ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 44  October 2022 CPALE  Pre-Week Summary Lecture

AUDITING THEORY J. IRENEO  C. ALLAUIGAN  E. ARAÑAS  F. TUGAS

AT PREWEEK LECTURE
1. An auditor who discovers that client employees have committed an illegal act that has
a material effect on the client's financial statements most likely would withdraw
from the engagement if
A. The illegal act is a violation of generally accepted accounting principles.
B. The client does not take the remedial action that the auditor considers
necessary.
C. The illegal act was committed during a prior year that was not audited.
D. The auditor has already assessed control risk at the maximum level.
2. On the basis of audit evidence related to internal control, an auditor decides to
increase the assessed level of the risk of material misstatement from that originally
planned. To achieve an overall audit risk level that is substantially the same as the
planned audit risk level, the auditor would
A. Increase the inherent risk.
B. Increase materiality levels.
C. Decrease substantive testing.
D. Decrease detection risk.
3. Which of the following statements best describes the auditor’s responsibility
regarding the detection of material errors and fraud?
A. The auditor is responsible for the failure to detect material errors and
fraud only when such failure results from the nonapplication of generally
accepted accounting principles.
B. Auditing procedures may or may not need to be extended if the auditor’s
analysis indicates the existence of fraud risk factors.
C. The auditor is responsible for the failure to detect material errors and
fraud only when the auditor fails to confirm receivables or observe
inventories.
D. Extended auditing procedures are required to detect unrecorded transactions
even if there is no evidence that material errors and fraud may exist.
4. An audit client failed to maintain copies of its procedures manuals and organizational
flowcharts. What should the auditor do in an audit of financial statements?
A. Issue a qualified opinion on the basis of a scope limitation.
B. Document the auditor’s understanding of internal control.
C. Assess control risk at the maximum level.
D. Restrict the auditor’s responsibility to assess the effectiveness of controls
in the audit engagement letter.
5. Which of the following actions should the auditor take in response to discovering a
deviation from the prescribed control procedure?
A. Make inquiries to understand the potential consequence of the deviation.
B. Assume that the deviation is an isolated occurrence without audit
significance.
C. Report the matter to the next higher level of authority within the entity.
D. Increase sample size of tests of controls.
6. When an auditor discovered that certain control activities were ineffective, the
auditor
A. Level of detection risk.
B. Extent of tests of details.
C. Level of inherent risk.
D. Extent of tests of controls.
7. While testing a sample of an audit client's bank reconciliations during the year
under audit, an auditor notices that several immaterial deposits in transit did not
clear the bank in a timely manner. The auditor suspects there may be fraud. Which of
the following audit responses is most appropriate
in this situation?
A. Because the findings are not material, the auditor should project the errors
to the population and consider the materiality of the projected misstatement
in the auditor's concluding procedures.
B. The auditor should consider the implications for the integrity of management
or employees and the possible effect on other aspects of the audit.

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Batch 44 – October 2022 CPA Licensure Examination
C. The auditor should focus on material misstatements and not consider these
immaterial findings or potential errors further.
D. The auditor should report the finding to the appropriate level of management
immediately.

8. The audit work performed by each assistant should be reviewed to determine whether
it was adequately performed and to evaluate whether the
A. Auditor's system of quality control has been maintained at a high level.
B. Results are consistent with the conclusions to be presented in the auditor's
report.
C. Audit procedures performed are approved in the professional standards.
D. Audit has been performed by persons having adequate technical training and
proficiency as auditors.

9. Analytical procedures used in the overall review stage of an audit generally include
A. Gathering evidence concerning account balances that have not changed from the
prior year.
B. Retesting control procedures that appeared to be ineffective during the
assessment of control risk.
C. Considering unusual or unexpected account balances that were not previously
identified.
D. Performing tests of transactions to corroborate management's financial
statement assertions.

10. Holding other planning considerations equal, a decrease in the amount of misstatement
in a class of transactions that an auditor could tolerate most likely would cause the
auditor to
A. Apply the planned substantive tests prior to the balance sheet date.
B. Perform the planned auditing procedures closer to the balance sheet date.
C. Increase the assessed level of control risk for relevant financial statement
assertions.
D. Decrease the extent of auditing procedures to be applied to the class of
transactions.

11. Which of the following factors most likely would lead a CPA to conclude that a
potential audit engagement should not be accepted?
A. There are significant related-party transactions that management claims
occurred in the ordinary course of business.
B. Internal control activities requiring the segregation of duties are subject to
management override.
C. Management continues to employ an inefficient system of information technology
to record financial transactions.
D. It is unlikely that sufficient appropriate evidence is available to support an
opinion on the financial statements.

