CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING THEORY FEBRUARY 14, 2015 FIRST PREBOARD EXAMINATION SATURDAY, 10:00AM ~ 11:30AM n 4 SETA INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. FULLY SHADE ONLY ONE BOX FOR EACH ITEM. STRICTLY NO ERASURES ALLOWED, $k Which of the following is considered audit evidence? Qral statements Written Auditor made by management Communications Observation A Yes No No B. No. Yes Yes No. No Yes Dy Yes Yes Yes fi BFF Manufacturing Co. received a substantial sales return on December 30, 2011, but the ‘credit memorandum for the return was not prepared and recorded until March 4, 2012. The retumed merchandise was induded in the year-end physical inventory taken on December 31, 2013. The most effective procedure for preventing this type of error is to A. Prepare an aged schedule of accounts receivable monthiy. 8, Prenumber and account for all credit memorandums. _C: Reconcile the subsidiary accounts receivable ledger with the general ledger contro! account monthly. D.) Prepare and numerically control recelving reports for all materials receved. 3. ____risk reflects the possibility that the information upon which the business decision Was made was inaccurate. A. Client acceptance. ©) information. B. Business. Dy Control. 4, Financial statement users often receive unreliable financial information from companies. Which of the following is nat a common reason for this? ‘A. Complex exchange transactions. B. Remoteness of information, G Voluminous data, ©) Each of the above choices is a common reason for unreliable financial information. 5. An auditor is planning an audit engagement for a new client in a business with which he is unfamiliar. Which of the following would be the most useful source of information during the preliminary planning stage, when the auditor is trying to obtain a general understanding of audit problems that might be encountered? Client manuals of accounts and charts of accounts. Onis ‘Audit Guides. Prior-year working papers of the predecessor auditor. D, Latest annual and interim financial statements issued by the client. #6. A financial statement audit client has an information processing system where all information Is transmitted, processed, and maintained electronically. Because the company has very litle tangible data available, the auditor has decided that it will be impossible to do enough substantive testing to reduce the risk of material misstatement to an acceptably ow level. What should the auditor do in that situation? ‘A. Express a qualified opinion or disclaim an opinion. B. Withdraw from the engagement. Page 1 of 12 Pages(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA FIRST PREBOARD EXAMINATION 15 / SATURDAY / 10: ©) Perform additional tests of controls to reduce the risk of material misstatement. . Recommend that the client convert a portion of the information pt 1g system to a ‘manual system so backup documentation can be made available to the; auditor. 7. An examination of part of an organization's procedures and methods for the purpose of luating efficiency and effectiveness is what type of audit? ‘Operational audit, i Production audit. . { ¢. Compliance audit. | ; dD. Financial statement audit. | i 8. an auditor has identified the controller's review of the bank reconciliatior| as a control to test. In connection with this test, the auditor Interviews the controller to| understand the ific data reviewed on the reconciliation. In addition, the auditor verifi¢s that the bank fecondliation is property prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of au Procedures do these actions illustrate? | A. Observation and inspection of records. ‘Confirmation and reperformance. Inquiry and inspection of records. ! *” Analytical procedures and reperformance. AK The overall attitude and awareness of an entity’s board of directors conceming the importance of internal control usually is reflected in its ‘A. Computer-based controls, System of segregation of duties. Control environment. ” Safeguards over access to assets. 10. An exception in a test of control provides only an indication of the likelihood of monetary misstatements in the financial statements because tess of controls do not reveal whether monetary misstatements have actually occurred. ‘An exception in a substantive test of transactions provides an indication of the likelihood of monetary misstatements in the financial statements because substantive tests of transactions do reveal whether monetary misstatements have actually occt c. A. True; False False; True | B. False; False ‘True; True | 11. The auditor has considerable responsibility for notifying users as to whether or not the stements are property stated. This imposes upon the auditor a duty to: | ‘A. Provide reasonable assurance that material misstatements will be detected. Be an insurer of the fairness in the statements. C. Be a guarantor of the faimess in the statements. D, Be equally responsible with management for the preparation of the financial statements. 12. Which of the following statements applies te consultation services engagements? A. Apractitioner should obtain an understanding of the internal control to assess control risk. B. A practitioner is not permitted to compile a financial forecast. A practitioner is to maintain an appearance of independence. D) A practitioner should obtain sufficient relevant data to complete the engagement. 