St. Vincent de Ferrer College of Camarin, Inc.

SVFC Compound,
San Vicente Ferrer St., Area D, Brgy. 178, Camarin, Caloocan City
Telephone Number: 668-25-75; Email address: st.vincentdeferrercollegeofccc@yahoo.com
Website: www.stvfc.com

MIDTERM EXAM IN ACCOUNTING 16A

Name: Date:
Teacher: Score:

TEST 1
Questions and Problems
1-1. Explain why auditors reports are important to users of financial statements.
Auditor’s reports are important to users of financial statements because they inform users of the
auditor’s opinion as to whether or not the statements are fairly stated o r whether no co nclusio n
can be m ade with regard to the fairness o f their presentation. Users especially look for any
deviation from the wording of the standard unqualified report and the reasons and implications of
such deviations

1-2. In addition to an understanding of the business and the industry, what are the requirements
for an effective audit?
Other requirements for an effective audit are:
a) Comprehensive knowledge of GAAP;
b) Understanding of internal control concepts;
c) Understanding of the client’s unique system of internal control; and
d) Knowledge of evidence gathering and evaluation methodology

1-3. Differentiate between the scope and opinion paragraphs of the standard audit report.
The Scope paragraph tells what the auditor did and whether or not the examination was conducted in
accordance with Generally Accepted Auditing Standard (GAAS). The opinion paragraph tells what the
auditor found and whether or not the Financial Statement Concern to generally accepted Accounting
principle (GAAP) in all material respect.

1-4. What is an “engagement letter?” why is it use recommend prior to the rendering of
professional services by CPAs?
An engagement letter is the agreement or understanding between the CPA and his/her client
concerning the nature of the engagement. It provides protection for the CPA in the event of
subsequent legal action alleging negligence or breach of contract. By committing the
agreement to writing, the engagement letter also minimizes future misunderstandings
between the CPA and client concerning the services to be performed by the CPA.

1-5. What function is served by the audit program?

The audit program is an important part of the systematic approach to auditing, and
demonstrates that the audit was properly planned
1-6. Who participates in the pre-audit conference, and what topic should be
covered?
The pre-audit conference should be attended by all members of the
audit team, including the partner in charge of the examination. The conference
should cover the following areas:
a) Nature of the client’s activities;
b) General nature of the client’s system of internal control;
c) Unique accounting practices
1-7. What distinguishes the intern phase from the final audit phase?
1-8. Why must the auditor test the information system prior to testing transactions and balances?
1-9. What purposes is served by the ten generally accepted auditing standards?
1-10. Define attestations. In what way(s) is auditing a form of attestation?

1-11. Discuss the role of risk in the audit process and how it is existence is communicated to the user in
the audit report.

1-12 Prior to naming Cuz and Company as its auditors, Del Pelayo of Verbatim, Inc., met with Gracie Cruz
and inquired about the auditors who would work on Verbatim’s audit. Pelayo wants cruz to assign only
persons who graduated from his alma matter.
REQUIRED:
How should Gracie Cruz respond?

1-13. Describe the conditions under which an auditor is associated with financial statements.

1-14. What factors should an auditor consider in determining whether financial statements are
presented fairly in conformity with GAAP?

1-15. Why must the auditor consider in determining whether financial statements are presented fairly in
conformity with GAAP?

1-16. Why must the auditor refrain from explaining why she or he is not independent?

TEST 2
2-1. Define the following terms:

a. audit risk –
It is the risks that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated.
b. inherent risk
c. control risk
d. detection risk

2-2. How does audit planning assist in assessing inherent risk?

2-3. Name three sources of business and industry information.
2-4 a. What is the audit risk model?
b. How can an auditor use the audit risk model?

2-5. Describe the relationship between detection risk and evidence accumulation.

2-6. Analytical procedures consist of evaluations of financial information made by a study of plausible
relationships among both financial and nonfinancial data. They range from simple comparisons to the
use of complex models involving many relationships and elements of data. They involve comparisons of
recorded amounts or ratios developed from recorded amounts, to expectations developed by the
auditors.

REQUIRED:

a. Describe the broad purpose of analytical procedures.

b. Identify the sources of information from which an auditor develops expectations.;
c. Describe the factors that influence an auditor’s consideration of the reliability of data for purposes of
achieving audit objectives.