12. The auditor with final responsibility for an engagement and one of the assistants
have a difference of opinion about the results of an auditing procedure. If the
assistant believes it is necessary to be disassociated from the matter's resolution,
the CPA firm's procedures should enable the assistant to
A. Refer the disagreement to the IAASB's Quality Review Committee.
B. Document the details of the disagreement with the conclusion reached.
C. Discuss the disagreement with the entity's management or its audit committee.
D. Report the disagreement to an impartial peer review monitoring team.

13. Which of the following activities would be most helpful to a CPA in deciding whether
to accept a new audit client?
A. Reviewing industry benchmarking data.
B. Considering the client's compensation methods.
C. Evaluating the CPA's ability to properly service the client.
D. Evaluating the most recent peer review of the client's previous auditor.

14. One purpose of establishing quality control policies and procedures for acceptance
and continuance of client relationships and specific engagements is to
A. Undertake engagements only that the accounting firm is competent to perform.
B. Monitor significant deficiencies in the design and operation of the client’s
internal control.
C. Identify noncompliance with aspects of contractual agreements that affect the
financial statements.
D. Provide reasonable assurance that personnel will be adequately trained to
fulfill their assigned responsibilities.

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15. Within the context of quality control, a primary purpose of the engagement performance
element is to help ensure that
A. CPA firm personnel have adequate technical training.
B. Engagements are adequately supervised.
C. The CPA firm undertakes only those engagements it is competent to perform.
D. CPA firm personnel comply with relevant ethical requirements.

UNDERSTANDING THE ENTITY’S INTERNAL CONTROL

16. In an audit of financial statements in accordance with generally accepted auditing

standards, an auditor is required to
A. Document the auditor’s understanding of the entity’s internal control.
B. Search for significant deficiencies in the operation of internal control.
C. Perform tests of controls to evaluate the effectiveness of the entity’s internal
control.
D. Determine whether controls are suitably designed to prevent or detect material
misstatements.

17. A primary objective of procedures performed to obtain an understanding of internal

control is to provide an auditor with
A. Knowledge necessary to assess the risks of material misstatements.
B. Evidence to use in assessing inherent risk.
C. A basis for modifying tests of controls.
D. An evaluation of the consistency of application of management’s policies.

RISK ASSESSMENT AND RESPONSE TO ASSESSED RISK

18. After assessing control risk, an auditor desires to seek a further reduction in the
assessed level of control risk. At this time, the auditor would consider whether
A. It would be efficient to obtain an understanding of the entity’s information
system.
B. The entity’s controls have been implemented.
C. The entity’s controls pertain to any financial statement assertions.
D. Additional audit evidence sufficient to support a further reduction is likely
to be available.

19. Assessing control risk at a low level most likely would involve
A. Performing more extensive substantive tests with larger sample sizes than
originally planned.
B. Reducing inherent risk for most of the assertions relevant to significant
account balances.
C. Changing the timing of substantive tests by omitting interim-date testing and
performing the tests at year-end.
D. Identifying specific controls relevant to specific assertions.

TESTS OF CONTROLS

20. After obtaining an understanding of internal control and assessing the risk of
material misstatement, an auditor decided to perform tests of controls. The auditor
most likely decided that
A. It would be efficient to perform tests of controls that would result in a
reduction in planned substantive tests.
B. Additional evidence to support a further reduction in the risk of material
misstatement is not available.
C. An increase in the assessed level of risk of material misstatement is justified
for certain financial statement assertions.
D. There were many internal control weaknesses that could allow misstatements to
enter the accounting system.

21. Which of the following types of evidence would an auditor most likely examine to
determine whether controls are operating as designed?
A. Confirmations of receivables verifying account balances.
B. Letters of representations corroborating inventory pricing.
C. Attorneys’ responses to the auditor’s inquiries.
D. Client records documenting the use of computer programs.

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22. The objective of tests of details of transactions performed as tests of controls is

to
A. Monitor the design and use of entity documents such as prenumbered shipping
forms.
B. Determine whether controls have been implemented.
C. Detect material misstatements in the account balances of the financial
statements.
D. Evaluate whether controls operated effectively.

FURTHER AUDIT PROCEDURES – SUBSTANTIVE TESTING

23. An auditor suspects that a client’s cashier is misappropriating cash receipts for
personal use by lapping customer checks received in the mail. In attempting to uncover
this embezzlement scheme, the auditor most likely would compare the
A. Dates checks are deposited per bank statements with the dates remittance credits
are recorded.
B. Daily cash summaries with the sums of the cash receipts journal entries.
C. Individual bank deposit slips with the details of the monthly bank statements.
D. Dates uncollectible accounts are authorized to be written off with the dates
the write-offs are actually recorded.

24. A client maintains perpetual inventory records in both quantities and pesos. If the
assessed level of control risk is high, an auditor would probably
A. Insist that the client perform physical counts of inventory items several times
during the year.
B. Apply gross profit tests to ascertain the reasonableness of the physical counts.
C. Increase the extent of tests of controls of the inventory cycle.
D. Request the client to schedule the physical inventory count at the end of the
year.