13, Which of the following statements about tests of controls is most accurate? A. Auditing procedures cannot concurrently provide both evidence of the effectiveness of internal control procedures and evidence required for substantive tests. {Bests of controls include observations of the proper sagregaticn of duties that ordinarily may be limited to the normal audit period.‘CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA Aut C. Tests of controls should be based upon proper application of an appropriate statistical sampling plan. D. Tests of controls ordinarily should be performed as of the balance sheet date or during the period subsequent to that date. | 14, The auditor's best defense when existing material misstatements in the financial statements areinot uncovered in the audit is The client is guilty of fraudulent misrepresentation. (8) The audit was conducted in accordance with PSAS, ‘The financial statements are the client's responsibility. D. The cient is guilty of contributory negligence, HE During an audit engagement, pertinent data are compiled and included in the audit working ” papers. The working papers primarily are considered to be ‘A. A client-owned record of conclusions reached by the auditors who performed the engagement. Evidence supporting financial statements. (C,) Support for the auditor's representations as to compliance with relevant PSAs. i" A record to be used as a basis for the following year’s engagement, ~~ HE. Which of the following types of documentary evidence should the auditor consider to be the : Most reliable? ! AA sales invoice issued by the client and supported by a delivery receipt from an outside ‘trucker. ‘Confirmation of an account payable balance mailed by and returned directly to the auditor. FONT CORP Kg and not AR . Acheck, issued by the company and bearing the payee’s endorsement, that is induded with the bank statements malied directly to the auditor. D. A working paper prepared by the client's controller and reviewed by the cient’s treasurer. 17. Which of the following is a definition of control risk? )The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls, B. The risk that the auditor will not detect a material misstatement. C. The risk that the auditor's assessment of intemal controls will be at less than the maximum level. D. The susceptibility of material misstatement assuming there are no related internal ‘control policies or procedures, 18. Assume that a company has a control deficiency regarding the processing of cash receipts. Reconciliation of cash accounts by a competent individual otherwise independent of the cash function might make the likelihood of a significant misstatement due to the control deficiency remote. In this situation, reconciliation may be referred to as what type of control? A. Adjustive. Compensating. Nonroutine. D. Preventive. 19. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is ‘A. Greater for management fraud because managers are inherently more deceptive than employees. B. Greater for employee fraud because of the larger number of employees in the i organization. © Greater for management fraud because of management's ability to override existing internal controls, D. Greater for employee fraud because of the higher crime rate among blue collar workers.(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA FIRST PREBOARD EXAMINATION AUDITING THEORY FEBRUARY 19% 2015 / SATURDAY / 10:00AM = 11:300M 20. Upon discovering material misstatements in a client's financial statements that the client would not revise, a predecessor auditor withdrew from the engagement. If asked by the auditor about the termination of the engagement, the predecessor auditor should A. Indicate that a misunderstanding occurred. B, State that he/she found material misstatements that the client would not revise. ‘Suggest that the auditor ask the client. '®,) Suggest that the auditor obtain the client's permission to discuss the reasons. 21. Evidence is generally considered appropriate when Tt has been obtained by random selection. ‘Thee is enough of it to afford a reasonable basis for an opinion on financial statements. 1t has the qualities of being relevant, objective, and free from known bias. “"B. lt consists of written statements made by managers of the enterprise under audit. 22, Which of the following analytical procedures should be applied to the income statement? A. Select sales and expense items and trace amounts fo related supporting documents. B. Ascertain that the net Income amount in the statement of cash flows agrees with the net income amount in the income statement, C. Obtain from the proper client representatives the beginning and ending inventory ‘amounts that were used to determine costs of sales, (Bp compare the actual revenues and expenses with the corresponding figures of the revious year and igvestigate significant differences. 23. The two phases of the auditor's involvement with internal control are sometimes referred to as “understanding and assessment” and “tests of controls.” In the tests of controls se, the auditor attempts to Obtain a reasonable degree of assurance that the dient’s controls are in use and are ‘operating as planned. B. Obtain sufficient, appropriate evidential matter to afford a reasonable basis for the auditor's opinion, C. Obtain assurances that informative disdosures in the financial statements are reasonably adequate. D. Obtain knowledge and understanding of the client's prescribed procedures and methods. 