2-7. The following questions deal with materiality. Choose the best response.
a. Which one of the following statements is correct concerning the concepts of materiality?
(1) Materiality is determined by reference to guidelines established by the AICPA.
(2) Materiality depends only on the peso amount of an item relative to other items in the financial
statements.
(3) Materiality depends on the nature of an item rather than peso amount.
(4) Materiality is a matter of professional judgment.

b. The concepts of materiality will be at least important to the CPA in determining the
(1) scope of his audit of specific accounts.
(2) specific transactions that should be reviewed
(3) effects of audit exceptions upon his opinion
(4) effects of his direct financial interest in a client a upon his independence.

2-8. The following questions concern materiality and risk. Choose the best response.

a. Edison Corporation has a few large accounts receivable that total P1,400,000. Victor Corporation has
a great number of small accounts receivable that also total P1,400,00. The importance of an error in any
one account is, therefore, greater for Edison than for Victor. This is an example of the auditor’s concept
of
(1) materiality.
(2) comparative analysis.
(3) reasonable assurance.
(4) relative risk.

b. Which of the following elements ultimately determines the specific auditing procedures that are
necessary in the circumstances to afford a reasonable basis for an opinion?

(1) Auditor judgment

(2) Materiality
(3) Relative risk
(4) Reasonable assurance

c. Which of the following best describes the element of relative risk that underlies the application of
generally accepted auditing standards, particularly the standards of field work and reporting?

(1) Cash audit work may have to be carried out in a more conclusive manner than inventory audit work.
(2) Intercompany transactions are usually subjects to less detailed scrutiny than arm’s-length
transactions with outside parties.
(3) Inventories may require more attention on an engagement for a public utility.
(4) The scope of the examination need to be expanded if errors that arouse suspicion of fraud are of
relatively insignificant amounts.

2-9. The following questions deal with materiality and risk, and their effect on audit reports. Choose the
best response.
a. A major customer of an audit client suffers a fire just prior to completion of year-end field work. The
audit client believes that his event could have a significant direct effect on the financial statements. The
auditor should

(1) advise management to disclose the event in notes to the financial statements.
(2) disclose the event in the auditor’s report until the extent of the direct effect on the financial
statements is known.
(4) advise management to adjust the financial statements.

b. Late in December, Tech Products Company sold its marketable securities that had appreciated in
value and then repurchased them the same day. The sale and purchase transactions resulted in a large
gain. Without the gain the company would have reported a loss for the year. Which of the following
statements with respect to the auditor is correct?

(1) If the sale and repurchase are disclosed, an unqualified opinion should be rendered.
(2) The repurchase transaction is a sham and the auditor should insist upon a reversal or issue an
adverse opinion
(3) The auditor should withdraw from the engagement and refuse to be associated with the company.
(4) A disclaimer of opinion should be issued.

c. A material change in an accounting estimate.

(1) requires a consistency modification in the auditor’s report disclosure in the financial statement.
(2) requires a consistency modification in the auditor’s report but does not require disclosure in the
statement
(3) affects comparability and may require disclosure in a note to the financial statements but does not
require a consistency modification in the auditor’s report.
(4) involves the acceptability of the generally acceptable accounting principles used.

2-10. below are an auditor’s planned audit risk and assessment of inherent risk and control risk for 5
situations.

Situations Planned audit risk Assessed Inherent Risk Assessed Control Risk
1 1% 20% 20%
2 1 100 50
3 4 20 20
4 5 100 50
5 5 100 100

REQUIRED:
a. Determine the detection risk that can be allowed for each situation
b. rank the five situations, base on the amount of audit evidence that will be needed. You may assume
that all other factors that may affect audit evidence accumulation are the same
2-11. Audit risk and materiality should be considered when planning and performing an audit in
accordance with GAAS. Both audit risk and materiality should also be considered in determining the
nature, timing and extent of auditing procedures and evaluating the result of those procedures.
REQUIRED:
a. 1. Define audit risk.
2. Describe is components of inherent risk, control risk, and detection risk.
3. Explain how this components are interrelated.

b. 1. Define materiality.
2. Discuss the factors affecting its determination

2-12. Last year you were assigned to minor parts of the audit of the sale and collections cycle for Patrich
Corporation. This year you have been assigned significant responsibility in the audit of the sa le and
collection cycle. You recall that last year, the credit manager, Josie Tan, treated you as if you were one
the clerks. In fact, you had to call her “miss Tan” when you went to ask her several questions. This year,
she has become very friendly. Josie, as she wants now you to call her, Has just invited you to join her for
dinner at a very exclusive private club in town. You were called away before you could give Josie a reply
but indicate to you that last year she took your predecessor to such a dinner.
REQUIRED:
a. How do you respond to Josie?