25. Alpha Company uses its sales invoices for posting perpetual inventory records.
Inadequate controls over the invoicing function allow goods to be shipped that are
not invoiced. The inadequate controls could cause an
A. Understatement of revenues, receivables, and inventory.
B. Overstatement of revenues and receivables, and an understatement of inventory.
C. Understatement of revenues and receivables, and an overstatement of inventory.
D. Overstatement of revenues, receivables, and inventory.

FRAUD, ERROR, AND NON-COMPLIANCE

26. While performing their audit, the audit team uncovers fraud that is likely to have
an immaterial effect on the financial statements taken as whole. In this case the
auditors should
A. Plan on additional audit procedures to determine the exact amount of the fraud.
B. Communicate with legal authorities as to the identity of the fraudsters.
C. Disclose the fraud to the appropriate level of management or to the audit
committee.
D. Call the whistleblower hotline and name the suspected individuals.

27. Auditors may identify conditions during fieldwork that change or support a judgment
about the initial assessment of fraud risks. Which of the following is not a condition
which should alert an auditor that the initial assessment should be changed?
A. Preliminary assessment of control risk has been modified
B. Discrepancies in the accounting records
C. Unusual relationships between the auditor and management
D. Missing or conflicting evidence

INFORMATION TECHNOLOGY

28. Auditing by testing the input and output of a computer system instead of the computer
program itself will
A. Not detect program errors which do not show up in the output sampled.
B. Detect all program errors, regardless of the nature of the output.
C. Provide the auditor with the same type of evidence as tests of
application controls.
D. Not provide the auditor with confidence in the results of the auditing
procedures.

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29. When an auditor tests a computerized accounting system, which of the following is
true of the test data approach?
A. Several transactions of each type must be tested.
B. Test data are processed by the client’s computer programs under the
auditor’s control.
C. Test data must consist of all possible valid and invalid conditions.
D. The program tested is different from the program used throughout the year
by the client.

30. A primary advantage of using generalized audit software packages to audit the
financial statements of a client that uses a computer system is that the auditor may
A. Access information stored on computer files while having a limited understanding
of the client’s hardware and software features.
B. Consider increasing the use of substantive tests of transactions in place of
analytical procedures.
C. Substantiate the accuracy of data through self-checking digits and hash totals.
D. Reduce the level of required tests of controls to a relatively small amount.

31. Auditors who prefer statistical sampling to non-statistical sampling may do so because
statistical sampling helps the auditor
A. Measure the sufficiency of the evidential matter obtained
B. Minimize the failure to detect errors and irregularities.
C. Eliminate subjectivity in the evaluation of sampling results
D. Reduce the level of tolerable error to a relatively low amount.

32. Alpha risk in statistical sampling is

A. Related to nonsampling risk.
B. The risk that a material misstatement will occur in a financial statement assertion
and the audit will not detect it.
C. The risk of deciding a book balance is materially misstated when it is fairly
stated.
D. The risk of selecting a sample that is too small.

33. To determine whether internal control effectively minimized errors of failure to bill
a customer for a shipment, the auditor would select a sample of transactions from the
population represented by the
A. Customer order file
B. Shipping records file
C. Subsidiary customer accounts ledger
D. Sales invoice

34. In the auditing profession, there is a need for uniformity in reporting in order to

I. Avoid confusion
II. Promote credibility in the global marketplace
A. I only
B. II only
C. Both I and II
D. Neither I nor II
35. Tatsuki is the external auditor for Heavenly Host Enterprises. The company provided
him with the statement of cash flows, statement of financial position and statement
of comprehensive income. The company did not provide him the statement of retained
earnings and statement of changes in equity. If the omission proves to be somewhat
close to the level of materiality, what should be Tatsuki's opinion?
A. Qualified
B. Unqualified
C. Adverse
D. Disclaimer of Opinion
36. An audit report contains the following paragraph: “Since the company did not take
physical inventories and we were not able to apply auditing procedures to satisfy
ourselves as to inventory quantities and the cost of property and equipment, the
scope of our work was not sufficient to enable us to express, and we do not express,
an opinion on these financial statements.” This paragraph illustrates a (an)
A. Disclaimer of opinion due to uncertainty
B. Disclaimer of opinion due to scope restrictions
C. Adverse audit opinion
D. Audit opinion qualified for material scope restrictions.