7K. A sales inyoice for P52,000 was computed correctly but, by mistake, was key entered as P25,000 to the sales joumnal and to the accounts receivable master file. The customer remitted only P25,000, the amount on his monthly statement. ‘A. Prelistings and predetermined totals are used to control postings. Safes invoice senal numbers, prices, discounts, extensions, and footings are independently checked. ©. The customers’ monthly statements are verified and mailed by @ responsible person other than the bookkeeper who prepared them. D.’ Unauthorized remittance deductions made by customers or other matters in dispute are investigated promptly by a person independent of the accounts receivable function. 25, A procedure that Involves tracing a transaction from its origination through the company’s formation syStems until it Is reflected in the company’s financial report is referred to as an A. Analytical analysis. B. Substantive procedure. Test of a control, (B.)walk-through. 26. Which of the following statements best describes the auditor's responsibility regarding the detection of fraud? == A. The auditor is responsible for the failure to detect fraud only when such failure clearly results from non-performance of audit procedures specifically described in the engagement letter.(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA FIRST PREBOARD EXAMINATION Fi @ ‘The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud. C. The auditor may extend auditing procedures to actively search for evidence of fraud where examination indicates that fraud may exist. D. The auditor Is responsible for the failure to detect fraud only when an unmodified opinion is issued. 27. An auditor is planning an audit engagement for a new client in a business unfamiliar to the auditor, Which is the least useful source of information for the auditor during the preliminary planning stage when the aucitor is tying to obtain an understanding of the entity and its environment? ~~ AS Inquiries of intemal auditing personnel, . B. Observation of the entity's activities. Inspections of documented business plans. CD, )Results of performing substantive procedures. +8. when making decisions about evidence for a given audit, the auditor's goal is to obtain a sufficient amount of timely, reliable evidence that is relevant to the information being verified. In addition, the goal of audit efficiency is to gather and evaluate the information ‘A. No matter the cost involved in obtaining such evidence. Even if cost is irrelevant to the auditor, because they bill the client for costs incurred, C. Dat the lowest possible total cost. .“ at the cost suggested in the engagement letter. 3B. An aucitor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts receivable master file back to the supporting duplicate sales invoices. What would the auditor intend to establish by this step? -A. Sales invoices represent existing saies. ~ B, Allsales have been recorded. Al sales invoices have been properly posted to customer accounts. Debit entries in the accounts receivable master file are properly supported by sales invoices. 30. A CPA has been engaged to perform review services for a client. Identify which of the following is a correct statement. A. The CPA must perform the basic audit procedures necessary to determine that the statements are in conformity with the applicable financial reporting framework. B. The financial statements are primarily representations of the CPA. C. The CPA may prepare the statements from the books but may not assist In adjusting = ~.and dosing the books. GPA is performing an assurance engagement other than an audit of the financial statements. - = ~ 31. Which of the following statements is correct regarding internal control? |. A well-designed internal control environiiient ensufes the achievement of an entity's contro} objectives. ‘An inherent limitation to internal control is the fact that controls can be circumvented by management override. C. A well-designed and operated intemal control environment should detect coliusion perpetrated by two people. D. Internal control is a necessary business function and should be designed and operated to detect all errors and fraud. 32, To provide assurance that each voucher is submitted and paid only ance, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is ‘Supported by a vendor's invoice. ~~ ‘Stamped “paid” by the check signer. C Prenumbered and accounted for. D. Approved for authorized purchases.(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)— MANILA, FIRST PREBOARD EXAMINATION } 33, Which of the following Is not a correct use of the terminology in relation to audit Evidence obtained from an independent source outside the client organization Is more reliable than that obtained from within. | )) Documentary evidence is more reliable when it is received by the auditor indirectly rather ‘than directly. C. Documents that originate outside the company are considered more reliable than those ‘that originate within the client's organization. . External evidence, such as communications form banks, is generally regarded as more | reliable than answers obtained from inquiries of the client. | { 34, ‘Three conditions are generally present in the client’s organization when fraud occurs. Those ‘Conditions include each of the following except a/an | Incentive or pressure to commit fraud. | (B.