA pra cti tioners auditing �ublic-interest entities (listed and not-listed but With public ilCCOUntability). Catego ry B - registration for CPA practitioners handling clients that. use the IFRS or their Philippine equivalents for Small and Medium· ;ized enterprises.

What is the effectivity date 'of the BOA Re!jolutlof\

A. Ju ne

4, 2008

8. June 20, 2008

32.

�C>. 88 (Seri es of 200B)

rules and regulations for the accreditation of aG ounting tea chers?

prescribing the

C. Decei':1ber, 3 l , 2008 • D. June • W, 2008 •

Which of the following requirements for the accredi tation of acc0unting teachers shall not apply to thos e CPAs cilready engaged in teach·ng as of the effe ctivity date of the Rules and Regulations? I. Poss essio n of relevant Master's degree.

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III. IV.

Co mp leti on of 12 units of re levant education s ubj ects from th e CHED recognized

schools.

A total of 3 years meaningful experience in actual accounting work either in Pu ql ic Practice, Commerce & Industry or Governr nent sector.

Proof that the CPA has undergone Conti nuing Professional Education (CPE).

A. I and II o nly 8.

II and III only

C. I and IV only J. II only

33. The following statements relate to the req u ire m ent to complete 12 units of relevant education subjects for the a ccredita tion of acco1 mting teachers. Which i s incorrect? A. For purposes of compliance, the �-2 unit:: may be earned from the undergraduate

education prograr.i or from a g1aduate .: �gree ,progra m . of! ,�flY Higher Education Institution (HEI) duly recog n i zed by CH Eb . . B. The 12 units meiy be earned from in-s·�rvice or in-house trainings on relevant . educa tion subjects offered by schools or tra; ning centers. •

C. The 12 units may be a combjnation of in-service trainings and units earned in an •

undergraduate or qraduate education progr;ims.

D. CPAs who have passed the Teacners Bo.3 rd Exams and are licensed Profess iona l Teachers should earn the 12 units through i i-service or in-house tra ini n gs: 34.

Which of the fol l o w i ng shall be considered proof of compliance with the CPE requirement for accreditation of accounting teachers7 I. Certification of CPE units from accredited •:PE provid e rs issued by the PICPA.

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II. Certificate of Attendance or other proofs �>r meaningful participation in other CPE programs as approved by the PRC/CPE Council 'llpon recommendation of the PICPA . of the individual CPA of a minim um of si)ty (60) cre"dit units earned for the past

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immediate 3 years. A. I only B . II only

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Either • or II D. Neither I nor II

C.

The Certificate of Accreditation issued by the-PRC to-an accounting teacher shall A. Be valid for 2 years and renewable every 2 yi:ars.

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B. Be valid initially for 3 years and renewable an:1ually. C. Remain in full force and effect unless revoked, cance!led or withdrawn . D. Be valid for 3 years and renewable every 3 yE ars.

36. According to the Transitory Provisions of the BOA Resolution No. 88, any tenured/fu] I

time/full load faculty member who does not meec the accreditation requirements as of tile effectivity date of the Rules and Regulations may be issued a Provisional Accreditation. Choose the correct statement. I. The Provisional Accreditation will be valid for a period not exceeding 3 years unless earlit!r withdrawn, revoked, or cancelled for cause by the BOA.

II. The Provisional Accreditation may be issuec! Dnly once and is no1 1 tenewable. The transitory provision shall also apply t•> returning teachers who have not· been teaching for the last 5 years. A. I only C . II and III only · B. I and II only D. I, II, c t;id III

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37.

In case of an initial public offering ( I PC) ct seCL:rities by a company, the inter-irn financial statements to accompany the Registration Statement (SEC Form 12-1, as amended) shall be audited by an external auditor accredited by t he A. Board of Accountancy ( BOA) B. Professional Regulation Commission (PRC) C. BOA/ PRC D. BOA/PRC and SEC (Securities a'hd Exchange Commission) •

38. The COA chairman and the two ( 2 ) commission.:!rs shall be appoi nted by the president: of the Philippines with consent of the Commission on Appointments for a term of• 5 years • C. 7 yea ..s D. 9 yea· ·s B. 6 years

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In an initial public offering of securities, a writcen communication from the inde�ndent accountant to an underwriter about proced1!res ,the accountant p�rformed on the • unaudited financial statements and sctieduli!S1 · accompanying a client's registration statement. Comfort letter

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efers to a company's maintaining a steady rat. of earnings growth over a series of years, thereby providing no reason for the financial markets to impute unexpected risk in the •

company or in expected stock prices. Income .Smoothing

41. All the components whose financia l ' inform2tion is included in 'the group financial •

statements. Group

nformation of more than one component. 42. Financial statements that include the financial

statements aggregating the financial information It also refers to combined financial but are under commo n control . pare;nt no have that nents compo prepared by

s Group Fina ncia l Statement

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. PRE WEEK AUDITING THEORY 7502

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