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37. An entity ordinarily issues on an annual basis a document which includes its financial
statements together with the audit report thereon. This document is frequently
referred to as the
A. Annual financial statement
B. Annual report
C. Annual document
D. Audit report

38. CPA Firm A has performed most of the audit of Consolidated Company’s financial
statements and qualities as the principal auditor. CPA Firm B did the remainder of
the work. Firm A wishes to assume full responsibility for Firm B’s work. Which of
the following statements is CORRECT?
A. In such circumstances, when appropriate requirements have been met, Firm A should
issue a unqualified opinion on the financial statements.
B. In such circumstances, when appropriate requirements have been met, Firm A should
issue an unqualified opinion on the financial statements but should make
appropriate reference to the Firm B in the audit report.
C. Such assumption of responsibility violates the profession’s standards
D. CPA Firm A should normally qualify its audit report on the basis of the scope
limitation involved when another CPA firm in involved.

39. Which of the following material events occurring subsequent to the December 31, 2019,
reporting date would not ordinarily result in an adjustment to the financial
statements before they are issued on March 2, 2020?
A. Write-off of a receivable from a debtor who had suffered from deteriorating
financial condition for the past 6 years. The debtor filed for bankruptcy on
January 23, 2020.
B. Acquisition of a subsidiary on January 23, 2020. Negotiations had begun in December
2019.
C. A 3 for 5 reverse stock split consummated on January 23, 2020.
D. Settlement of extended ligation of January 23, 2020 in excess of the recorded year-
end liability.

40. When considering the use of management’s written representations as audit evidence
about the completeness assertion, an auditor should understand that such
representations
A. Constitute sufficient appropriate audit evidence to support the assertion when
considered in combination with a sufficiently low assessed level of control risk
B. Are not part of the audit evidence considered to support the assertion
C. Replace a low assessed level of control risk as audit evidence to support the
assertion
D. Complement, but not replace, substantive tests designed to support the assertion

41. When obtaining evidence regarding litigation against a client, the CPA will be least
interested in determining?
A. The period in which the underlying cause of the litigation occurred
B. The probability of an unfavorable outcome
C. An estimate of when the matter will be resolved
D. An estimate of the potential loss

42. On February 25, a CPA issued an auditor’s report expressing an unqualified opinion
on financial statements for the year ended January 31. On March 2, the CPA learned
that on February 11, the entity incurred a material loss on an uncollectible trade
receivable as a result of the deteriorating financial condition of the entity’s
principal customer that led to the customer's bankruptcy. Management then refused to
adjust the financial statements for this subsequent event. The CPA determined that
the information is reliable and that there are creditors currently relying on the
financial statements. The CPA’s next course of action most likely would be to
A. Notify the entity’s creditors that the financial statements and the related
auditor’s report should no longer be relied on.
B. Notify each member of the entity’s board of directors about management’s refusal
to adjust the financial statements.
C. Issue revised financial statements and distribute them to each creditor known to
be relying on the financial statements.
D. Issue a revised auditor’s report and distribute it to each creditor known to be
relying on the financial statements.

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43. An auditor’s report on financial statements prepared in accordance with another

comprehensive basis of accounting should include all of the following except
A. An opinion as to whether the basis of accounting used is appropriate under the
circumstances.
B. An opinion as to whether the financial statements are presented fairly in conformity
with the comprehensive basis of accounting.
C. Reference to the note to the financial statements that describes the basis of
presentation.
D. A statement that the basis of presentation is a comprehensive basis of accounting
other than generally accepted accounting principles.

44. Harris, CPA, has been asked to audit and report on the balance sheet of Fox Co. but
not on the statements of income, retained earnings, or cash flows. Harris will have
access to all information underlying the basic financial statements. Under these
circumstances, Harris may
A. Not accept the engagement because it would constitute a violation of the
profession’s ethical standards.
B. Not accept the engagement because it would be tantamount to rendering a piecemeal
opinion.
C. Accept the engagement because such engagements merely involve limited reporting
objectives.
D. Accept the engagement but should disclaim an opinion because of an inability to
apply the procedures considered necessary.

45. Which of the following is a prospective financial information for general use upon
which an accountant may appropriately report?
A. Financial projection
B. Partial presentation
C. Pro forma financial statement
D. Financial forecast

46. S1: A self-interest or intimidation threat to compliance with the principles of

integrity and professional behavior is created when a professional accountant becomes
aware of non-compliance or suspected noncompliance with laws and regulations.

S2: When encountering such non-compliance or suspected non-compliance, the accountant

shall obtain an understanding of those legal or regulatory provisions and comply with
them, including any requirement to report the matter to an appropriate authority and
any prohibition on alerting the client.
A. True, True
B. False, true
C. True, false
D. False, false

47. Independence is linked to the principles of

A. Objectivity
B. Objectivity and integrity
C. Integrity and due care
D. Objectivity, integrity and confidentiality

48. Which of the following threats is most likely created when an individual is involved
in an audit engagement over a long period of time?
A. Familiarity threat.
B. Familiarity and self-interest threats.
C. Self-interest threat.
D. Advocacy and familiar threats.

- END -

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