> Professional skepticism about the likelihood of fraud. | "C. Attitude or rationalization about the act of fraud. | D. Opportunity to commit fraud. i 35, Which of the following is the best argument against the use of negative|cohfirmations of accounts receivable? A. The cost per response Is excessively high. B, There is no way of knowing if the intended recipients received them. Recipients are likely to feal that the confirmation is a subtle request for payment. .)\The inference drawn from receiving no reply may not be correct. | 36. [Which ofthe folowing best describes a CPA's engagement to report on as entity’s internal contro? . "JAN assurance engagement to examine and report on management's written assertions *—“ about the effectiveness of its intemal contol. |B. An audit engagement to render an opinion on the entity's internal . C. A prospective engagement to project, for a period of time not to exceed]one year, and |___Report on the expected benefits of the entity's intemal control. |. A consulting engagement to provide constructive advice to the entity pn its internal control, -W. When assessing intemal auditors’ objectivity, an independent auditor should ‘A,) Corisider the policles that prohibit the internal auditors from auditing argas where they were recently assigned. B. Review the internal auditors’ reports to determine that their conclusionsjare consistent with the work performed. C. Verify that the intemal auditors’ assessment of control risk is comr ible to the independent auditor's assessment. _®, Evaluate the quality of the internal auditors’ working paper documentation and their recent audit recommendations. i -$8. Which of the followir 2 bresuans is comect about the reliability of audit evidence? A. Information obtair i from outside sources is the most reliable audit evidence. B,. To be reliable, audit evidence should be convincing rather than persuasive. Reliability of audit evidence refers to the amount of corroborative evidence obtained. ) Effective internal control provides more assurance about the reliability of audit evidence, $e. The auditor is concemed that a client is failing to bill customers for shipments. An audit procedure that would gather relevant evidence would be to AS Select a sample of duplicate sales invoices and trace each to related shipping documents. GG) Trace 2 sample of shigning documents to related duplicate sales invoices. C, Trace a sample of Sales Journal entries to the Accounts Receivable subsidiary ledger. D. Compare the total of the Schedule of Accounts Receivable with the balance of the Accounts Receivable account in the general ledger.(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA. FIRST PREBOARD EXAMINATION 40. Intemal a Croveereasing ‘the external auditor’s need to perform detalled tests. Eliminating the need to be on hand during the physical count of inventory. C. Limiting direct testing by the external auditor to assertions not directly tested by internal auditing. D, Alowing the extemal auditor to timit his/her audit to substantive testing. ing can affect the scope of the extemal auditor’s audit of financial statements 4L re urpose of an engagement letter is to secure the CPA firm's responsibility to external users of the audited financial 8 notty the the auait staff of an upcoming engagement so that personnel scheduling can be facilitated, =, Emphasize management's responsibility for approving the audit program. D.} Document the terms of the engagement. 42. Which of the folowing Best desaribes the independent auditor's approach to obtaining satisfaction concerning depreciation expense in the income statement? A. Verify the mathematical accuracy of the amounts charged to Income as a result of depreciation expense. B. Determine the method for computing depreciation expense and ascertain that it fs in accordance with generally accepted accounting principles. Reconcile the amount of depredation expense to those amounts credited to accumulated depredation accounts. (CB) Establish the basis for depreciable assets and verify the depreciation expense. 43. Prior to commencing field work, an auditor usually discusses the general audit strategy with the clien’S management Which of the following delails do management and the auditor usually agree upon at this time? ‘A. ‘The specific matters to be included in the communication with the audit committee. B. The minimum amount of misstatements that may be considered to be reportable conditions. (ore schedules and analyses that the cients staff should prepare. ‘The effects that inadequate controls ray have over the safeguarding of assets. 44, Which of the following should an auditor do when control risk is assessed at the maximum level? ‘A. Perform fewer substantive tests of details. Perform more tests of controls, Document the assessment. |. Document the internal control system more extensively. 45. To reduce the tisks associated with accepting e-mail responses to requests for confirmation accounts receivable, an auditor most likely would ‘A.) Request the senders to mail the original forms to the auditor. . Examine subsequent cash receipts for thé accounts in question. C. Consider the e-mail responses to the confirmations to be exceptions. D. Mail second requests to the e-mail respondents. 46. Trea team gathers information about a new client’s business and industry in order to ak ‘An understanding of the client's internal control system for financial reporting. {B}An understanding of how economic events and transactions have an effect on the comgony’sfancel statements, C._ Information about engagement risk. . Information regarding whether the company is engaging in financial statement fraud. tp. In evaluating the reasonableness of an accounting estimate, an auditor is most likely to concentrate on key factors and assumptions that are(CPA REVIEW SCHOOL, OF THE PHILIPPINES (CPAR) ~ MANILA, FIRST PREBOARD EXAMINATION. AUDITING THEORY FEBRUARY 1% 2015 / SATURDAY / 10:00AM — 11;30PM .) Deviations from historical pattems. =" Similar to industry guidelines. D. Objective and not susceptible to bias. 48. During audit planning, the auditor uses analytical procedures primarily to A, Identify wéakhesses in internal control. B. Determine if the company’s financial statements appear reasonable and are free of material misstatement. C. Determine the correspondence of the company’s financial statements to the valuation _—. and accuracy audit objectives. (©)) Understand the client's business and industry and to indicate possible misstatements. © Consistent with prior periods. B. 49. A major customer of an audit client suffers a fire just prior to completion of year-end field work. The audit client believes that this event could have a significant direct effect on the incial statemerits. The auditor should ~ ‘A) Advise management to disclose the event in notes to the financial statements. Disclose the event in the auditors report. C. Withhold submission of the auditor’s report until the extent of the direct effect on the financial statements is known. D. Advise management to adjust the financial statements. 50. Which of the following factors would most likely be considered an inherent limitation to an entity's internal control? _Ax_The complexity of the information processing system. {/B)Human judgment in the decision making process. : The ineffectiveness of the board of directors. D. The lack of management incentives to improve the control environment. -¥& The company being audited has an internal auditor that is both cor and objective. ‘The independent auditor wants to assign tasks for the internal ai Bir to perform. Under Gircumstances, the independent auditor may A.) Allow the internal auditor to tests oF intemal controls. 'B. Allow the internal auditor to aUdit a major subsidiary of the company. . CC. Not assign any task to the internal auditor because of the internal auditor's lack of independence. “B. Allow the internal auditor to perform analytical procedures, but nat be involved with any test of details. 52. A limitation on the scope of the auditor's exemination sufficient to preclude an unmodified ‘opinion will always result when management AL Prevents the auditor from reviewing the working papers of the predecessor auditor. B. Engages the auditor after the year-end physical inventory count is completed. . Fails to correct a significant deficiency of internal control that had been identified during | the prior year’s audit, D} Refuses to furnish a management representation letter to the auditor. 53. When performing planning analyticat procedures for a client, the auditor detected that the gross profit percentage had declined by 50% from the previous year to the year currently under audit. The auditor should >) Investigate the possibilty the client may have made an error In their cost of goods sold computation. B. Assist management in developing greater cost efficiencies in their product tine. C. Prepare a going concer opinion for the client. D. Advise the client to have extensive disclosure to alleviate investor concems. 54. Why do auditors generally use a sampling approach to evidence gathering? |” A. Auditors are experts and do fot need to look at much to know whether the financial | statements are correct or not.‘GPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) AUDITING THEORY FIRST PREBOARD EXAMINATION autos must balance the cost of the audit with the need for precision, Auditors must limit their exposure to theit client to maintain independence. D. ‘The auditor's relationship with the client is generally adversarial, so the auditor will not have access to ail of the financial information of the company. 55. ‘The auditor's primary purpose in auditing the client's system of Internal control over financial reporting is A. To prevent fraudulent financial statements from being issued to the public. (B.) To evaluate the effectiveness of the company's internal controls over all relevant "~~ assertions in the financial statements. C. To report to management that the intemal controls are effective in preventing misstatements from appearing on the financial statements, « D. To efficiently conduct the audit of financial statements. 56. When an auditor believes that an understanding with the client has not been established, he or she should ordinarily = Perform the audit with increased professional skepticism. B.) Decline to accept or perform the audit. ASSEss control risk at the maximum level and perform a primarily substantive audit. D. Modify the scope of the audit to reflect an Increased risk of material misstatement due to fraud. 57. A successor ausiitor ls reauired to attempt communication with the predecessor auditor prior to: A. Performing test of controls. B. Testing beginning balances for the current year. &_ Making a proposal for the audit engagement. (©) Agcenting the engagement. 58. Which of the following is least likely to be a test of a control? A. Inquiries of appropriate personnel, ‘Inspection of management's engagement letter. Qbservation of the application of a policy. D. Reperformance of the application of a policy. PR Fingncial statements of an entity that have been reviewed by an agcquntant should be accompanied by a report stating that a review A. Provides only limited assurance that the financial statements are fairly presented. B. Includes examining, on 2 test basis, information that is the representation of pox Management D Spnsss pantplyofinartes of comer personnel and anata! procedures applied i . D. Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit. 60. Which of the following best describes the purpose of control activities? A. The actions, policies and procedures that reflect the overall attitude of management. B. The identification and analysis of risks relevant to the preparation of financial statements. © the policies and procedures that help ensure that necessary actons are taken to address risks to the achievement of the entity’s objectives. D. Activities that deal with ongoing assessment of the quality of intemal control by management. 61. An investor is reading the financial statements of the Staquio Corporation and observes that the statements are accompanied by an auditor's unmodified report. From this, the investor may conclude that a disputes over significant agcounting issues have been settled to the auditor's satisfaction.re | CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) — MANILA FIRST PREBOARD EXAMINATION Y 19, 2 B. The auditor is satisfied that Staquio will be highly profitable in the future, C_ The auditor is certain that Staquio's financial statements have been prepared accurately | __ and that all account balances are precisely correct. | D. The auditor has determined that Staquio's management Is not qualified to lead the | company. i 1 .| A. company is concemed with the theft of cash after the sale has been recorded. One way | in which fraudsters conceal the theft is by a process called “lapping.” Which of the following best describes lgpging? i A Reduce the Customer's account by recording a sales return. i B. Write off the customer's account. i Reduce the customer’s account by recording a sales allowance. | D>) Apply the payment from another customer to the customer’s account. 63." An entity’s management is responsible for the preparation and fair presentation of the financial statements. Its responsibility includes the following, except A. Designing, implementing, and maintaining intemal controftelevant = Preparation and presentation of financial statements, _ B. Making aocounting estimates that are reasonable in the circumstances. | Selecting and applying appropriate accounting policies, B. Assessing the risks of material misstatement ofthe financial statements. 64. The most reliable procedure for an auditor to use to test the existence of a c! at an outside location would be to: “AObserve physical counts of the inventory items. ' Trace the Total on the inventory listing to the general ledger inventory account. C. Obtain a confirmation from the client indicating inventory ownership, D. Analytically compare the éurrent-year inventory balance to the prior- balance i ABs. IF the objective of a test of details is to detect cvgrstatements of Re Auditor shoud inyentory ‘race transactions from the ; A. Cash receipts journal to the sales journal. | B, Sales journal to the cash receipts journal. | € Source documents to the accounting records, (Bp aecounting rece records to the source documents. 66.' An examination of a financial forecast is a professional service that involyes, ‘A. Compiling or assembling” financial forecast that is based on |management’s assumptions, 8, Limiting the distribution of the accountant’s report to management ard the board of directors. . Assuming responsibility to update management on key events for one year after the report's date. D,) Evaluating the preparation of @ financial forecast and the support undertying Management's assumptions. | fz. An important characteristic of IT is uniformity of processing. Therefore, a risk exists that ‘A. Auditors will not be able to access data quickly. . Auditors will not be able to determine if data is processed consistentiy. | *) Erroneous processing can result in the accumulation of a great number of Ina short period of time. B: All of the above. misstatements 68. with ‘to detecting fraud, auditing standards require auditors to bem procedures designed to detect all inabices OF rad that might affect the financial statements, (Ce) Provide reasonable assurance that the financial statements are not materially misstated because OF fraud.(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION RAY. C. Issue an unmodified opinion only when the auditor is satisfied that no instances of fraud have occurred. D. Design the audit program to meet financial statement users’ expectations coneeming fraud. 69. Which of the following statements is not true? A. Analytical procedures emphasize the overall reasonableness of transactions and balances. B))Tests of controls are concerned with evaluating whether controls are sufficiently effective to justify reducing control risk and thereby reducing analytical procedures. C. Substantive tests of transactions emphasize the verification of transactions recorded in ___ the journals and then: Bosted in the general ledger. D. Tests of details of balances emphasize the ending balances in the general ledger. 70. Which of the following fundamental ethical principles prohibits association of professional accountants with reports, returns, communications or dther information that Is believed to in a materially false of misleading statement? Integrity” 'B. Objectivity C. Professional competence and due care D. Confidentiality 71. Which of the following procedures would yield the most competent evidence? A. A scanning of trial balanoss. B. An inquiry of client personnel. ‘A comparison of beginning and ending retained earings. 'D.DA recaleulation of bed debt expense. 72. Which of the following is a contro! weakness for a company whose Inventory of supplies consists of a large number of Tidividual items? K Supplies of relatively ttt'e value are expensed when purchased. |. The cycie basis is used for physical counts. “€S)The storekeeper is responsible for maintenance of perpetual inventory records. Perpetual inventory records are maintained only for items of significant Value. 73, The auditor should perform tests of controls when the auditor's risk assessment includes an tion of the operating effectiveness of internal control or when A.) Substantive procedures alone do not provide sufficient appropriate audit evidence at the Felevant assertion level. B. Tests of details and substantive analytical procedures provide sufficient appropriate audit evidence to support the assertion being evaluated. C. The auditor is not able to obtain an understanding of internal contro's. D. The owner-manager performs virtually ail the functions of intemal control. 74, In many audits of sales transactions, substantive tests of transactions can be reduced in determining the completeness objective because ~~ ~~ ‘Understatement of assets and income are a greater concern than overstatements. Qverstatements of assets and income are a greater concern than understatements. ‘It doesn't matter if income is understated becalise thé savings on income tax offsets the reduced revenue and net income is correct. D. The unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading. 75. When engaged to compile the financial statements of an entity, an accountant Is required to possess a level of knowledge of the entity's accounting principles and practices. This requirement most likely will include obtaining a general understanding of the A. Internal control awareness of the entity’s senior management. B,_ Risk factors relating to misstatements arising from illegal acts. CC. Design of the entity's internal controls implemented.© CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA FIRST PRE EXAMINATION i | D5} Nature of the entity's business transactions, the form of its accounting cecards and the ‘ésgunting basis 6n which the financial information is to be presented. | 76. | Which ofthe following statements about the assessment of the risk of material misstatement in a client's computer environment is true? be ‘A. The auditor must obtain an understanding of internal control and test controls. in |, SoMputer environments. ii i | 8. If the general controls are ineffective, the auditor ordinarily can assess the risk lof material misstatement at a low level if the application controls are effective, | C. The auditor usually can ignore the computer system if (s)he can abtain'an understanding of the controls outside the computer , i (2) the auditors objectives with respect to the assessment of the! risk of material +" misstatement are the same as in @ manual system, 77. The auditor's risk assessment procedures ; (A) Bithemselves, de not provide sufficient appropriate aucit evidence on whi to base ‘the audit opinio’, = | 8. Should not consider information obtained from the auditor’s previous experience with the entity. i C. Are designed to detect material misstatements at the assertion level! for dasses of transactions, account balances and disclosures. D. Are designed to test the effectiveness of the entity's controls. 78.. Which of the following events most likely would indicate the existence ofrleted parties? ‘A. Granting stock options to key execitives at favorable prices. ' = | B. High turnover of senior management and members of the board of ci C. Failure to correct internal contro! weaknesses on a timely basis. . Selling real estate at a price significantly different from appraised value. 79, | Observation is considered a reliable audit procedure but one that is limited in usefulness. | However, it is used in a number of different audit situations. Which of the following statements is true regarding observation as an audit technique? A. It Is the Tost effective audit methodology to use in filling out internal control questionnaires, : | B. It Is the most persuasive methodology to leam how transactions “ lly processed fed ] ~_. during the period under audit. €.)It is most persuasive about the performance of a process but is limi time at which the obsérvation takes place. | D. It is the most persuasive audit technique for determining if fraud has! octurred. (to the point in n.! To reduce audit risk associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would i A. ‘Examine the shipping documerits that provide evidence for the existence assertion. CG yety ees cor often aepore le ote oreo sider the faxes to be onresponses and evaluate them as unadjusted differences. D._ Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted. “= END OF EXAMINATION—- |